31 December 2017 | www.moneymarketing.co.za
First for the professional personal financial adviser
YOUR DECEMBER ISSUE
REDUCING ‘BAD LUCK’ IN RETIREMENT INVESTING Everyone needs to incorporate some techniques for reducing sequence risk in their retirement planning
LONG-TERM INVESTORS MUST BE APPROPRIATELY DIVERSIFIED
MOST COMPLAINTS ABOUT SHORT-TERM INSURANCE: OMBUD
The biggest companies on the JSE are global in nature
FSPs who operate in the short-term insurance space still violate provisions of the FAIS Act and the Code
Investing and the ANC elective conference
hile we all know that long-term investors should ignore short-term ‘noise’, there have been suggestions amongst market players as to how one should invest according to the outcome of this month’s ANC elective conference, (Cyril Ramaphosa vs Nkosasana Dlamini Zuma, it would appear). It is becoming increasingly difficult to brush aside the different opinions. MoneyMarketing spoke to Reyneke Van Wyk, Head of Investment Management, Stonehage Fleming in South Africa, and Tinyiko Ngwenya, Economist, Old Mutual Investment Group, about the possible outcomes of the conference. “As long-term investors, we look beyond the ANC December elective conference when constructing portfolios,” says Stonehage’s Van Wyk. “We do see the potential for various scenarios to play out over the coming months, but none sufficient to significantly alter our positioning ahead of December. Domestically, we remain cautious on longer dated
bonds, favour quality companies with globally diversified earnings and continue to advise clients to diversify surplus assets offshore.” However, he adds that should a Ramaphosa victory be the case, “confidence should improve off a low base, accompanied by a short-term relief rally in domestic asset classes, especially bonds and the rand.” Investors will keep a close eye on whether Ramaphosa follows through on his campaign pledge to clamp down on corruption. “We are of the opinion that this rally will be short lived as South Africa’s structural economic challenges will take time to improve (unemployment, anaemic GDP growth, highly indebted state-owned entities) and the fiscal position will remain constrained.” National elections Van Wyk says the national elections in 2019 also reduce the likelihood of the required focus to implement the challenging reforms necessary to reignite the economy.
Should Nkosasana Dlamini Zuma be elected as the next ANC president, “we believe that it would negatively impact South Africa’s economy in the short to medium term.” Domestic government debt would likely be downgraded by both Moody’s and Standard & Poor’s to below investment grade, if not downgraded before then, and pressure on the rand could increase further. “The status quo of rampant patronage and corruption within SOEs is likely to continue, which is already posing a meaningful risk to the economy and confidence levels. If this trend continues, further
deterioration is anticipated for South Africa’s already weak fiscal position, budget deficit and general economic environment.” Van Wyk notes that the outcome could lead to a split in the ANC, endangering its majority in the 2019 elections and potentially an era of coalition politics. Old Mutual Investment Group’s Ngwenya says it’s important to note that the market is not so much concerned about a particular name but rather what the candidate represents in terms of economic policy. Continued on page 2
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NEWS & OPINION
NEWS & OPINION
31 December 2017
Continued from page 1
“South Africa is currently at a tipping point where drastic policy reforms need to be implemented in order for us to prevent a fiscal crisis,” she adds. ‘Anything-but-Zuma’ “Cyril Ramaphosa – in the minds of investors – is purely seen as a Zuma alternative. Although there are questions around what he can or cannot do to drive policy reform, particularly with him being so close to the labour unions, investor sentiment has been so low in South Africa that an ‘anything-but-Zuma’ win will be seen as a positive outcome.” Ngwenya notes that a key determinant behind a Ramaphosa win is the assumption that Jacob Zuma will be recalled by the newly elected ANC National Executive Committee as Zuma is currently seen as the key obstacle to sound policy making. “Even though a Ramaphosa win may be seen as a positive outcome, in order to sustain that initial uplift in market sentiment, Ramaphosa will have to demonstrate some signs of intent to adopt measures to rein in on government’s debt, improve the governance of state owned entities and more importantly revive the economy. “Emphasis must be made on the word ‘intent’ because I do think that the market understands that it will not take one silver bullet for South Africa
to solve its countless problems. The market may be willing to give Ramaphosa some time to alter the trajectory of our path as opposed to Nkosazana Dlamini Zuma who would have to work hard and make drastic changes in order to gain the confidence of investors.” Ngwenya says – as the surname suggests – that Dlamini-Zuma’s campaign has unfortunately been tainted by her ex-husband’s endorsement. “Therefore a Dlamini-Zuma win will be seen as a negative outcome mainly because her policy stance has been largely around populist policies of land and wealth re-distribution. What I do think can surprise investors is if Dlamini-Zuma, in her pursuit of differentiating herself from Jacob Zuma, becomes a ‘Ramaphosa’ and starts using her political capital to implement business friendly reforms. The market won’t exactly warm up to her initially but the possibility of her becoming a reasonable successor is not as far-fetched as many people would imagine.” Compromise candidate Ngwenya points out that one name surfacing lately as a compromise candidate is the ANC Treasurer-General Zweli Mkhize. “A Zweli Mkhize win would most likely be seen as a better outcome than a full out Ramaphosa win as it limits the possibility of an ANC breakaway which wouldn’t be
ideal for the upcoming 2019 national elections. Coalition governments tend not to work very well, just cast your eyes to Johannesburg and Tshwane where it is extremely difficult for the DA to make any decisions as each of the party representatives have their own motives. “What South Africa really needs to prosper is a unified and pragmatic ANC. Mkhize has a good track record as a former premier of Kwa-Zulu Natal and appears to have a sensible relationship with the business community.” Ngwenya notes that the outcome of the elective conference seems very binary – and although her analysis is a fair attempt at identifying the market reaction for either outcomes, “it is important to note that we won’t really know until the actual event occurs.”
Reyneke Van Wyk, Head of Investment Management, Stonehage Fleming
Tinyiko Ngwenya, Economist, Old Mutual Investment Group
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ike thousands of other South Africans, I put some time aside last month to read Jacques Pauw’s, The President’s Keepers: Those keeping Zuma in power and out of prison. When I first saw the book’s front cover with a comment from Max du Preez that said: “This is dynamite”, I knew that I was in for an informative read. I didn’t however, expect the feelings of utter rage, bewilderment and sadness that swept over me as I turned the pages. In Pauw’s superb writing style, he alleges that Jacob Zuma is kept in power by a cabal that eliminates the President’s enemies and empties law enforcement departments of good people. His narrative takes us from South Africa, all the way to Russia, as he attempts to expose what some call, a mafia state. Every few pages, there is a new and unsettling revelation, including how Zuma loyalist, Tom Moyane, was placed in control of SARS and how the dedicated professionals in that institution were pushed out. Then there’s the allegation of President Zuma’s refusal to file tax returns as well as one that suggests he was paid R1m a month by a private security company during his first months in office, (it is illegal for a president of this country to be employed by a private company). There's also the assertion that the State Security Agency (SSA) wasted over R1bn of taxpayers’ money – and on and on the accusations go. Some journalists are unhappy, claiming that Pauw went ahead and published information that they too had, but were too wary to use in print. This is unjustified criticism. Pauw was more courageous than his colleagues and this is indeed laudable. He has also been accused of not offering the right of reply but I’m not sure that the book would have been printed if he had done so. It will be interesting to see whether Pauw is successfully sued by SARS or the SSA or anybody else. I have a feeling that he won’t be. On behalf of the MoneyMarketing team, I wish our readers a happy holiday season. Janice firstname.lastname@example.org @MMMagza www.moneymarketing.co.za
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NEWS & OPINION
31 December 2017
EROL ZEKI CHIEF EXECUTIVE OFFICER, SASFIN WEALTH
How did you become involved in financial services – was this something you always wanted to do? Growing up, I always enjoyed numbers and problem solving but truly didn’t know what I wanted to do with that. What I was always sure of, however, was that I was interested in businesses in general; and as a result I defaulted to a B.Com degree without a clear direction or specialty in mind. Around half way through my bachelor’s degree, I completed a semester course on risk management and derivatives. I was hooked. From that point on, everything I studied and did was deliberately focused on driving towards a career in financial markets. Of course what I thought I knew and understood about financial markets back then was not remotely accurate. Financial markets were far more interesting than I could ever have imagined and make for a fulfilling career.
What was your first investment and do you still have it? My first real investment was Impala Platinum. At the time I joined the markets, industrial demand for platinum group metals and supply constraints drove exceptional profits in the industry, boosted by a depreciating rand. I no longer hold the position. What do/will you teach your children about money? I hope to teach them to act respectfully and prudently when it comes to money and to never take it for granted. When it comes to saving, if I can teach them one thing, it would be the power of compounding that comes from long-term investing.
What makes a good investment in today’s economic environment? Broad diversification across quality assets for the long term. I realise this sounds overly simplistic and a little clichéd, but experience has taught me this lesson over and over again. What have been you best and worst financial moments? The worst was in my first year of working. I managed to blow my entire first bonus in the futures market in one week. Thankfully, despite my overconfidence, naivety and recklessness with my personal money as a young newbie, my advice to clients has always been holistic and aligned to their personal needs. I have always held this as a central philosophy.
Aon plc has completed the sale of its shareholding in its employee benefit, insurance and reinsurance brokerage operations in Kenya, Lesotho, Malawi, Namibia, Uganda and Zambia. The sale of Aon’s shareholding of its businesses in Angola, Mozambique, Swaziland and Tanzania is still awaiting regulatory approval and expected to conclude in early 2018. The buyer, Capitalworks, will rename the firm ‘Minet’ and will become Aon’s exclusive global network correspondent in these countries. Aon operates successfully through correspondent arrangements in a number of countries globally, and in other African markets such as Ghana, Nigeria and Zimbabwe.
UPS & DOWNS The FTSE/JSE All Share Index (Alsi) broke through the 60 000 points mark for the first time last month. Dave Mohr and Izak Odendaal at Old Mutual Multi-Managers commented: “Humans like round numbers for some reason, and 60 000 is therefore a fairly arbitrary level to celebrate. However, this level reflects price movements only. There is a separate total return index that measures the Alsi with dividends included. This index predictably runs ahead and sets new records well
before the price index, since it benefits from compound growth. Also, since the market trends up over time, it will obviously set fresh record highs as it goes along. Finally, the index is not adjusted for inflation while investors should ideally think in terms of real returns.”
Last month, Kingsley Williams was appointed Chief Investment Officer (CIO) at Satrix. Williams was previously CIO of Indexation at Old Mutual Customised Solutions. He has an extensive track record of almost 20 years covering indexation, portfolio management, quantitative research, product development and information technology. He holds an MBA in Finance from Wits Business School, a BSc Honours degree in Computer Science as well as an undergraduate major in Mathematical Statistics. The International Investment Funds Association (IIFA) will be chaired by a representative from Africa for the first time in its 30-year history. Leon Campher, CEO of the Association for Savings and Investment South Africa (ASISA), was appointed IIFA chairman at the recent IIFA Annual Conference held in Zurich, Switzerland. Yoshio Okubo of the Japan Investment Trust Association (JITA) was appointed deputy chairman. The IIFA consists of 41 domestic and regional investment fund associations from around the globe representing assets under management of US$44.7tn as at the end of the second quarter of 2017.
The TransUnion Consumer Credit Index (CCI) declined slightly in Q3 2017, though it continues to reflect marginally improving consumer credit health. The latest report comes in the wake of a period of difficult economic conditions in South Africa, including government debt downgrades earlier in the year, slow GDP
growth and exchange rate volatility. The CCI dropped slightly to 53.9 in Q3 from 54.1 in Q2, but because it remained above 50.0, this is an indication of some improvement in consumer credit health. An index level of 50 is considered the ‘break-even’ point, with lower scores reflecting worsening credit health.
BDO South Africa has announced its intention to merge with the Cape Town and Port Elizabeth offices of Grant Thornton. The merger, which will be effective 1 March 2018, will consolidate the BDO and Grant Thornton Cape Town offices under the BDO brand whilst BDO will again be represented in Port Elizabeth. The merger is a key part of BDO’s business strategy, both in South Africa and globally. BDO South Africa CEO, Mark Stewart, says: “The demand for in-depth expertise is increasing, with technical and industry advice in high demand. Critical to this merger is our ability to scale up and to leverage the opportunities created by the changes in the auditing profession, including the introduction of mandatory audit firm rotation. BDO will now be in a far stronger position to take advantage of opportunities in the market and to provide the market with a significant alternative to the competition.”
NEWS & OPINION
31 December 2017
Why every adult should make a Living Will Many people think a Living Will is not something they need unless they reach senior citizen age. However, this could not be further from the truth.
avid Knott, a fiduciary expert from Private Client Trust, a division of Private Client Holdings, advises that with statistics showing that younger adults are far more likely than the elderly to be involved in fatal or near-fatal accidents, they must ensure that they have a Living Will. “Life is unpredictable which is enough reason for adults of any age to take the time to protect themselves should an accident occur. “A Living Will states your wishes regarding life support should you be unable to communicate your end-of-life wishes yourself – such as in the case of being left in an irreversible coma,” explains Knott. “A Living Will spares your family the anguish of making life-support decisions without your input and allows you to have the last say – ensuring that your doctor understands your end-of-life wishes and treats you accordingly.” There are five reasons why every adult should take the time to make a Living Will, no matter how old they are. A Living Will: 1. Speaks for you when you can no longer communicate “The most beneficial part of having a Living Will is that it protects you in a future situation in which you may no longer be able to communicate your wishes,” says Knott. 2. Prevents arguments between family members A Living Will prevents arguments between family members should they disagree on what happens to you. It will be your choice and no one else’s – thereby eliminating any arguments. 3. Gives you a say over medical treatments/procedures Knott advises that a Living Will also gives you a say over what medical treatments and procedures take place in a situation where you are ill to the point of not being able to communicate. “In this situation a Living Will asks doctors to fulfil your wishes.” 4. Reduces potentially crippling medical bills for your family
“Many people would rather die than live additional years on life-support that will rack up enormous medical bills, which their family will have to pay,” warns Knott. “If you do not specify this, then your family may be left paying insurmountable medical bills. To circumvent this you need a Living Will that specifies exactly what you would like to happen in such a situation.” 5. Gives you peace of mind “Last of all, making out a Living Will provides peace of mind. Tragic situations are hard enough and you want to know that your family, as well as yourself, will be taken care of properly in such a situation.” He goes on to advise that Living Wills have moved away from simply focusing on specific treatments and medical procedures to also focusing on patient values, personal goals, and health outcome states. “For example, a Living Will might designate an agent to make care decisions; dictate what kind of life support treatment that the patient does or does not want; discuss pain management, personal grooming and bathing instructions; address how the patient wants to be treated, including religious, spiritual, and emotional support; and detail funeral or memorial plans.” Knott says many are still of the view that a general power of attorney will suffice if they are mentally incapacitated or in a coma following an accident. “Unfortunately, a power of attorney becomes invalid the moment the grantor of that power of attorney cannot exercise his judgement,” he warns. “The last thing you want to do is leave your family with impossibly tough decisions and crippling bills to pay should you end up in such a dire medical condition. Get a Living Will drawn up and file it with your regular medical practitioner and trusted adviser. That same adviser should be consulted to ensure that the documents in your Living Will are binding and not ambiguous,” Knott adds.
CLAIRE SMITH Discovery Certified Financial Adviser
Education funding: A critical element of family financial planning
hile the right to education is indisputable, many challenges persist that prevent equal access to quality education, particularly at tertiary level. Education inflation is consistently outstripping salary inflation, with the result that it can cost more than R2m to educate a child from crèche through to the end of their tertiary studies. This situation is further exacerbated by a tight national fiscus, slow economic growth, and individuals who generally do not save enough money to fund their children’s education. These factors all lead to parents wondering how they will be able to afford their children’s education, and, if something were to happen to them, who would pay for their children’s schooling. Education is of paramount importance Education is a lot more than just learning to read and write. It is a tool that can be used for change, and it has the power to increase post-graduate income by an additional 10% per year ‒ and increase a country’s GDP by 18% on average. The costs of education are increasing exponentially Education costs increase by about 3% above the inflation rate, making education inflation about 10% per year. This means that the cost of education increases much quicker than our salaries do. A child born in 2017 will start high school in 2031, at a cost of around R100 000 per year (or R300 000 per year in a private school). Helping clients to save for their children’s education Financial advisers need to clearly understand the positive impact that a wellthought-through investment strategy for education costs can have for clients and their children. People are increasingly recognising the importance of a good education and are also becoming more and more aware of its escalating costs. This is an opportunity to help clients make sound financial decisions that will help them in the long run. Five ways to save for children’s education Below are some ways that financial advisers can help their clients to save for children’s education: Start from birth In the six years until a child enters Grade R, clients can build a sizeable education fund if they start saving when the child is born. Of course, the sooner a client starts the better. Focus on university Financial advisers can also calculate the realistic cost of the preferred university, and then offer clients savings or investment solutions to achieve this. Savings plans It is advisable to inform clients of alternative options such as Fundisa, which is a government-sponsored education savings scheme for a child’s tertiary education, with contributions from R40 a month. Government will top up contributions to the scheme by adding 25% to the amount saved annually, but only to a maximum of R600 per year. (The benefit can only be used at approved tertiary institutions.) Fundisa is a great option if a client is investing less than R300 a month. Investment options Savings do not need to be restricted to a bank account. In fact, most bank accounts are not going to keep up with inflation. In order to achieve longerterm goals, clients need to take the appropriate risk to deliver long-term inflation-beating returns. Discovery’s Global Education Protector offers a dynamic new way in funding for risk and tertiary education By optimising Discovery’s shared-value model, and by managing their health and wellness, clients can get up to 100% of their children’s tertiary education fees funded by Discovery Life. This is possible through Discovery’s new Global Education Protector, which rewards clients for living healthier lives.
Help your clients’ protect their children’s education with the Global Education Protector. Discovery Life’s new Global Education Protector helps to cover your clients’ children’s education from crèche through to tertiary education, should something happen to them. It also allows them to get up to 100% of their child’s tertiary tuition fees funded, even if they don’t claim, by simply leading a healthy lifestyle.
Special Offer | Ends 15 December 2017 For a limited time, Discovery Life will immediately fund a minimum amount of up to 33% of your client’s children’s tertiary tuition fees through the University Funder Benefit. The percentage as well as the number of years of education provided is based on their children’s age when they take out the policy and on the benefit option they select. By engaging in Vitality they can increase the amount of their children’s tertiary tuition fees that we will fund to up to 100%*.
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NEWS & OPINION
31 December 2017
FINANCIAL MATURITY IAN KILBRIDE Chairman and CEO, Warwick Wealth
One measured step at a time
hen one of the leading or at the very least, better known economists writes openly, as he did this month, that “it is time to send all of your money out of South Africa”, then many people sit up and take notice. It is, however, better to know all of the facts and thus always better to have at least a third, fourth or a handful of opinions, before you take action. Balance and common sense are often far better traits than risk and impulse. As we contemplate the position of the young democratic South Africa today, we should also remain cognisant of perhaps how we ourselves grew up and how our own personality and attitudes changed as we passed through adolescence into our 20s, 30s, 40s and then, in my case at least, middle age. I remember an earlier me, who as a younger businessman, was all wide eyed, mystified and excited about the endless possibilities of life and business. I also remember a great friend and guide, for at least the last twenty five years. Rodney Reid allowed me to set off at a blistering pace to achieve a particular goal. Just like the fabled hare I darted off and, in a frenzy of ambition and excitement, rushed around to achieve the long forgotten goal – only to arrive at that final point, all flushed and proud of myself, to see Rodney, the tortoise to my hare, awaiting my arrival. His methodical, rational and calm approach had achieved exactly the same objective, but in far less time than my panting excitement and fervour had achieved. There is no doubt that South Africa faces some fearsome challenges, but then so did many new nations at their birth and during adolescence; the Americans even declared war on themselves! Our nation’s finances may not be in such a noble place today, but neither were they under PW, FW or PG. Only a year ago Pravin was proclaimed a saviour, but he clearly also oversaw our decline to where we are today. Mr Gigaba, our latest financial guru, in his recent ‘mini budget’ may have shocked a few people with the hard core numbers, but perhaps that budget may just be his and possibly also the ANC’s ‘Rubicon’ moment. That budget may forever be the one remembered for when the cover was finally pulled back and the full reveal finally occurred. We have needed a no holds barred, ‘tell us like it is’, moment for the last five years and we certainly got one. South Africa is a young nation, an ‘immature adult of a nation’ and yet it is still an amazing country, full of amazing people. It has a great future and we should not lose faith and doubt that, or worse choose a President based upon who is the ‘least corrupt’. No, we must rather choose and or make choices that give the future middle-aged South Africa the best chance of success.
Investec collects six awards The second annual Africa Structured Products & Alternative Investments Conference, hosted by Structured Retail Products, the online resource for the global structured products community, saw Investec collect six awards. Investec was recognised in the following categories: 1. Best Performance, South Africa 2. Best House, Africa 3. Deal of the Year 4. Best Distributor, South Africa 5. Best House, Equities 6. Personality of the Year, Brian McMillan The event, which took place in Johannesburg last week, recognises the best performing structured products manufacturers, distributors and service providers in the market, and is voted for by the industry. “What makes this accolade particularly satisfying is the acknowledgment from our distributors as well as our peers,” says Kenric Owen, Investec Structured Products. “Together, we have seen the industry
develop considerably over the past twelve months, to a point where structured products comprise an increasing proportion of typical asset allocations. This is largely thanks to these investments being steadily demystified through the hard work of the industry. This bodes well for all stakeholders.” Structured products provide a pre-defined risk-and-return profile with returns linked to one or more underlying assets or indices. Investec has launched 17 structured products in the past 12 months, eight of which were offshore and nine were randdenominated local investments. “The peculiar global investment environment currently – where we are seeing major political shifts with little predictability of outcomes, against a backdrop of muted growth, is causing investors to seek some level of certainty in the pre-defined nature of structured products. This is specifically relevant to investors wanting their principal investment protected as well as seeking attractive upside potential,” says Owen.
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31 December 2017
Financial service providers take the lead in TCF
ith the imminent rollout of the much anticipated Twin Peaks financial regulations in South Africa in 2018, aspects of it are already entrenched in the way financial services companies deal with their clients. One of these aspects is Treating Customers Fairly (TCF), which was initially introduced by the Financial Services Board (FSB) in 2011, and is an outcomes-based regulatory and supervisory approach to ensure that financial services providers (FSPs) treat their customers fairly. FSPs are required to deliver six outcomes that are applied to every step of the financial service cycle and the relationship between them and their clients. Twin Peaks will result in the restructure of the financial services environment, including the transformation of the Financial Services Board (FSB) in its current form into the Financial Services Conduct Authority, which will focus on supervising financial providers’ market conduct. “The implementation of TCF outcomes, which is a crucial element of market conduct, is incremental in any financial business and has been given extensive consideration in our business,” says Gavin Smith, Head of Africa, deVere Acuma. The six key outcomes of TCF are: • That customers must feel confident they are dealing with an institution where TCF is at the core of its culture • That products and services are designed to meet their needs • That customers are provided with clear information and kept informed • That advice is suitable and according to the customer’s circumstances • That service is of an acceptable standard and products perform as customers have been led to expect • That customers do not face unreasonable barriers when they want to change a product, switch providers, submit a claim or make a complaint. Although some TCF outcome principles are already manifested in the Financial Advisory and Intermediary Services Act and subordinated legislation, for example the general code of conduct, the TCF outcomes necessitate an additional layer of requirements to ensure fair treatment of customers.
“While most financial service providers are progressing well with their TCF programmes, smaller financial services providers might need further support from the FSB and/or financial industry bodies,” says Smith. “Investors should make themselves familiar with the TCF outcomes and ensure they reap the benefits thereof.” In earlier communication, the FSB said all customers, regardless of sophistication, are entitled to fair treatment, but, “the nature and intensity of conduct of business supervision will be proportional to the risks posed to relevant customers and the vulnerability of those customers to potential abuse”. It said that specific TCF-related requirements will not be required for certain classes of customer and/or product. FSPs, representatives and intermediary services providers will also have to work together closely to ensure financial services offered and provided are aligned to TCF outcomes, irrespective of where they are located in the value chain. According to the FSB, investment managers, while not directly responsible for customer experience, will have to identify how their business models, processes and offerings contribute to the end customer experience and consider whether they are in a position to mitigate the risk of unfair customer outcomes. “What clients can be assured of is increased protection when buying investment products under the new regulation, which is expected to work in conjunction with the proposed Retail Distribution Review, proposing substantive reforms to the regulatory framework for financial advice and distribution of financial products to customers and, of course, Twin Peaks itself.” Smith adds that placing clients’ needs at the centre of business culture is vital to how business is done. “We are in full support of these important developments and, as a company, we are continuously working on further enhancing our company culture and processes,” he says.
Gavin Smith, Head of Africa, deVere Acuma
GERRY GRISPOS Compliance Officer, Compli-Serve
AI and the fund manager of the future The fund manager of the future will wake up each morning, come out of his bedroom, pick up a coffee on his way to his lounge, switch on his laptop, and immediately get a summary of how financial markets behaved the day before. Using scan engines on his software, recommended ‘buy and sells ‘are automatically generated based on pre-set criteria. This will happen irrespective of his style of investing, or investment philosophy. Those criteria, and more, will already have been programmed into his software. No longer will he have to rely on teams of analysts studying reams of data far into the night. Thanks to his software the scans will have gathered all the data his analysts could have accessed – and much more. In addition, because his software is capable of machine learning, it will generate its own ideas and tell him to tweak his parameters for a better result. That’s artificial intelligence (AI), and it’s going to revolutionise the asset management industry, both for the smaller players, for whom it will be a great opportunity, and the large houses. I once went on a course to learn how to use technical analysis to choose shares to invest in. Manually there were 39 steps to go through, which would take me an hour and a half just to assess one share. Now, with a piece of software that costs approximately R3 500, my computer does it in five minutes tops and gives me five shares to choose from. There is simply too much data available today. In addition, fund managers get conflicting views from market watchers from around the world and it’s too much to interpret. So, they tend to align themselves with a few market analysts whose thinking they like, and that can be fatal. Or, they link themselves to a particular set of stock markets they like, thereby omitting areas where there are greater opportunities. Over the last five years, the exchange traded fund industry has taken off like a rocket. One of the reasons is that there are far too many local collective investment schemes to choose from. At the same time, only a handful of managers are able to consistently beat the benchmark. Investors are tired of paying heavily for that service, so there has been a huge outflow from traditional unit trusts into index or exchange traded funds. Highly sophisticated software with an array of highly complicated algorithms will enable investors and fund managers alike to scan through a plethora of data and technical charts and arrive at a small number of ‘appropriate’ investments. AI is already beginning to enable fund managers to analyse a multitude of investment instruments, taking into account countless economic variables – using a laptop and some specialised software. AI can sift through all the data and the wads of reports that currently require the attention of teams of analysts, before summarising the shares that fund managers should buy or sell. There is a wonderful opportunity for fund managers to embrace AI and if they do, a great deal of time and resources will be saved. Ignore AI at your own peril.
31 December 2017
hange in the asset and wealth management (AWM) industry is now accelerating at an exponential rate. This is the conclusion drawn from PwC’s recent report: Asset & Wealth Management Revolution: Embracing Exponential Change. Although the industry is set for growth over the next ten years, asset and wealth managers must become business revolutionaries, even disruptors, if they’re to survive and prosper. Now is the time for action, the report says. It also notes that asset and wealth management has been in a period of upheaval globally since the 2008-2009 Global Financial Crisis (GFC) that is intensifying. The modern-day industry has remained fundamentally the same since the last decade of the 20th century; over the next 10 years it will be substantially reinvented. There will be major changes to fees, products, distribution, regulation, technology and people skills. Assets under management (AuM) will continue to grow rapidly, according to PwC. “We estimate that by 2025 AuM will have almost doubled – rising from $84.9tn in 2016 to $145.4tn in 2025.” This growth will likely be uneven in consistency and timing: slowest in percentage terms in developed markets and fastest in developing markets. But there are risks. Rising populism in Europe, Brexit negotiations, China’s transition to a consumer-driven economy, Asian geopolitics and the potential changes in US policies on regulation, tax and trade all create uncertainty. The report identifies four interconnected ASSETS UNDER trends that will MANAGEMENT drive the AWM industry’s WILL CONTINUE revolution. TO GROW “Between RAPIDLY them, they will squeeze industry margins, making scale and operational efficiency far more important, and meaning that all firms need to integrate technology in all areas of the business and develop a clear strategy for the future.” 1. Buyers’ market Fees are being pushed down by investors and regulators. Increased regulation, competition and new entrants are disrupting traditional value chains and revolutionising wealth managers’ raison d’être. Regulations are being introduced worldwide to prevent asset managers from paying commissions to incentivise distributors, leading to lower cost retail products. Meanwhile, institutional investors have the tools to differentiate alpha and beta – they will pay more for alpha but not for beta. As low-cost products gain market share, and larger players benefit from scale economies, there will be further
industry consolidation and new forms of collaboration. Asset and wealth managers must be ‘fit for growth’ or they can expect either to fail or to become acquisition targets. They must act now. 2. Digital technologies: do or die The AWM industry is a digital technology laggard. Technology advances will drive quantum change across the value chain – including new client acquisition, customisation of investment advice, research and portfolio management, middle and back of office processes, distribution and client engagement. How well firms embrace technology will help to determine which prosper in the years ahead. Technology giants will enter the sector, flexing their data analytics and distribution muscle. The race is on. 3. Funding the future Asset and wealth managers have been filling the financing gaps that have emerged since the GFC. They have been first movers, providing capital in areas short of funding due to banks’ regulatory and capital limitations, as well as investing in real asset classes. To generate alpha, their involvement in niche areas such as trade finance, peer-to-peer lending and infrastructure will dramatically increase. Equipping individuals to save for old age, as governments step back, will also support growth in AuM. Action is needed to capitalise on the gaps. 4. Outcomes matter Investors have spoken loudly. They want solutions for specific needs – not products that fit style boxes. Active, passive and alternative strategies have become building blocks for multi-asset, outcome-driven solutions (which will increasingly include environmental, social and governance outcomes). Demand for passive
and alternative strategies will grow quickly. While active management will continue to play an important role, its growth over the near term will be slower than passive. Firms must either have the scale to create multi-asset solutions or be content as suppliers of building blocks. Managers must deeply understand their investors’ needs, tailor solutions and focus on optimising distribution channels. They must also focus on their core differentiating capabilities and move to outsource non-core functions, such as tax compliance. Investors have great choice; they will move to optimal solutions regardless of prior loyalties. According to the report, these four trends listed above, will transform the industry’s nature and structure. Scale, price, diverse people and technology capabilities will characterise the largest firms. Smaller, specialist firms will prosper if they offer excellent investment performance and service. PwC recommends that the industry act in three areas:
Strategy Firms should reorganise their business structure to support its differentiating capabilities and to cut costs elsewhere.
Technology Every firm must embrace technology as it impacts all functions.
People Different skills are needed, backed by new employment models. Firms must find and develop people with new skills and adapt their employment models to nurture and retain them.
Change accelerating in wealth management industry
31 December 2017
Reducing ‘bad luck’ in retirement investing
PIETER HUGO Managing Director, Prudential Unit Trusts
Sequence Risk: Two Identical I
BRIAN THOMAS Co-Portfolio Manager and Retail Analyst, Laurium Capital
nvestors in South Africa may be forgiven for the fatigue and confusion that they feel around the multitude of benchmarks that exist in the country. Since the turn of the century, there have been four main benchmarks for clients to evaluate South African asset managers – the All Share Index (ALSI), the Top40, the Shareholder Weighted Index (SWIX) and now the Capped SWIX. As the technology boom of the 90s gave way to the resources boom of the early 2000s, a number of SA companies including Anglo American, Dimension Data, Old Mutual and SA Breweries, applied to have their primary listings moved to London. This allowed them to tap the world’s large liquid capital markets for capital to support their growth ambitions. When companies have a listing in two places, the market force of arbitrage drives the price of the shares in each market to be equal. In 2002, such had been the success of these offshore listings, fuelled by the start of the commodities bull market, the likes of Anglo American and BHP Billiton began dominating the South African market. In early 2002, market participants met with the JSE and voiced concerns over the concentration of these large companies on the JSE, pointing out their cyclical nature and the fact that the benchmark, which in theory should be a broad representation
Sequence Risk: Two Identical Investors in different ways as the markets, and underweight asset classes SEQUENCE RISK: TWO IDENTICAL INVESTORS R4.0m their capital, gained and lost value over that are overvalued in order R3.5m R4.0m the years, so that Joe ended up with to mitigate future losses R3.0m R3 601 375 some R1.5m less at retirement than in market downturns, and R3.5m R2.5m Jane. It was simply a matter of unlucky overweight undervalued R3.0m JANE JOE timing for Joe. assets where necessary. R2.0m - Same investment term R2 081 423 R2.5m - Same salary and growth Financial advisers and investors Thirdly, a valuationJANE JOE R1.5m - Same contribution rates R2.0m have no idea who will end up being sensitive approach to both - Same investment term - Same asset allocation R1.0m - Same salary and growth Same 5% p.a. average real return unlucky when they start on their stock selection and asset R1.5m - Same contribution rates R0.5m investment journey, since no one allocation - Same asset allocation can also help: R1.0m R0.0m knows when market downturns will Same 5% historic performance p.a. average real return data 65 68 71 R0.5m happen. Therefore everyone needs shows that buying assets R0.0m to incorporate some techniques at undervalued levels 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 for reducing sequence risk in their (compared to their history) Investment Start Date retirement planning. One of the primary increases the probability of Prudential Investment Managers ways is to build a well-diversified enhanced future returns. date funds that haveSource: pre-determined portfolio with enough growth assets And finally, some active fund managers paths that simply reduce equity weights (equities, property) to meet your longerlike Prudential also design their funds to as retirement approaches, without term goal, while also including income help compensate for market downturns, taking cognisance of the valuation of assets (bonds, cash) to cushion the managing them to meet a longer-term those assets at the time. Such methods market downturns. Such a balanced return objective like retirement with a can force investors into undesirable portfolio can reduce both the volatility very risk-conscious approach. portfolio exposure, for example, by of returns and the severity of negative By implication, retirement solutions obliging them to sell equities when they return periods, without significantly that employ a passive or fixed longare cheap. They focus on solving the impacting total returns earned. term asset allocation, and ignore asset wrong problem – high market volatility – Active asset management is also valuations, can exacerbate sequence when the true concern is falling short of very important, since the manager can risk. The same can be said of targetyour retirement goal. Investment Value
A little-considered, but significant risk when investing for retirement is ‘sequence of return risk’ or ‘sequence risk’. This is when an investor ends up with less capital than expected at retirement, but has actually done everything right: made regular, sufficient investments for the prescribed number of years, stayed invested in the right assets, and even earned the correct targeted average return over time. How is this possible? Simply because they were unlucky: the sequence of investment returns they received, following the ups and downs of markets over time, ended up being unfavourable for them. Take the example of two investors as shown in the graph, Joe and Jane. All of their investment parameters are identical, including their average investment return over 40 years. However, because Joe started investing three years earlier than Jane, the sequence of their annual returns ended up markedly different: their returns accumulated
What’s in a benchmark? of the market, had become anything but that. The eventual solution after much deliberation was to propose two new indices: • A Capped Index which would cap each share at a maximum of 10% weight and be re-weighted quarterly. • A shareholder weighted index, the ‘SWIX’. This index aimed at reducing the weight of a share in the index by the number of shares that were not available for purchase by local managers. The SWIX index gave investors the broad exposure that a benchmark should do. The weights of Anglo American and BHP Billiton moved from 11.78% and 10.6% in the ALSI to a more reasonable 5.1% and 4.6% respectively on the SWIX at the end of June 2015. At the peak of the commodity bull market in June 2008, Anglo and Billiton’s combined weight in the ALSI grew to 32.6%, but on the SWIX was much ‘safer’ at 15.8%.
THE RDR WILL PROVIDE FINANCIAL ADVISERS WITH THE OPPORTUNITY TO CLEARLY ARTICULATE THE VALUE THEY ADD TO THEIR CLIENTS
Anglo traded at R548 on 30 June 2008 and eight years later traded at R141, losing nearly 75% of its value. It is simple maths that holding a lower weight in the SWIX (rather than the ALSI) saved those benchmarked against the SWIX from the fall. While the SWIX protected investors from the fall of Anglo and Billiton, investors were handsomely rewarded with the incredible success of Naspers. On 30 June 2008, Naspers traded at R171; at the end of September 2017, it traded at R2 920, some 16.1 times higher, and with a 21.5% weight in the SWIX. Investors in SA have been massive beneficiaries of this incredible gain in Naspers. However, it is rare that the largest stock in the market now will be the top stock 10 years from now. Although the fundamentals of Naspers and its subsidiary Tencent look good, a 21.5% weight we feel is just too high for responsible fund management. Holding 21.5% in one stock is akin to putting a good proportion of your eggs in one basket. The FTSE-JSE now blends the concept of capping with the SWIX into the ‘Capped SWIX’ and rebalances the index on a quarterly basis. Each quarter, Naspers is down weighted in this index to 10%, meaning that the other stocks in the index receive a greater weight than they naturally would have. Without getting into complex mathematics, it stands to reason that this would be a more diversified index than the SWIX is with Naspers at 21%. We believe the Capped SWIX is a broader, more representative benchmark; as such it is a more realistic benchmark for active equity portfolio managers to be evaluated against. Laurium moved its Equity Prescient Fund to the Capped SWIX benchmark in November 2017.
31 December 2017
Regulation and the SA hedge fund industry Novare has released the findings of its 14th annual Hedge Fund Survey, which analyses the overall effects of regulation and its impacts on the industry.
In the South African hedge fund The survey also found that the industry landscape, most hedge funds operate experienced its first decline in assets under as collective investments,” says management (AUM) in over five years Eugene Visagie, Head of Hedge Fund with assets dropping to R62.2bn. This was investments at Novare. caused by a combination of factors, such as “This is due to regulatory authorities poor fund performance, outflows and the assessing the systemic risks of these transitory phase. alternative assets,” he adds. “Performance from South African In fact, SA’s regulated setting for hedge based hedge funds has been subdued over funds – both at the manager and product the last couple of months mainly due to level – gives it one of the world’s most significant political changes both locally advanced operating environments. and abroad – such as Nenegate, Brexit, and While hedge fund specific regulation is the election of Trump. In addition, there a fairly recent development, hedge fund was the unforeseen strengthening of the asset managers have been regulated under rand during 2016. These factors, combined the Financial Advisory and Intermediary with the low levels of volatility in the AllServices (FAIS) Act since October 2007, Share index, have resulted in muted under a separate license category, Cat 11A. returns,” says Visagie. (Discretionary asset managers such as “In the coming year(s), it would unit trust asset managers require a Cat 11 serve the industry well to explore licence.) In 2015, Hedge funds were external investor sources in addition to included under the regulation of the local improving performance in order to attract Collective Investment new inflows and achieve Schemes Control Act also sustainable growth.” THE FIRST known as CISCA. The industry also witnessed “Almost every industry an increased amount of hard REGULATED undergoes teething and closed funds, up from 15.9% in FUND WAS growth phases on the road the previous period to 19.5%. LAUNCHED IN to maturity. Especially when This was prevalent in major considering the latter, one FEBRUARY 2016 hedge fund asset managers not would argue that there has wanting to dilute returns and never been a better time to rather focusing on satisfying be in the industry because like all growth existing investors return expectations. stories, it comes with periods of lows and Hard closed funds are not open to new uncertainty. For instance, looking at the investments, meaning that even though newly implemented regulation one might investors might have wanted to invest, they conclude that this is not the markings of would have been unable to do so. an industry that is undergoing its growth Education will always remain key and phase, but one that is well on its way to an adequate understanding of, and better achieving maturity,” explains Visagie. education regarding hedge funds, its This year, a total of 52 hedge fund capabilities and how it works will encourage asset managers collectively managing risk-averse investors to embrace the benefits over 98 uniquely mandated hedge funds of hedge funds. participated in the survey. With the Despite the misconception that hedge introduction of the new regulation, there funds are risky investments, South was uncertainty within the hedge fund African-based funds are in fact relatively industry. Subsequently, a few anticipative conservative and excellent for capital trends emerged, such as: preservation in the current market • Investors changing mandates and switching environment. Interestingly, many South to either traditional long-only mandates, African investors still perceive hedge funds unique segregated mandates or to moving as the riskier investment compared to unit the capital offshore. trusts when, in fact, the CIS environment • Consolidating smaller hedge funds and experienced much more volatility of late. not classifying these funds as hedge funds. This is done with the aim of running the fund as a private portfolio until such time that it achieves a solid track record and asset base. The first regulated fund was launched in February 2016 and since then, more than 90% of industry assets have been successfully transitioned into the regulated space.
Eugene Visagie, Head of Hedge Fund investments, Novare
NESAN NAIR Portfolio Manager, Sasfin Wealth
e often hear people speak about how the stock market can create value for investors. The simplest interpretation is where the market value of the company exceeds the total amount that shareholders invested. In other words, value is created when the company’s share price exceeds its book value per share. Market analysts use the ratio of the share price to book value per share as a single measure of value creation and refer to this ratio as the price-to-book ratio or ‘P/B’. A company with a P/B ratio of one has created no value for shareholders whereas one that has a P/B ratio greater than one has created value. Sometimes, the P/B ratio is less than one and we refer to this as a scenario where value has been destroyed. It is possible to break down the P/B ratio into two factors that contribute equally to its value via the following mathematical identity: P/B = P/E x ROE where P/E represents the Price /Earnings ratio of the company (this is the number of years it would take to earn back your investment in the company through its current annual profit), and ROE refers to the return on equity of the company, a measure of the annual profit of the company in relation to the amount invested by shareholders in that year of profit. Unpacking the ambiguity of the P/E ratio Most market analysts reference the P/E to the value of the company. A high P/E is interpreted as expensive, whereas anything less than 10 is considered cheap. A company’s profits may change from year to year and a higher growth company usually has a higher P/E, so one needs to interpret the P/E in the context of the company’s growth in order to make meaningful assessment of the expensiveness of a company. The factors that drive the P/E ratio, however, are varied and would include things like changes in interest rates, exchange rates, GDP growth rates etc. There are also company specific issues that may influence the P/E ratio of a company such as the ability of the company to grow its earnings in excess of that of the sector it operates in. It is important to understand though that the P/E is largely set by the market and not by the company or its management itself. In fact, there is often very little management can do to influence its P/E. The second factor, though, the company’s ROE, is very much in control of the management of the company. The factors that drive the ROE relate to VALUE IS CREATED operational and financial WHEN THE efficiencies. On the operational side, the biggest driver is COMPANY’S SHARE product mix, ie being able to PRICE EXCEEDS market and sell higher margin ITS BOOK VALUE vs lower margin products and cost efficiencies. The use of PER SHARE technology to achieve higher productivity is a standout area that companies target to grow their ROEs. On the financial side, the intelligent use of leverage and business restructuring, for example mergers and acquisitions, can help grow profits of the existing shareholder capital base. In the current SA environment we operate in, with stagnant GDP growth and high interest rates, it’s difficult to expect value to be created by an expansion of P/E ratios, which themselves are high compared to history. The opportunity exists though, for innovative management teams to carefully examine their businesses with a view to expanding their current ROEs to sustainably higher levels, thereby delivering value to shareholders.
31 December 2017
What makes a city a worthy investment?
LESIBA LEDWABA Head of Property Portfolio Management, Ashburton Investments
Modest returns seen from listed property in medium term
ccording to the latest Schroders Global Cities Index, which ranks over 700 cities in order of their attractiveness from a long-term real estate investment perspective, South African cities leave much to be desired, with Johannesburg being ranked fairly low at 212th, while Cape Town is all the way down at 414th. Tom Walker, Co-Head of Global Real Estate Securities at global asset manager, Schroders, says that the Index is the result of thorough research into what makes a city most attractive for real estate investors. The index uses a number of factors to identify the most economically vibrant cities, such as the total population residing in a city aged 15 and over; median household income; university ranking; retail sales; and Gross Domestic Product (GDP). Cities are then ranked in the index to provide a view of where some of the biggest global real estate opportunities lie. “From a long-term real estate investment perspective, the best cities share similar characteristics – diverse economies, strong zoning regulation, world-class universities and developed infrastructure. Together, these ingredients allow select cities to maintain their competitiveness, making them well placed for long-term real estate investment and attractive places to live with diverse cultural and leisure activities,” Walker explains. Expanding on why universities are seen as being critical in powering city economies, he says that their focus on innovation and education helps contribute to better earning power for graduates, which is better for both the economy and for real estate. “Knowledge-based hubs are growing in economic strength with a positive knock-on to real estate markets in those locations. “Alongside universities, we look at the health of the wider economy and its potential for growth in real estate demand, alongside the number of people and their earnings.” Over and above these factors, Walker believes that there are two significant trends that are shaping the future investment potential of real estate, namely technology and urbanisation. “Real estate is being increasingly disrupted by technology – from offices to self-storage and healthcare – look, for example, at how Amazon and online shopping continues to reshape the retail sector.
“Urbanisation, on the other hand, which has been called the most defining trend of the 21st century, refers to the constant creation of strong urban hubs, resulting in certain cities offering more opportunities than others and promising greater investment potential as a result. A great example of a city that has become a beneficiary of urbanisation over the years has been Hong Kong, which is ranked 6th on the Index.” Leading the pack in the Index is Los Angeles, followed quite closely by London. “Los Angeles jumped from sixth place to first, due to its scale and economic depth, which makes it a compelling location to work and live,” says Walker. “One of its key economic strengths is that it doesn’t have to rely on only one industry, as its diversified across financial services, media, trade and technology.” Looking forward, however, Walker predicts that Miami, currently ranked 27th on the Index, is one of the leading global cities of tomorrow. “Miami is a hub that plays a crucial role in trade between the US and Latin America. Although already ranking fairly high on the Index, we feel that this city is well-positioned to continue to grow as it possesses many of the elements we look for when investing in a city: a strong service sector, tourism and its role as a trade hub.” Walker concludes by saying that, interestingly enough, from a real estate perspective, the type of real estate being invested in is actually irrelevant. “At the end of the day, it really doesn’t matter if you own a data centre, a logistics unit or a health service, as you are ultimately investing in the city and its potential for achieving long-term growth.” South Africans looking to gain exposure to the top cities as ranked by the Schroders Global Cities Index can access the Schroder ISF Global Cities Real Estate Fund via the Absa Global Property Feeder Fund. The fund is also currently listed on Glacier International and Momentum International platforms.
Tom Walker, Co-Head of Global Real Estate Securities, Schroders
The listed property sector has delivered exceptional returns over recent times. In fact, over the 15 years to September 2017, the sector gained 22.2% per annum, well exceeding equity returns of 15.9% a year. This is a return most investors have grown accustomed to. The sector’s contribution to general equity benchmarks has also grown significantly from a meagre 2% to just under 7% during this time. This is not only owing to the performance of the sector, but also to ongoing capital raises – about R80bn has been raised by South African property players in just under two years. Its allocation within multi-asset portfolios including retirement funds has also gained traction. The largest drivers of return have been capital or share price appreciation emanating from two sources: compressed yields and dividend growth. First, listed property yields have declined from levels of 13% (seen 15 years ago) to about 6.8% currently. This compression coincided with similar moves in global bond yields and other income yielding assets because of quantitative easing, or asset purchases, by major central banks aiming to revive and stimulate global economic activity following the global financial crisis. Major central bank balance sheets have swollen to about $14tn as they have bought both corporate and sovereign bonds, pushing developed market real rates to all-time lows and into negative territory. Low bond yields in turn drove other financial asset prices and valuations to elevated levels even in the absence of earnings growth to justify such valuations and lack of inflation. There is, however, less commitment to quantitative easing and a mulling of THE LARGEST potential unwinding of these balance DRIVERS OF sheets, which could lead to a gradual RETURN HAVE increase in listed property yields and remove support for share prices. BEEN CAPITAL Secondly, in the absence of gearing, OR SHARE PRICE accretive acquisition pipelines and APPRECIATION financial engineering, dividend growth is simply driven by macroeconomic conditions as well as property demand and supply fundamentals, which determine whether net rentals increase or decline. South Africa makes up about 60% exposure within the South African listed property benchmark. Given the benign economic outlook, growth from locally sourced income is likely to continue to come under pressure. We are expecting economic growth of just 0.7% in 2017 and about 1.2% in 2018, which is clearly unlikely to lead to any meaningful support for overall rental growth. Likewise, recent IPD/ MSCI data has shown rental growth slowing in the second quarter of 2017. The retail sector, which makes up the greatest proportion of local property exposure and the best performing sector until recently, is also showing signs of weakness. Pressure on trading densities in shopping centres and a slight uptick in vacancies is quite evident. The rest of the income within the benchmark originates offshore, most of it from Central Eastern Europe (about 22%) with less exposure from developed markets. Given the lack of attractive opportunities locally, numerous funds have been increasingly reallocating capital to these territories. Of the R80bn capital raised these two years, the majority thereof was or will be deployed offshore. This could underpin dividend growth and potentially provide a surprise on the upside. If you exclude the offshore income, the sector’s distribution growth would be just over 6%. Given the above scenarios, Ashburton Investments’ multi-asset funds retain a slightly underweight to neutral exposure to this asset class ranging from about 5% to 9% depending on the mandate and return targeted.
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INVESTING LONG-TERM INVESTING LESSONS OF 2017 FEATURE
here’s been a lot of market noise around this year – some of it true, some of it untrue. For many, removing emotion to focus on a longterm investment strategy seemed horribly difficult. Winning the war Long-term investing is about winning the war in the end, says Hannes van den Berg, Portfolio Manager at Investec Asset Management (IAM). “This war is one where we all want to have more assets than liabilities and during this journey enough net assets to provide for ourselves and our families until the end. To do that, you need to make sure that you win most of the shorter-term battles during the war. In 2017, it was difficult to focus on the end victory, as there were so many short-term battles to fight.” He adds that in terms of SA exposed stocks, (those reliant on the strength of the SA economy and consumers, such as retailers, insurers, banks and SA-focused property companies), this year was a case of trying to hold more of the shares that would perform better and less of those that struggled. “It proved to be a year where it was more rewarding to focus on the stocks exposed to improving global growth and global consumer strength, such as Naspers, Richemont, and British American Tobacco, as well as Resource equities, which benefited from better supply and demand dynamics and a focus from the management teams on ‘value over volume’. “Perhaps the trickiest short-term battle was navigating the rand volatility. Thanks to local uncertainty, we’ve seen the rand at R14.40 to the US dollar twelve months ago, strengthening to R12.50 and then heading back to above R14.00 again, making it the most volatile currency relative to the US dollar over the last twelve months.” Market noise For Laurium analyst, Ruan Koch, it became increasingly important to drown out the market noise in 2017. “We can easily be swayed into thinking we have some edge in forecasting political events, but the average market participant is poorly equipped to do so. “Long-term investment decisions are difficult when faced with binary political outcomes. We stick to what we are good at, seeking to invest in stocks where we have a sufficient margin of safety with a deep discount to intrinsic valuation, aiming to generate positive risk-adjusted excess returns and this never changes.” What does change, he adds, is the general appetite for risk. “Considering renewed political and policy uncertainty, we are predisposed to err on the side of caution.” For Sandy McGregor, Portfolio Manager at Allan Gray, the local market began to offer some attractive investment opportunities in 2017, after three years of falling company profits and lacklustre equity returns. “It is now possible to find companies with a strong asset base or a competitive advantage which should deliver inflation-beating returns over the longer
The year of uncertainty MoneyMarketing speaks to two portfolio managers and an analyst to find out what they thought about long-term investing in 2017. term. Where three years ago the expected annual return from equities was below 10%, they now exceed 10%.” He adds that according to research, Allan Gray clients did not make any substantial changes in their investing behaviour over the year. IAM’s van den Berg believes that many retail investors may have decided to park their money in cash or alternatively take it out of South Africa. “I also think that global investors would have gone underweight with South Africa equities in their emerging market allocation.” In May this year, van den Bergh was asked by an investor whether he should move his investment into a money market fund or stay invested. “At that stage, the stock market had returned a dismal 6% over a period of three years. By staying invested, he participated in a more than 12% rally in the JSE All Share to date. So despite WE CAN EASILY our dismal South Africa BE SWAYED INTO GDP growth, THINKING WE the market HAVE SOME EDGE has rallied and rewarded IN FORECASTING POLITICAL EVENTS’ investors handsomely over the last five months.” He adds that there are so many themes to play in the SA market from China and resource demand to accessing the global growth story through companies like Naspers, Richemont, British American Tobacco, Bidcorp, Mondi and Steinhoff, to betting on SA Inc, which gives the investor emerging market South African consumer exposure. “If you had moved into cash, you would have missed the opportunity to participate in this unique index with its unique opportunities.” Laurium’s Koch says both investors and corporates ‘played it safe’ this year. “Looking at flow numbers, we can see that low equity funds have seen pronounced outflows, with the biggest beneficiary the income funds. Investors are adopting a ‘wait-and-see’ approach with high political risk heading into December when the ANC’s elective conference takes place. “Corporates too are hoarding cash, estimated by the University of Johannesburg Centre for Competition, Regulation and Economic Development at R1.4tn. With such pent up corporate demand, a positive political resolution could certainly serve as a catalyst.”
Fiscal crisis Allan Gray’s McGregor agrees that business investment plans are on hold until later this month when the outcome of the ANC conference is known. “Given the positive global backdrop, an outcome which restores business confidence could see a stronger economic recovery next year. A businessunfriendly outcome would probably have the opposite effect.” South Africa is facing a fiscal crisis, he adds. “Due to the stagnant economy, the growth in tax revenues has slowed at a time when fiscal spending is rising faster than planned, particularly because the government has been forced to bail out bankrupt state-owned enterprises. Without remedial action, the fiscal deficit is heading towards 5% of GDP. It will be difficult to increase tax collections without a recovery in economic growth and to reduce spending is politically challenging.” The rising deficit will require significantly increased borrowing. “It will be difficult to fund this without improved investor confidence and a credible plan as to how, in the longer term, a more sustainable fiscal balance will be achieved,” he says. “The prospect that the South African government’s domestic credit rating will be downgraded to subinvestment grade further complicates matters. The outcome of this fiscal dilemma is critically important to South African investors.” SA on hold IAM’s van den Berg says the whole country is on hold: “Confidence is low, consumers are de-gearing their balance sheets and businesses aren’t investing. The worst thing that could happen is that the ANC conference gets postponed, as that just prolongs the uncertainty.” Investors need to find investment opportunities through research and then balance the willingness to take risk with insistence on safety. “Once we know where we stand, we’ll know whether we need to insist on safety or whether we have the conviction to access certain pockets of risk. What is also very important and a key consideration for investing in such an environment is to understand how your own biases impact your investing process. If you want to avoid making certain errors, you must at least be aware of them,” he says.
31 December 2017
SA execs adopt ‘wait and see’ approach Laurium’s Koch says local investors remain extremely concerned about local politics and with good reason. “There is a lot of uncertainty surrounding the December ANC elective conference and upcoming decisions by ratings agencies.” In a statement about South Africa, S&P noted that politics would “probably trump the near-term macroeconomic performance.” Moodys concurred, commenting that Finance Minister Malusi Gigaba’s Medium Term Budget Policy Statement is “crowding out pro-growth expenditures.” Says Koch: “With very little prospects for a strong economic recovery and fiscal deficits forecast to be higher than expected for the rest of this decade, we can understand the concern. Interestingly, foreign investors appear to be less concerned, comparing SA to other emerging markets like Russia or Turkey.” IAM’s van den Berg maintains that if investors ignored all the local politics and just looked at the global backdrop, the environment is very supportive: “Synchronised global growth, stronger dynamics in commodities, a search for yield benefiting emerging markets, low inflation and low interest rates and fears about a Chinese hard landing proving unfounded.” In terms of global politics, 2016 was hard to beat, he says. “So even though we had to entertain the notion of a nuclear threat from North Korea and Catalonian independence, 2016’s Brexit and the Trump election victory in the US proved to be more unsettling for markets.” The next big crash Investors are currently most concerned about the elevated level of the markets. People are always trying to predict the next big crash, and while there might be pullbacks along the way, van den Bergh doesn’t believe the market is excessively priced from a valuation perspective. “In the South African market, for example, while the price earnings ratio of our JSE All Share remains elevated at 20, the median price earnings is 14. This is because 55% of the All Share Index constituents have a price earnings ratio below 15. We have not seen this many stocks with dividend yields above 4% since 2011. Nearly 40% of the market has dividend yields that exceed 4%, the highest proportion since 2011.” He expects it will be a stock picker’s market, with an associated opportunity for active managers to outperform passive indices. Hannes van den Berg, Portfolio Manager, Investec Asset Management
Ruan Koch, Analyst, Laurium
Sandy McGregor, Portfolio Manager, Allan Gray
Economic instability seems to be the ‘new normal’ in South Africa as 72% of business executives confirm that turbulence in the SA economy over the past six months has affected business operations and decisions. When asked in Grant Thornton’s International Business Report (IBR) for the third quarter of 2017 to explain how this turbulence had affected privately held businesses and listed companies, 68% of SA business executives stated that they were delaying business expansion plans, 61% were putting off investment decisions, 38% were considering investing offshore and 28% were contemplating selling their businesses. “Our IBR data for Q3 to the end of September 2017 shows a nation that is experiencing total uncertainty with no sign of any stability on the horizon,” says Gillian Saunders, Head: Advisory Services, Grant Thornton South Africa. “The fact that businesses are delaying important investment decisions or expansion plans, coupled with a challenging economic environment, indicates they are just managing to keep their heads above water, with operations stagnant, ‘in a holding pattern’ of sorts. It’s very concerning.” The IBR provides tracker insights from around the world on a quarterly basis. These findings are from the IBR’s third quarter tracker data for 2017, revealing views from business executive interviews held between August and September 2017. Regional and national perceptions are also researched every quarter for South Africa.
SA execs are the second most pessimistic worldwide
Coupled with uncertainty affecting investment decisions and expansion plans, when asked how optimistic SA business executives are regarding the outlook for the country’s economy over the next 12 months, businesses confirmed a negative outlook for the second consecutive quarter – at on balance -6% (6% pessimistic). This balance statistic is determined by calculating the percentage of respondents who report a positive outlook, less the percentage who report a negative outlook for the year ahead. In the case of Q3 2017, the outlook is negative with net 6% more negative responses expressed than positive. There is some improvement though; compared to the previous quarter (Q2) when the figure was -28% pessimistic and we were the most pessimistic of the surveyed 36 countries. South Africa this quarter recorded the second lowest figure, with Japan at the lowest with a negative 14% (-14%) pessimistic outlook. HOW OPTIMISTIC ARE YOU FOR THE OUTLOOK OF YOUR COUNTRY’S ECONOMY OVER THE NEXT 12 MONTHS?
Source: Q3 2017 Grant Thornton International Business Report
“For South Africa, most of 2017 has been marred by political upsets and these were followed by subsequent downgrades of the nation’s sovereign credit rating by key ratings agencies,” says Saunders. “Then, towards the end of the third quarter massive ructions occurred with further developments which drew the nation deeper into the ‘state capture’ debacle, and more concerning revelations were uncovered regarding high profile private companies with suspicious Gupta ties. The year is going from bad to worse.” Conversely global business optimism was fairly stable at +49% optimistic for Q3, just two percentage points below the +51% recorded during the second quarter of this year. Optimism among firms in the US is well above the global average at 70% in Q3, while Chinese business optimism has hit a three-year high of 52%. “South Africa’s instability, uncertainty and pessimistic outlook has no doubt influenced the World Economic Forum’s Global Competitiveness Report for 2017-2018 in which South Africa’s overall ranking declined 14 places to 61st position from 47th,” Saunders adds.
INVESTING LONG-TERM INVESTING LESSONS OF 2017 FEATURE
IZAK ODENDAAL Investment Strategist, Old Mutual Multi-Managers
quity markets are up strongly this year. In the ten months to end October, the FTSE/JSE All Share Index returned 19% including dividends. The MSCI World Index gave South African investors 21% over the same period. However, things didn’t look quite that rosy at mid-year. South Africa lost its investment grade credit rating after the axing of Finance Minister Pravin Gordhan. Stats SA announced in June 2017 that the economy was in a technical recession following two consecutive quarters of economic contraction. Consumer and business confidence indices were at multi-year lows (and they still are). Apart from the gloomy domestic, political and economic backdrop, South African investors’ returns barely beat inflation. At the end of June 2017, Datastream indicated that the major asset classes only delivered the following over the preceding 12 months (in rand): • Local equities: 1.4% • Local property: 3% • Local money market: 7.6% • Local bonds: 6.8% • Global equities: 6% June and July According to Morningstar, the average balanced fund (ASISA’s Multi Asset High Equity category) had a return of only 1.5% over the 12 months to end June. The average balanced fund lost 1.7% in June 2017. Therefore, investors wondered whether it was worth it all after viewing their second quarter statements, questioning why they were exposed to the volatility of the market without seeing the benefit of it. Wouldn’t it make more sense to just put their money in the bank, at least beating inflation somewhat without being exposed to the negative drawdowns? Then in July 2017, the local equity market delivered almost a year’s worth of bank deposit returns (7%) in a single month. August 2017 was also a strong month for equity markets. September was negative but in October 2017 the JSE delivered another 6%. What is the lesson? Nobody can predict whether the next month will be a June (with markets deeply in the red) or a July (with markets surging).
31 December 2017
Long-term investors must be appropriately diversified We know that after a month like June, the temptation is to give up. But we also know that the market trends up over time, so there must be more months like July. Research by Professors Dimson, Staunton and Marsh (authors of Triumph of the Optimists) show that South African equities have returned on average 7.2% per year above inflation since 1900, and 7.5% since 1967. But the market almost never returns 7.2% in a single year. That impressive average return includes some fantastic years, some ordinary years and a few disappointing ones. To benefit from this long-term trend you have to remain invested. Timing entry and exit into the market is extremely difficult, since to benefit from market timing you have to get both the exit and the re-entering calls spot-on. Most investors sitting on the sidelines are waiting for ‘the dust to settle’ before getting back into the market, but the jump in share prices from July onwards happened despite little meaningful improvement in the political and economic situation in South Africa. October’s rally came despite a gloomy Medium Term Budget Policy Statement that could very well lead to further credit ratings downgrades. Therefore, the market would have already priced in the
new reality by the time the dust settled and investors would have missed out. So why then did the local market rally so strongly? Because it is increasingly not a local market anymore. The biggest companies on the JSE are global in nature, and not focused on the domestic economy. The improving global economic backdrop (accelerating growth with low inflation and low interest rates) has been very good for equities worldwide. Even companies traditionally focused on the local economy are increasingly expanding abroad. More than half of the earnings of JSE-listed companies are generated abroad, and this number is rising. This is also true of JSElisted property companies, whose international exposure has increased from virtually nothing to above 40% in the past ten years. Reserve Bank data shows that South African companies have spent R300bn investing abroad over the past five years in search of growth. Another lesson from 2017 is that most South African investors have more global exposure than they probably realise, even in Regulation 28-compliant balanced funds. A typical balanced fund with 25% offshore, 50% in local equities, 15% in bonds, 10% in cash and 5% in property will these days only have approximately 20% to 25% exposure to domestic profit growth, including more than 50% exposure to global growth.
The rand The final lesson for long-term investors is the importance of the rand on returns. By the end of June, the rand was 10% stronger against the US dollar compared to the previous year. This not only weighed on the rand-hedge JSE stocks, but also meant South Africans couldn’t fully participate in the rally in global stocks. Towards the end of the year, the local currency lost steam against the dollar and this supported local equities and global returns in rand. However, the rand remains unpredictable, and 2017 was no exception. Many investors think that the exchange rate is primarily determined by domestic political events, and therefore it is easy to assume it will always weaken. Domestic political and economic developments do cause volatility in the exchange rate in the short term, but over time the trend is determined predominantly by commodity prices, investor sentiment to emerging markets and perceptions over monetary policy in the major economies (especially the US). If these factors are supportive, the rand can appreciate even if local politics are messy and the economy is weak, as we saw in 2016 and the first half of 2017. The rand is therefore never a one-way bet and this is yet another reason why long-term investors need to be appropriately diversified, including assets that will do well when the rand appreciates (such as bonds), as well as assets that benefit from currency depreciation (such as global equities).
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INVESTING LONG-TERM INVESTING LESSONS OF 2017 FEATURE
WARREN KELLY Business Development, Obsidian Capital
31 December 2017
An American artefact
rchaeologists should be good investors. They thirst after knowledge across a broad spectrum of interests, put massive but patient efforts into problem solving, and aren’t fazed about getting their hands dirty. But it’s their ability to uncover intricate artefacts, and then place those pieces in time and space in such a way that the bigger picture becomes clearer, that we so admire. If you subscribe to a multi asset approach when investing, then you appreciate – much like an archaeologist does with his precious finds – that assets don’t exist in isolation, that their value is largely dependent on the surrounding universe of investable assets. It follows that to capture the returns from the best performing asset class at any given time – the purpose of a multi asset product – you need to grasp how these asset classes relate to each other. There has been one particularly influential asset in 2017 that deserves attention, the US dollar. Synchronised global growth has seen the greenback weaken for most of this year, its depreciation stemming from greater demand for other currencies as more goods and services were bought from those territories. Commodity producing countries in particular benefit as manufacturers and builders across the globe demand more of their resources. And because those
resources are priced in US dollars, they get cheaper and intact, we were surprised by a resurgent when the dollar depreciates, further enticing buyers. greenback. We likely missed just how divergent This theme usually strengthens their economies and developed market monetary policies have become, currencies, which should be a boon for the assets particularly in relation to their past. domiciled in these territories. Yields in the US are, unusually, climbing in Which assets you prefer within these markets also isolation to those in other developed markets. The depends, to some extent, on the US dollar. Inflation extent of the divergence has proven to be fertile in many of these countries has ground for the onset of a ‘carry trade’ moderated because their dollar where there’s enough yield for investors denominated import costs declined to prefer first world, US dollar assets THERE HAS as the greenback faded. Falling over others vying for their attention. BEEN ONE inflation gives the consumer more The sustainability of this ‘carry PARTICULARLY buying power and allows their trade’ likely depends on what happens central banks to cut interest rates. with interest rates in other developed INFLUENTIAL This is good for consumption and markets. The negative European bond ASSET IN 2017 investment so equities that benefit yields in particular look spring-loaded THAT DESERVES given how strong their growth is. If they from this dynamic, like retailers and banks, become attractive. Their ATTENTION, THE rise faster than US yields from here, bonds also tend to perform well as we’d expect the greenback to weaken US DOLLAR foreign investors covet their high again, assuming global growth remains yields and appreciating currencies. synchronised. An investment allocation to emerging markets Sometimes it’s difficult to place an investment has been fruitful year-to-date (as expected) but ‘artefact’; perhaps more time is needed. But just being some of the shine has been taken off since midaware of it improves our understanding of how asset September in the face of a strengthening US dollar. classes influence one another, and by extension, our And herein lies our lesson for the year. With ability to capture the asset classes offering the best the global economic recovery well established returns over time.
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INVESTING LONG-TERM INVESTING LESSONS OF 2017 FEATURE
Navigate the trends of uncertainty with certainty “Set the trend. Create certainty in times of uncertainty. Be concerned about your planning, not your future.” These were the themes underlying recent presentations at Ecsponent’s final investor update for 2017. Guest speaker, Nerina Visser – CFA, ETF Strategist and Market Commentator based in Johannesburg – challenged the anxiety and apprehension people are currently facing when considering financial planning for the future. But, in an uncertain world, Visser explained, controlling the future doesn’t have to be absolute and ever-lasting. In fact, it is impossible. As such, the control of your financial planning is far more beneficial and more likely to yield results than over-analysing a future that is impossible to predict. Almost motivational in her approach, Visser referenced Dr Vikram Mansharamani’s ‘Seventeen Developments to Watch in 2017’, which includes the trends redefining the world, from politics in China to the proliferation of crypto-currency trading. South Africa’s volatile political situation is on the list too, which feeds into local anxiety. Visser suggested that these events have led to an explosion of financial planning anxiety, which has brought on an almost obsessive need to control an uncertain future. With an air of welcomed enlightenment and simplicity, Visser explained that there is no uncertainty in the present, but that uncertainty only exists in the future. Therefore, her advice is to avoid paralysing anxiety and invest time in constructing a solid financial plan. Once you have a plan, stop trying to AVOID PARALYSING control the future. This is what you ANXIETY AND INVEST can control: “Do what TIME IN CONSTRUCTING you can do,” she said. A SOLID FINANCIAL PLAN “Define your goal, design a strategy to reach that goal and stick to it. Control your costs, your contributions and consistency, while resisting the urge to chop and change.” Terence Gregory, CEO, Ecsponent Group Limited, agrees. As the head of a financial services company that recorded an average annual increase of 230% in operating profits over the past five years, he believes that Visser’s approach is sound. “Creating certainty outside the realm of your control is impossible. There is no sense in being overly-obsessed with ‘what-ifs’. You can only work with what you have and know in the present and make the most of the opportunities that present themselves,” Gregory adds. Ecsponent is introducing a range of new investment products in addition to their cost-effective preference shares that will enable investors to effectively control their investment costs. “We know investors are influenced by the barrage of unsettling media reports. With our new product range, they will have one less thing to worry about and be able to take control of their future in a small but significant way.” His reference to Visser’s assertion that you can create a certain level of certainty is based on the simple belief that you can: Prepare in advance, plan for the worst, expect the best, create a plan of action and focus on short-term solutions. “The future might not be yours to decide, but it never has been. Stick to your plan and navigate with certainty the trends of uncertainty.”
Nerina Visser CFA, ETF Strategist and Market Commentator
Terence Gregory, CEO, Ecsponent Group
31 December 2017
Trouble in Paradise
he Paradise Papers, released last month, are a set of over 13 million documents that shed light on the world of offshore investing. Like last year’s Panama Papers, the documents were obtained by the German newspaper Suddeutsche Zeitung, which asked the International Consortium of Investigative Journalists to preside over the investigation. The collection of documents is named after the idyllic profiles of many of the offshore jurisdictions whose workings are unveiled, including Bermuda and the Isle of Man. South African companies named in this tax leak include Standard Bank, the Shanduka Group and Glencore – although it must be emphasised that being mentioned in the documents does not imply any wrongdoing. Nigel Green, the founder and CEO of independent financial services organisation, the deVere Group, is of the opinion that politicians speaking out against the Paradise Papers are misinformed and hypocritical. This followed comments from the British leader of the opposition party, Jeremy Corbyn, and the veteran US Senator and former presidential hopeful, Bernie Sanders, amongst others. “The heightened level of sensationalism is out of control, masking the reality of the situation, and is being fuelled by misinformed politicians out to score cynical political points,” Green says. “Corbyn implies the Queen, rock stars, and multinational firms, amongst others, must apologise for benefitting from legal, tax-efficient schemes. Meanwhile, Sanders maintains that money in offshore accounts illustrates the movement towards an ‘international oligarchy’. “This hyperbole is unhelpful, misleading and demonstrates their monumental naivety. It’s time to set the record straight.” Green adds that the murky world inaccurately described by these and other
politicians, is not one that he recognises. “The vast majority of international financial centres are now transparent and appropriately regulated. They provide a sought-after service for individuals – and not just the uber rich ones – as well as organisations across the globe. “Indeed, they are an important, legitimate and a beneficial cog in the global economy.” Green explains that internationallymobile individuals and firms typically find that offshore accounts are a sensible option because of their convenience. “They offer centralised, safe, flexible and worldwide access to their funds no matter where they live and no matter to which country the person or firm might relocate in the future. Also, they provide a greater selection of multi-currency savings and investment options. “Other, often ignored, benefits also include that they can assist firms to avoid double taxation on the same income, and that they offer legitimate financial refuge for those in countries where there is economic, social and political turmoil.” Green adds: “For high-profile politicians to complain and to take the moral high ground – on this, when it is they who have the powers to change tax laws and regimes, smacks of political opportunism and hypocrisy. “The notion that the majority of individuals and firms in these allegations are ‘getting away’ with mitigating their tax liabilities legally is absurd. It is akin to someone ‘getting away’ with driving at 50mph in a 50mph zone.” He says tax is a legal impost and it is the duty of both individuals and corporations to pay the amounts required. “Whilst the ‘Paradise Papers’ do indeed highlight that more needs to be done to increase efficiency and cooperation in some regards and jurisdictions, the current furore is distracting attention and resources away from the serious global issue of tax evasion.”
Nigel Green, founder and CEO, deVere Group
31 December 2017
OFFSHORE IN VESTING
Plotting the course of a mature bull market “Bull markets are born on pessimism; grow on scepticism, mature on optimism and die of euphoria.” – John Templeton, investor and fund manager
ince March 2009, the S&P 500 stock index – considered a global equity barometer – has almost quadrupled in value. Investors are asking how much longer this bull market will last – to which there is no sure answer. Jeff Saut, Chief Investment Strategist at US diversified financial services firm Raymond James, recently told CNBC that investors are now witnessing the second leg of the bull market, and stocks likely have eight to 10 more years to grow. “The second leg is usually the longest and the strongest. That’s where earnings start to come on stronger and the economy improves. I think The Investec Global Franchise Fund. that’s where we are now.” Celebrating a decade of investment in global market leaders. Not everyone agrees. Some investors are worrying that Take your investments offshore with the Investec Global Franchise Fund. We not only invest in tried and tested world-leading brands – some with a successful track record dating back over equity valuations could soon two hundred years – but also in the leaders of tomorrow’s digital age, thereby striking a lead to the expiry of the balance between staying ahead of the curve and seeking stability. current bull market. The Investec Global Franchise Fund. Seeking certainty in uncertain times. “Lately there has been a continuing refrain about Speak to your financial advisor or search The Investec Global Franchise Fund excessive valuations of the US equity market – as if other equity markets would Asset Management be immune from a serious sell-off in US equities, and talk of bond bubbles,” says Philip The portfolio is a sub-fund in the Investec Global Strategy Fund, 49 Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, and is approved under the Collective Investment Schemes Control Act. The manager does not guarantee the capital or return of the portfolio. Saunders, Head of MultiPast performance is not an indicator of future outcomes. Investec Asset Management is an authorised financial services provider. Asset Growth, Investec Asset Management. Yet, he adds, are they worryingly so? factors have improved significantly history suggests that Longer-term measures, and the growth environment is valuation is rarely the which include the ostensibly supportive. VALUATION primary cause of equity inflationary 1970s, would “Global growth is synchronised and IS RARELY bear markets. have us believe so, but self-reinforcing and this in turn has THE PRIMARY others, which take greater boosted top line revenue growth to “In fact only one since the 1920s – the account of persistently levels that have generally been absent in CAUSE OF crash of 1987 – can be low inflation interest rates, this cycle, which has been more about EQUITY BEAR suggest more moderate so ascribed. Shocks and cost reduction. MARKETS recessions come in as overvaluation.” “Earnings growth has been and is the primary triggers What is undeniable likely to remain for now, robust and 25% and 50% of the time respectively, is that this has been an unusual and broad based. The Federal Reserve has whereas tighter credit conditions, unusually extended cycle. announced that it will start to shrink at over two thirds, are the real bull “Most of it has been driven by its balance sheet and other key players market killers.” declining interest rates but since the such as the ECB are initiating tapering, So are valuations a problem at the correction of 2015/2016, earnings but these developments coupled with moment? In an equity context, it dynamics and momentum have led the an economic recovery, don’t yet seem to depends to some extent on the bias of charge, which is much more typical of have constrained liquidity.” the ‘eye of the beholder’, says Saunders. late cycle market environments.” Saunders says that high-yield credit “Valuations are clearly elevated but Saunders says fundamental spreads, “normally the best candidate
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for the proverbial canary in the coal mine,” have continued to narrow and the dollar has weakened. Money supply growth is broadly supportive and inflation is notable in its absence, much to the surprise of the Central Bankers whose attempts to increase its level have largely been frustrated. “Investor positioning has consistently been too conservative for the whole of the current bull market cycle, which has been dubbed the most hated in history. “Needless to say, the opportunity costs of such caution have been substantial. Clearly a more positive environment is to some extent ‘in the price’, but the typical signs of late cycle euphoria don’t seem to be prevalent yet and in the meantime momentum is in the driving seat.” So what should investors do at this point in the market cycle? Firstly, says Saunders, it doesn’t seem to be a good environment in which to chase returns aggressively. “Chuck Prince, a former CEO of Citigroup, famously wanted to ‘keep on dancing’ in 2007, and that didn’t exactly end well. Hence, we believe it is probably wise to be progressively counterbalancing exposure to growth assets with selective defensive positions. “We would all like to believe in the efficacy of market timing but humility at this stage of the cycle is the surer strategy. In our view it is still right to keep ‘skin in the game’. The best periods for returns in growth assets are at the beginning of a new cycle or towards the end of an old one.” In Saunder’s view, investors could consider the following actions: • Improve portfolio liquidity – now is not the time to be sacrificing liquidity. • Take advantage of broad opportunity sets to generate returns that don’t depend so much on the directional behaviour of the primary asset class. • Resist the siren song of cheap, broad-based passive exposure and be increasingly selective in terms of the exposures within asset classes which are likely to show more resilience if times get tougher.
RENÉ GROBLER Head, Investec Cash Investments
31 December 2017
Cash is important for retirement savings plans
lients’ perceptions of retirement have changed significantly in the last decade or so. As a life stage, retirement doesn’t have to be a full-stop but rather the start of another exciting chapter. Many South Africans are enjoying active, vital lives after retirement – whether this is starting a new business, investing or travelling more. However, as a life stage or a milestone, retirement does require some planning. Most people do not wish to rely on their adult children or the state for their later years. This is why we should encourage clients to start thinking about the day they will not be earning a regular monthly salary, and replacing that with an annuity income to cover monthly expenses. Of course, there are a few investment choices that can create this new income stream, which may include rental properties, unit trusts, or provident fund and income-wrapped retirement products. It is important to investigate and identify the right product for your clients, their anticipated needs and other factors. This is where your skills as a professional financial adviser can
add significant value. However, what most retirees do not want to do is dig into their capital and, if they do, they want a view of how any investment will generate an annuity income. What is also extremely important to retirees is certainty - and that is where cash can be an amazing asset class for retirees, because their capital is guaranteed and their income stream is very predictable. For example, on a fixed interest account, they will have the consistency of that interest paid out to them monthly. I must concede that many people approaching retirement age in South Africa do so with some trepidation. Taking a broader view of South Africa’s economic and political landscape – with business confidence low as we come out of a technical recession, and a lower interest rate cycle – there is a sense of anxiety. In times of anxiety people often look for a safe haven for their investments and cash is often identified as a safer, more reliable option when compared to other volatile options, which rely on equities or dividends. And even though we are seeing lower interest rates, these have not dropped
REMAY DE KOCK Legal Adviser and DESIREE RAGHUBIR Certified Financial Planner® Professional, BDO Wealth Advisers
e find that the term ‘savings’ is usually associated with a negative view when discussing budgets. Clients see this as another expense in an already too long list of expenses. Other than the expenses you have to pay in order to sustain your day to day living needs, savings are needed in order to ensure sufficient means for certain and uncertain future events. Thus, we need to save money today, in order to be able to ensure our future needs will be provided for – an endless cycle. The focus of this article is savings for retirement – a period in life when you had to save enough in your working years in order to be able to provide for yourself in your post working life. Questions you should be asking yourself is if you are saving for retirement, and if you are, are you utilising the maximum contribution allowed in terms of Income Tax in order to ensure ‘savings’ on your income tax, by saving more to retirement. From 1 March 2016, the tax deductions for retirement savings increased from 15% to 27.5%. You are now able to deduct your contributions to all retirement funds (pension funds, provident funds and retirement annuity policies) with the maximum tax deduction limited to the greater of 27.5% of taxable income or remuneration subject to an annual ceiling of R350 000. This allows one to save more for retirement and pay less tax. Excess contributions in one year may also be carried over and deducted in the next tax year. In order to show the saving on income tax, we compare three individuals in the following circumstances: • No contribution is made • A 10% contribution is made • A 15% contribution is made • A 20% contribution is made.
on too steep a curve. In a more volatile political or economic environment, knowing where your clients’ income will be coming from is even more important. Rather than focusing on the uncertainty, seize the opportunity to reassess your clients’ retirement plans and help them start making conscious and positive decisions about the future. While it is always a good idea to diversify their savings and investment portfolio, cash should not be dismissed or overlooked in the current climate. Not all deposits are created equal, and it is worth your time to shop around and compare different products and banks on behalf of your clients. You should factor in brand security, liquidity needs and products or service providers that offer your clients the best rate or a pensioner’s rate. While equities will generally outperform cash in the long term, cash is attractive for the shortterm needs of a retiree as it offers more stability and peace of mind. Regardless of their age or income level, your clients should be thinking about maximising their savings and making the most of them.
Making the most of your retirement savings contribution
A earns an annual income of R1.6m Contribution
R1 600 000
R1 600 000
R1 600 000
R1 440 000
R1 600 000
R1 360 000
R1 600 000
R1 280 000
B earns an annual income of R900 000 Contribution
C earns an annual income of R600 000 Contribution
It is clear from the calculations above that by saving towards retirement, or increasing your retirement contribution, you can make a substantial saving on your income tax payable. Even if you are a member of a company pension or provident fund, you can set up a retirement annuity in your name to supplement your existing contributions. By taking advantage of the new tax deduction limits, you not only save on your annual tax but also increase your retirement savings, which are ultimately your money.
31 December 2017
Most complaints about shortterm insurance: Ombud
he Office of the Financial Advisory and Intermediary Services (FAIS) Ombud last month released its 2016-2017 annual report. For the period from 1 April 2016 to 31 March 2017, the office received a record number of 10 846 complaints. The number of complaints relating to short-term insurance policies far exceeded those from any other product category of complaints received by the FAIS Ombud in the period under review and in previous financial years. “Through hard work and commitment, we have once again managed to achieve all our business goals for the year under review,” says Noluntu Bam, Ombud for Financial Services Providers. “We are proud of our achievements but we have also identified several opportunities to build on what we have achieved.”
Complainants who are not satisfied with the decision to dismiss their complaint have the right to lodge an informal appeal for review by a senior person who is likely to be an Assistant Ombud or Team Resolution Manager. “The process of informal appeals mirrors that of lodging complaints in that it is simple, informal and flexible. People from all backgrounds can therefore be accommodated,” Bam adds.
Short-term insurance Bam says her office espouses the importance of short-term insurance in financial inclusion and knows the financial stability short-term insurance brings to households that need protection against unexpected losses. “However, despite the importance that shortterm insurance plays in an individual’s financial planning, financial service providers (FSPs) who operate in the short-term insurance space still Complaints violate provisions of the FAIS Act and the Code. The annual report for the 2016/2017 financial They do so by providing the most affordable year reflects an increase in the number of new premium possible regardless of the implications complaints received by the office from 9 891 for the client, who might only in the event of a in the previous financial year to 10 846. claim find out what the true cost of the lower “This is the first time that this premium is. This true cost office has received more than could include a reduction or FSPs WHO 10 000 complaints within exclusion in the cover provided one financial year and also or the numerous additional OPERATE marks the first time that excesses payable.” IN THE the office has resolved more Bam adds that it is SHORT-TERM than 10 000 complaints in a therefore no surprise that the financial year, having resolved number of complaints that INSURANCE 11 025 complaints.” relate to short-term insurance SPACE STILL Bam says the quantum of policies far exceed those from settled/determined cases also any other product category VIOLATE showed an increase from PROVISIONS OF of complaints received by the R50.2m in 2015/2016 to FAIS Ombud in the period THE FAIS ACT R58.3m in 2016/2017. Of the under review and in previous 10 846 complaints received, a AND THE CODE financial years. total of 3 794 complaints were “The main concern with dismissed and 4 639 were referred regard to the provision of short-term to the appropriate forums. insurance is the persistent refusal by FSPs “Lest our efforts are misinterpreted operating in this area to obtain all relevant as inadequate because of the increased and available information from the numbers of dismissals and referrals to prospective client, in violation of section 8 other forums, we should look at the (1) (a-c) of the Code. These FSPs also have process that underpinned the 3 794 a preference for what they call ‘a single dismissed complaints and the 4 639 referred need’ which, more often than not, short elsewhere,” Bam adds. changes clients.” “The 3 794 complaints were dismissed Bam says the term ‘single need’ is used by after applying the legal rigour that the FSPs as a way to circumvent the requirements circumstances of each case warranted.” of section 8(1) (a-c) of the Code.
“By claiming that the client requires assistance only for a specific need, such as insurance for his new motor vehicle, FSPs argue that there is no need to obtain all relevant and available information and by extension, no need to conduct a needs analysis for the client. “A disconnect exists between the client’s understanding of comprehensive cover and the FSP’s understanding. When a client requests such cover, the expectation is that the entire value of the vehicle (including extras) will be covered in the event of theft or a total loss.” Bam says that for an FSP, comprehensive cover often means that the vehicle is insured for any eventuality up to the retail value of the vehicle, with extras not taken into account. “There is a failure to determine whether the vehicle has any extras that would need to be specified. For example, canopies on bakkies are not covered unless specifically noted in the policy.” FSPs might ask clients whether or not a vehicle is financed – but very rarely offer or recommend top-up cover, which often compromises clients if they make a claim in the early stages of the credit agreement. With homeowners’ insurance, Bam says FSPs tend to fail to disclose to clients the exclusions that exist in terms of their homeowners’ policy. “This is especially true for new homeowners who, in the absence of these disclosures, are unable to take any steps to mitigate their losses. It is devastating when, for example, one’s roof collapses during a heavy storm and the claim is rejected for wear and tear. With insurance on household contents, there is failure to provide for accidental damage, which is not automatically covered.” Bam adds that FSPs also fail to advise clients about items such as jewellery, laptops and cell phones, which are required to be specified.
Noluntu Bam, Ombud for Financial Services Providers
31 December 2017
Hetzner breach exposes the need for cyber insurance
ast month, one of SA’s largest hosting companies, Hetzner, was hacked, exposing hundreds of thousands of FTP (File Transfer Protocol) passwords, domain names and bank account details, with the exception of credit card information. This has left South African organisations vulnerable to bad actors that could now control the websites of customers, says MyCyberCare’s Simon Campbell-Young. “Hetzner notified clients on its website that it had become aware of unauthorised access to its konsoleH control panel database, and said it was crucial for customers to update all passwords associated with their Hetzner account at once, including konsoleH admin passwords.” Hetzner confirmed that an SQP (Structured Query Language) injection vulnerability was identified within konsoleH, which had been fixed, and that the company shut down access to konsoleH during the course of the day to facilitate investigations. Hetzner added that konsoleH administrator passwords had not been compromised, but as a precaution, said it had proactively updated all FTP passwords which were exposed.
In addition, Hetzner advised its customers that should they have provided konsoleH access details to any other parties, they should advise them to update their login details as soon as possible. Hetzner appointed external forensic investigators to investigate the breach. “This is just one more major security incident that proves the maxim ‘it’s not a question of if, but when’. No business is completely safe from cyber attacks, and it makes sense to have insurance in place to protect the business should they fall victim. No one buys car insurance thinking they are going to have an accident, but I don’t know anyone who’s foolish enough to drive without it,” Campbell-Young says. A cyber insurance policy is designed to help organisations mitigate risk exposure by offsetting costs associated with recovery after a security breach or event, he explains. “This would include the costs of any forensics investigation undertaken to find out what happened, how to repair the damage and how to prevent a similar incident from happening in the future.” It would also cover business and financial
losses incurred through network downtime, business interruption and data loss recovery, as well as cover crisis and reputation management costs involved in managing perception and repairing reputation damage. Another important expense covered by cyber insurance, says Campbell-Young, is the expense of privacy and notification, including mandatory data breach notifications to any affected customers and other parties, which are required by law, as well as credit monitoring for customers whose information may have been exposed. “A good policy will cover legal expenses associated with the release of confidential information and intellectual property, settlements and any regulatory fines imposed,” he adds.
Simon Campbell-Young, MyCyberCare
Sporting equipment can be costly to replace Expensive sports such as cycling or mountain biking, scuba diving and golf are becoming increasingly popular among professionals, because many of these sports not only provide opportunities to network and build relations, but also a way to relax after-hours. However, some people forget to disclose their expensive sporting equipment to their insurance company, which may result in problems should their equipment become lost, stolen or damaged as a result of unforeseen circumstances. This is according to Nazeer Hoosen, CEO of PPS Short-Term Insurance, who states that some insurers require any moveable goods to be disclosed with their proper replacement value to the
insurance company in order to ensure they are fully covered. “This is particularly important for sporting equipment which can cost a lot to replace or repair.” Those traveling with sporting equipment internationally need to ensure that their policy covers them outside of the South African borders, he says. “The All Risks section of an insurance policy generally provides worldwide cover against all risks aside from what is specifically excluded. However, some items are excluded from general All Risks cover, which means these items must be specified or specified according to their replacement value to ensure coverage.” It is usually necessary to specify the item under the All Risk cover if the single item value exceeds a certain amount or percentage of the unspecified sum insured, or if the policy excludes the item unless specified, he adds. “It is important to fully
understand what is and is not covered, as well as what the policy conditions require for a successful claim. It can be incredibly confusing, so the guidance of a broker cannot be underestimated here.” Many people partake in multiple sports and own a variety of expensive sporting items, such as a set of golf clubs and an expensive bicycle. “These individuals would need to specify all their expensive sporting goods. These items would then be automatically covered for all risks, besides risks that are excluded, such as damage whilst using the equipment professionally. This, however, could be overcome by negotiating with insurers to provide cover at higher premiums and excess if insurers are comfortable to accept the increased risk – another function of a good broker.” Hoosen explains that some policies exclude damage to sporting equipment whilst in use, while other policies exclude
damage whilst in use in a professional capacity only. “Other claims that are typically excluded include: abuse or deliberate damage; theft from unattended vehicles unless accompanied by forcible entry; anything covered by a manufacturers guarantee; gradual operating wear and tear.” He says that when it comes to insuring expensive sporting equipment, it is usually better to seek the advice of a broker. “The broker will be able to determine and negotiate the best possible cover given the person’s circumstances and clearly explain what is excluded so as to avoid unhappiness at claims stage.”
Nazeer Hoosen, CEO, PPS ShortTerm Insurance
31 December 2017
Genetic testing and the insurance industry
enetic testing is steadily gaining more and more publicity, especially when people like the Chief Medical Officer of Britain calls for genetic testing to be routinely offered to cancer patients to help select the most effective treatment. This is according to a recent article published by Sky News where research suggests that in 60% of Britain’s cancer cases, the genomes of cancer patients reveal ‘actionable’ data which can shape the future of precision treatments. Science and technology of a different kind With the drastic advances made in the medical field, it comes as no surprise to read about scientists who are able to determine, via genetic testing, if an individual has a high probability to develop Huntington’s disease. Even more astounding is the fact that scientists from Georgetown University Medical Centre in the United States can determine, via a simple blood test, if a person is likely to develop dementia within three years from when the test was conducted, according to their research findings that were published in the Nature Medicine Journal. They also said that the differences in a person’s blood biomarkers may signify the early stages of Alzheimer’s disease – a condition that affects 35 million people world-wide. Genetic testing makes you think very differently about life in general and the quest for developing new methods that can assist with early detection of health disorders has migrated to the field of technology. Hence, young women with a pre-disposition to breast cancer can now benefit from early detection using an imaging scan called the Digital Infrared Thermal Imaging (Diti) method. These cameras are similar to those used at airports to scan travellers although the software used is different. Traditional methods of diagnoses, like mammograms, often detect cancer at a fairly advanced stage. This technology can detect most breast disorders at an early stage. This is not science fiction but a reality of our time. Looking at all the possibilities that emerge from these scientific and technological developments, one cannot help but think about the impact that this might have on the life insurance industry.
WE DO EXPECT CLIENTS WHO HAVE HAD GENETIC TESTING DONE TO DISCLOSE THIS TO US The implications of genetic testing for the insurance industry Unlike other countries including the United States and Britain, in South Africa, genetic testing is not a component of the long-term insurance industry’s current underwriting processes.
However, during 2009, the Association for Savings and Investment South Africa (ASISA) released The ASISA Standard on Genetic Testing. This stipulated that an insurer is obligated to review the terms of a policy if an applicant provides the results of a predictive genetic test. Furthermore, when assessing an individual’s risk profile, the insurer should take the value of specialist surveillance, medical intervention and successful treatment into consideration. In addition, the insurer may not request an applicant to undergo a genetic test to support an application for insurance whether this is in order to obtain a lower than standard premium rate or to indicate the presence or absence of a suspected genetic condition. Although these standards are not legally binding, support for the various parties is provided through the Long-term Insurance Ombudsman whose role includes mediating disputes between insurers and the insured life. This includes cases where there is a concern of genetic discrimination or adverse selection. From our perspective When it comes to including genetic testing in Momentum's underwriting processes, George Kolbe Head of Marketing for Life Insurance states: “We do not foresee sending clients for genetic testing, but there might be instances where clients do specific genetic tests to prove they are a lower risk than what we attribute to them based on their family history. But those tests are done voluntarily and initiated by the client.” He adds: “Momentum’s underwriting research and development unit, in collaboration with our experienced product development team, is focused on keeping abreast of changes in the medical/ insurance arena and on finding ways to pass the benefit of any learning on to our clients. Also, industry underwriting practices are regulated by the ASISA and as a result we adhere to their standard.” Janet Brodie-Thompson, Chief Underwriting Officer for Product Development at Momentum, states: “We do expect clients who have had genetic
testing done to disclose this to us and also to divulge the result, but we will not request a client to have a genetic test done.” She adds: “Genetic testing is not undertaken lightly and is normally only done after extensive counselling where physical signs and symptoms of a disease exist or where a risk for developing a disease exists. This is most often suggested in the client’s family history. Momentum’s normal underwriting practices will scrutinise a client’s family history and the information will be utilised as a proxy to determine the probability of developing any hereditary medical conditions.” Kolbe notes that from a consumer perspective, numerous fears can crop up regarding genetic testing once the test results have been disclosed to an insurer. “These may include the fear of genetic discrimination that limits access to insurance by ways of medical underwriting, impacting the claims process, sacrificing privacy regarding medical information as well as affecting affordability of cover. “Herein lies the dilemma: genetic testing and other new-generation tests impacts on an ethical, regulatory, social, constitutional and emotional level and leaves us with the burning question: In this day and age of revolutionary medical testing and technology, how does one find a balance of fairness for both the insured life and the insurer?”
George Kolbe, Head of Marketing for Life Insurance, Momentum
Janet Brodie-Thompson, Chief Underwriting Officer for Product Development, Momentum
31 December 2017
GARETH FRIEDLANDER Head of Research and Development, Discovery Life
n the past decade, the life insurance industry has seen a wide range of product innovations, but most of these innovations have not been uniquely tailored to the distinct needs of young professionals. Young professionals are on the rise There has been a general upward trend in the number of youth obtaining tertiary qualifications in South Africa. About 192 000 youth obtain qualifications every year, an increase from about 93 000 in 2001*. Young professionals are beginning to acquire assets such as property and cars and are beginning to save. The average property price paid by buyers between the ages of 20 and 30 is R772 000. Discovery Insure data indicates that the average client under the age of 30 insures a car valued at R199 728 and portable possessions amounting to R19 535.
Smart life insurance solutions for young professionals
Young professionals have four key issues when it comes to insurance:
A considerable shortfall in life and disability insurance According to the ASISA South African insurance gap study in 2016, young professions have a life and disability insurance shortfall of R4.1bn.
A high percentage of preventable deaths According to the Discovery Life claims data from 2014 to 2016, 88% of deaths in this segment were due to behavioural causes, highlighting the controllable nature of their risk.
A lack of affordability The Finscope South Africa 2015 Consumer Survey revealed that 55% of young adults do not have insurance due to affordability constraints. This shows that price sensitivity is very high within this group.
55% OF YOUNG ADULTS DO NOT HAVE INSURANCE DUE TO AFFORDABILITY CONSTRAINTS
A much higher prevalence of car accidents The biggest mortality threat for individuals between the ages of 18 and 30 is car accidents. Data from Discovery Life Claims experience for 2016 reveals that motor vehicle accidents caused 56% of deaths among young people. Considering the above, there is a need to create life protection that is affordable and tailored to the needs of young professionals. It was with this in mind that Discovery Life created the Smart Life Plan. The Smart Life Plan was designed with an efficient and relevant product chassis, and by simplifying benefit options while still protecting clients’ future lifestyle and their families’ financial security with our comprehensive benefits. This tailored offering includes a number of unique features under the Income Continuations Benefit which protect a client while they are travelling and engaging in an
active lifestyle, while also taking into account future promotions that they may have received had they not become disabled. The Smart Life Plan also provides an automatic parent funeral cover benefit of up to R20 000. The offering rewards clients for managing their health and wellness, and for driving safely. In addition to receiving weekly rewards through Vitality or Vitality Active, young professionals can receive up to 100% of their qualifying Smart Life Plan premiums back for managing their health and wellness and practising good driving behaviour through the Smart PayBack Fund. By linking the Smart Life Plan with their other Discovery products, clients can get an upfront premium discount of up to 39%. This allows them to have a starting premium from as low as R100 per month. Source: *Bunting, I; Sheppard, C; Cloete, N; Belding, L. “Performance indicators in South African Higher Education 2000-2008”CHET, pg 16
Making medical aid cover last longer
ith the country’s grim economic outlook, many South Africans will try and tighten their belts, but cancelling their medical aid should be last on their lists, says Alexander Forbes Health, despite increased costs around affordability of schemes. MD of Alexander Forbes Health, Bütsi Tladi said many of the company’s more than 200 corporate clients had raised concerns about the affordability of the different medical aid schemes. “Unlike previous years, where we did not see a drop in membership, we are now very worried that financially stressed families will cancel their medical aid cover.” To address these concerns Tladi says Alexander Forbes is looking at more affordable and appropriate plans for their clients. Most medical aid schemes offer basic primary health care insurance cover, designed to offer affordable medical aid care to the previously uncovered population. Health insurance covers unforeseen medical emergencies and does not cover Prescribed Minimum Benefits. “Health Insurance is not a substitute for medical aid schemes and must not be confused as such. We are now able to offer solutions for young talent in organisations
whose starting salaries excluded them from medical scheme cover. Similarly, low-income earners can now have some level of cover.” Every year, the cost of medical aid cover goes up but that does not always mean that the medical savings amount will increase too. In some cases, there may be a slight decrease or the amount stays the same. Tladi says that this benefit can be extended by making use of network service providers. “We encourage the use of networks as these lead to less gaps in cover. Schemes need to work harder in ensuring that the networks in place give access to all members.” Tladi says South Africans can make their medical aid cover go further by: • Using network doctors • Using network optometrists • Using network hospitals • Using network dentists • Using network approved pharmacies. Gap cover, explains Tladi, is an insurance policy which covers certain medical costs that medical aid may not cover while patients are in hospital. “It is important to note that there are certain things that gap cover will not pay for.” This includes but is not limited to the following:
• Routine medical check-ups • Medical procedures that are done by nonnetwork service providers • Home-based care • Co-payments for procedures while you are in a waiting period. “It can be overwhelming to decide on an appropriate medical aid scheme and the cover that is right for you. This is why it is important for potential medical aid scheme members to speak to a consultant who is knowledgeable and who would be able to guide members on how to select the appropriate cover. “An adviser will guide members on how to select appropriate cover in a manner that maximises benefits and manages premiums. This selection would include use of networks and gap cover. It is about choosing the most appropriate option after considering the unique circumstances of each member.”
Bütsi Tladi, MD, Alexander Forbes Health
31 December 2017
Understanding medical aid terms
e live in a world of acronyms and industryspecific jargon, which does little to offset the anxiety and confusion of consumers. However, understanding your medical aid terms will help you get the most out of your benefits. Gerhard Van Emmenis, Principal Officer, Bonitas Medical Fund gives the lowdown on terms you need to know. Principal member This is the main member on the medical aid scheme: either one person or someone who has registered one or more dependants. The principal member pays a larger contribution than the dependants do. Medical schemes refer to principal members and dependants as beneficiaries. Waiting periods According to the Medical Schemes Act 131 of 1998, medical aid schemes are entitled to impose waiting periods on new members. This protects other members of the Fund by ensuring that individuals aren’t able to make large claims shortly after joining and then cancelling their membership. Unlike other financial products, medical schemes are not-for-profit entities, they are highly regulated to ensure they fulfil a social solidarity role, ie everyone benefits from the dependence individuals have on each other. There are two types of waiting periods, general waiting periods (up to three months) and condition-specific waiting periods (up to 12 months). During a general waiting period, a beneficiary is not entitled to any benefits (in some instances not even Prescribed Minimum Benefits). Conditionspecific waiting periods are related to a specific medical condition. During this time a beneficiary is not entitled to any benefits for a particular condition for which medical advice, diagnosis, care or treatment was recommended or received. Late-joiner penalties In South Africa, medical aid schemes can impose late-joiner penalties on individuals who join a medical aid scheme after the age of 35; those who have never been medical aid members; or those who have not belonged to a medical aid scheme for a specified period of time since April 2001. If you are over 35 and haven’t been on a medical aid then – depending on your age – you will be penalised and charged a surcharge between a 25% and up to 75% loading of your premium. This is outlined by the Council for Medical Schemes, but at the discretion of the scheme.
Designated Service Provider (DSP) This refers to a healthcare practitioner (doctor, pharmacist, hospital etc) that has been contracted by your medical aid as the first choice when you need diagnosis or treatment. The scheme generally agrees to pay these providers a specific rate for these services. “Negotiating with healthcare providers is critical to make sure that members get maximum value for money. It also allows us to monitor service to ensure that members receive care and services of the highest quality”, Van Emmenis explains. If you choose not to use the DSP, you may have to make a co-payment, which is an additional cost from your own pocket. You do not need to go to a DSP in an emergency or if there is no DSP within reasonable distance. Acute vs chronic conditions Acute is severe and sudden in onset and could describe anything from a broken bone to an allergic reaction. A chronic condition, by contrast is a longdeveloping syndrome usually lasting more than three months for which you’ll need ongoing treatment, such as diabetes or hypothyroidism. It usually requires lifelong treatment and daily medicine to improve quality of life. Prescribed Minimum Benefits (PMBs) These are a set of defined benefits to ensure that all medical scheme members have access to certain minimum health services, regardless of the benefit option they have selected. The aim is to provide people with continuous care to improve their health and wellbeing and to make healthcare more affordable. The Medical Schemes Act requires all medical schemes to pay ‘in full’ for the medical care, pathology, radiology and medication costs related to the diagnosis, treatment and care of: • Emergency medical conditions • A list of 270 medical conditions (known as Diagnosis Treatment Pairs), which includes • 27 common chronic conditions (defined in the Chronic Disease List).
GET TO KNOW YOUR DSPS FROM YOUR PMBs TO ENSURE YOU UNDERSTAND WHAT YOU ARE COVERED FOR
This means that, by law, your medical scheme has to pay your claims for the diagnosis of and consultations or treatment of a PMB. Remember, however, that you may be required to inform your medical scheme of your condition to ensure that your treatment is paid for correctly. In addition, schemes may require that you use a specific provider. Hospital plan A hospital plan provides you with basic but important medical cover. It covers a range of treatment and procedures when you are admitted into hospital. All hospital plans, however, have to pay for chronic medication prescribed for the 27 PMB chronic conditions. “Always look at the benefits provided by hospital plans carefully when selecting one, as some offer additional benefits that offer more value for money,” says Van Emmenis. Pre-authorisation Hospital admissions for non-essential or non-life threatening procedures need to be authorised by your medical aid prior to being admitted. Unless there is a medical emergency, you will have to get pre-authorisation. If you do not have pre-authorisation, the scheme can refuse to pay. Pre-authorisations are obtained by contacting your scheme administrator at least three days before admission. Exclusions Some medical conditions and procedures may be excluded from medical schemes, for example cosmetic surgery and selfinflicted injuries. So, get to know your DSPs from your PMBs to ensure you understand what you are covered for and how to get the most out of your medical aid or hospital plan.
Gerhard Van Emmenis, Principal Officer, Bonitas Medical Fund
31 December 2017
SUDOKU ENTER NUMBERS INTO THE BLANK SPACES SO THAT EACH ROW, COLUMN AND 3X3 BOX CONTAIN THE NUMBERS 1 TO 9.
TWILIGHT OF THE MONEY GODS BY JOHN RAPLEY We all think about money, yet few of us study the one subject dedicated to it: economics. Maybe that’s because economists, by using complex maths and jargon, have built a structure so imposing that we now see it with the awe our ancestors reserved for their temples – so let’s approach it that way, says author John Rapley: Let’s treat economics as a religion. Rapley takes the reader through the history of economic thought, approaching economics as if it were an allencompassing doctrine with its own moral code and an ideology so credible that the ‘faithful’ remake whole societies in pursuit of wealth. The author sees economics as providing instruction on deeply human matters – although in a language sometimes understood only by capitalism’s priests – the economists. Yet while the magicians of economics can create money out of thin air, using spells like ‘derivatives’ or ‘structured investment vehicles’, its strength ultimately comes from the same force that brought life to the old religions it displaced: man’s faith in it. At the moment, the world is going through a crisis of faith with its trust in the ‘experts’ having plunged over the last few years. By comparing two narratives – the rise and fall of various economic doctrines, and the material changes they caused and which in turn affected their fate – this book takes readers on a three-century journey featuring Adam Smith, Karl Marx, John Maynard Keynes and many others. Rapley shows how we got to where we are and he indicates where we might go next, as we search for an economics we can all believe in.
MY MONEY BY GERALD C. MWANDIAMBIRA Money is a tool that we can all master, says author Gerald C. Mwandiambira. You choose to either be a ‘Money Slave’ or a ‘Money Master’. My Money is a practical, easy to read, personal finance book – a guide that will help many South Africans – especially those just starting to earn a salary – to begin to create wealth and not fear the subject of personal financial planning. A treasure trove of useful advice and tips, this book is essential reading to gain a basic understanding of money mechanics. It serves as a guide to help people find their confidence, and see money as it really is – a tool that anyone can use. With a chapter dedicated to almost every financial situation we face in our lives, My Money will help readers unlock their financial potential and gain control of their financial affairs. Mwandiambira is a CFP Professional who has a postgraduate degree in Financial Planning Law. He is also the acting head of the SA Savings Institute, an organisation dedicated to developing a robust culture of saving in SA.
Mergence’s Peter Takaendesa wins ABSIP award
eter Takaendesa, Portfolio Manager, Mergence Investment Managers, was voted Domestic Listed Equity Fund Manager of the Year at the ABSIP awards on 26 October 2017. The award was made in recognition of: • Strong risk-adjusted fund performance • Community involvement • Advancement of the voice of black asset managers/ professionals in the media. Brad Preston, Mergence Chief Investment Officer, said: “In addition to Peter’s strong performance, he plays an important role in managing and mentoring participants in Mergence’s graduate trainee programme.” Takaendesa has 10 years’ financial services industry experience and was a top-rated TMT equity investment analyst working for two global investment banks prior to joining Mergence in January 2014. He obtained his MCom at Rhodes University majoring in Finance and Economics, followed by a number of professional industry certifications.
Prior to joining the financial services industry, he was a university lecturer in Economics and published a number of papers in leading academic journals.
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Financial Services Publications 2018
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Published on Nov 27, 2017
Published on Nov 27, 2017
The December issue of MoneyMarketing features some long-term investing lessons learned in 2017, as well as how local investors should view t...