31 January 2020 | www.moneymarketing.co.za
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Most retirement plans are held together using capital growth assumptions, which are notoriously volatile Page 18
A 12J investment is 100% tax deductible in the year of investment
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predictions for 2020
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axo Bank stresses that its predictions are not its official market forecasts for 2020, but instead represent a warning of a potential misallocation of risk among investors who see only 1% of these events playing out. Steen Jakobsen, chief economist at Danish investment house Saxo Bank, says, “We see 2020 as a year where at nearly every turn, disruption of the status quo is an overriding theme. The year could represent one big pendulum swing to opposites in politics, monetary and fiscal policy and, not least, the environment.”
The rand One of the outrageous predictions for this year is that the South African rand will sink to 20 against the US dollar due to the country being ‘electrocuted’ by Eskom debt. Kay Van-Petersen, Global Macro Strategist at Saxo Bank, says that South Africa closed out 2019 with both good and bad news. The good news was that the Springboks took home the World Cup trophy. “Their last victory was in 2007, a year that ended with USDZAR below 7, versus 15 now. In carry-adjusted terms, the rand has fallen far less – only
IMAGE: SAXO BANK
Continuing almost two decades of tradition, Danish investment bank Saxo has published its annual Outrageous Predictions for 2020. While these predictions are, admittedly, ‘tongue-in-cheek’ and unlikely to materialise, if they did in fact come true, there would be enormous consequences for investors around the world. And that’s why these ‘Black Swan occurrences’ are worth looking at!
some 6%, though with plenty of volatility along the way. That is a near miraculous feat.” The bad news, Van-Petersen adds, is that the South African government announced late last year that in order to continue to bail out troubled utility Eskom, the budget in 2020
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is projected to balloon to its worst level in over a decade at 6.5% of GDP, “a sharp deterioration after the government managed to stabilise finances at a near constant -4% of GDP for the last few years”. Continued on page 3
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NEWS & OPINION
31 January 2020
Continued from page 1
He believes that late 2019 saw some of the most “Talking to investors around the world, we’re generous credit conditions for emerging markets staggered by the consensus that Trump is a shoo(EMs) in history and the market somehow in for a second term. They and the markets are managed to absorb this news without jettisoning in for quite a shock: voter turnout in the 2018 the rand to new lows for the year. But this all midterms point to heavy turnout in 2020 as well, changes as 2020 dawns. as the younger generation is in a rebellious mood.” Having done the maths, Van-Petersen states Hardy believes that millennials and even the that in 2007, the last time South Africa won the oldest of ‘generation Z’ in the US have become Rugby World Cup, GDP for the year was $309bn intensely motivated by the injustices and in nominal USD. For the four quarters ending inequality driven by central bank asset market at Q2 2018, meanwhile, South African GDP was pumping and fears of climate change, where $338bn in nominal USD. “That rise may seem President Trump is the ultimate lightning rod for small – at less than 10% – but in constant US rebellion as a climate change denier. dollar terms (adjusted for US CPI), this means “We believe that elections are lost far more than that the South African economy has shrunk a they are won. In 2016, the uninspiring, unpopular staggering 9% over the avatar of the Democratic elite last 12 years. Worse still, establishment, Hillary Clinton, WE SEE 2020 AS A the World Bank estimates failed to motivate many on the left that its external debt has to even show up at the polls and YEAR WHERE, AT more than doubled over lost the election to a fired-up mass NEARLY EVERY TURN, that period to over 50% of Trump voters who wanted to DISRUPTION OF THE of GDP.” overturn the system. Van-Petersen predicts “This time around, the vote on STATUS QUO IS AN that the Eskom fiasco the left is thoroughly rocked by OVERRIDING THEME could be “the straw dislike of Trump – with suburban that will break the back of creditors’ willingness women and millennials showing up to express to continue funding a country that hasn’t had their revulsion for Trump.” its financial or governance house in order for He predicts that the Democrats could win decades”. the popular vote by over 20 million, grow their Other uncreditworthy EMs will be drawn into control of the House, and even narrowly take the abyss as well in 2020, he says, with the most the Senate. “Healthcare is the single sector that differentiated performance across EM economies is in for a strong headwind from a Democratic in years. “USDZAR rises from 15 to 20 as the clean sweep in the election, as Medicare for all country teeters toward default,” he concludes. and negotiations for drug pricing bring a massive haircut to the industry’s profitability.” US presidential election Another outrageous prediction concerns the Other predictions outcome of the US presidential election this year. Some of the other 2020 Black Swan events that John Hardy, Saxo Bank’s Head of FX Strategy, Saxo predicts include the UK’s nominal growth says the polls going into 2020 don’t look doubling to 8%, the European Central Bank promising for Trump: 2018 mid-term elections hiking rates, Hungary leaving the EU, Asia and limited 2019 elections in the US showed that launching a new reserve currency in a move away voters living in suburbs across the US are turning from US dollar dependence, the sudden arrival in droves against Trump’s Republican party. Hardy of stagflation rewarding value over growth, and adds that the marginal Trump voter in 2016 and investors realising that oil is still more profitable in 2020 is old and white, a demographic that is than clean energy. fading in relative terms as the largest generation in the US now is the maturing millennial generation Editor’s note: For rather less outrageous predictions, please see of 20- to 40-year-olds, a far more liberal and less pages 22 and 25. white demographic.
EDITOR’S NOTE
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owards the end of last year, I had a very unpleasant short-term insurance experience. It all began when a bolt of lightning hit our property during a violent storm in the early hours of the morning. Damage was done to the front wall, the electric fence, the gate motor, the geyser, the burglar alarm, a windowpane and the house’s electrical system. And just to make it all worse, a tree had been hit by the bolt, causing it to split down the middle so that a large branch fell on to the roof of our home. We called our insurer and that’s when the problems started. We had hoped for some sort of co-ordinated response and we expected a visit from the insurance company’s assessor. Sadly, that wasn’t the case. We were left to find out what needed repairing, compile a list, and hope for the best. Our insurer wanted us to make an excess payment of R1 000 – and that my husband did electronically. Nevertheless, every one of the eight workmen that called at our property to repair the damage demanded the excess payment – in cash. And failing that, every one of them demanded proof that it had been paid. I found this highly irregular and I began wondering if some sort of scam was afoot. The sequence of the repairs mattered – nothing could be done before the tree was cut down as the falling branches might have caused further damage. It was left to us to tell the workmen when they should call. Was I just plain naïve to expect the insurance company to have handled all this? The largest shock came when we were told to pay a further access of R250 – all because the removal of the tree had cost R15 000. I have asked around and no one has ever paid this sum to a tree feller to dispose of one tree. Undoubtedly, this will push up the price of our insurance premiums going forward. On behalf of the MoneyMarketing team, I wish you a happy and prosperous New Year. Janice janice.roberts@newmedia.co.za @MMMagza www.moneymarketing.co.za
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NEWS & OPINION
31 January 2020
PROFILE STUART DUNBAR PARTNER, BAILLIE GIFFORD
How did you get involved in financial services – was it something you always wanted to do? I wanted to work in financial services from a relatively early age, but motivated, in the beginning, for all the wrong reasons. This was the early 1990s and ‘investments’ was a glamorous industry with hot-shot traders driving fancy cars. What 23-year-old guy wouldn’t want that? When I started applying for jobs (in Hong Kong – it was a British Dependent Territory at the time), I didn’t even know the difference between an investment bank and an asset manager. Only later did I begin to understand that asset management ought not to be a game of self-enrichment. It’s a fundamentally important part of the economic system that should be focused on wealth creation, productivity enhancements and, most of all, the honourable stewardship of our clients’ assets. What we do meaningfully impacts many, many lives. People say there’s nothing like the zeal of a convert: well, that’s me. What makes a good investment in today’s economic environment? The same that makes a good investment in any economic environment: companies that disrupt incumbents with newer business models, technologies or products; that have large addressable markets, aligned and adaptable management, and the ambition to keep reinvesting for the future. There are precious few such companies. What was your first investment, and do you still have it? I made my first – very modest and pretty calamitous – investment in a European technology fund in 1999, well below the peak tech bubble. Post tech-crash, the fund was merged with other funds three or four times, changed management company at least three times, and had too many changes of objective to count. It’s now worth around 10% less than when I invested almost 20 years ago (distributions reinvested) and has an eyebrow-raising ongoing fund charge of 2.09%, of which an inexplicable 0.59% is additional expenses beyond the 1.5% annual charge. That 0.59% on its own is more than the all-in charge on some of our own funds. The firm that now runs it refuses to switch my units to the much cheaper non-advised share class, despite my having written to them asking them
VERY BRIEFLY
to do so, explaining that I have literally not spoken to the financial adviser concerned since 1999. I do still have the investment – it’s a very small amount of money – to remind me of just how awfully our industry treats retail investors and of the obligation that Baillie Gifford has to set ourselves apart from this behaviour. If I ever find time, I’m going to write it up for the regulator, saying it’s embarrassing to be part of an industry that treats its clients like this. Charge reasonable fees, always put client interests first and act with integrity. It’s not that hard, is it? What have been your best – and worst – financial moments? My best moment: Personally, along with a lot of other people I’m sure, paying off my mortgage and becoming debt free was liberating. I think we in the industry need to recognise what matters to people in the real world. Professionally, the best moments are when our clients tell us we’ve helped them hit their funding targets or savings goals, so accomplishing what they hired us for in the first place. Worst financial moment: See above! What’s the best book on investing that you’ve ever read – and why would you recommend it to others? Nicholas Nasim Taleb’s first book, Fooled By Randomness (2007), is by far his best and most interesting on the topic of randomness, luck and the narrowness of how people retrospectively interpret the world. I’ve read it at least three times. It opened my eyes not only to the nature of uncertainty in the context of investment and the practical uselessness of the capital market theory that I so diligently learned at university, but also – more philosophically – to the randomness of social equity and the obligation on those of us who are fortunate to help those who are less so. Everybody should read it.
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Alicia Goosen has been appointed Chief Broking Officer of Aon South Africa. “Her appointment follows years of outstanding performance underscored by her thorough understanding of the insurance sector and carrier market,” the company said in a statement. Prior to her promotion to the role of Chief Broking Officer, Alicia was Business Unit Head: Financial Services at Aon, a role she fulfilled since 2011. “Alicia has a well-established career in the insurance industry, she is a Fellow of the Insurance Alicia Goosen, Institute of South Africa Chief Broking and holds a BA degree in Officer, Aon Psychology,” the statement South Africa added.
Carrick Wealth’s Managing Director Mike Potts will be leaving the company. In a statement, Craig Featherby, CEO, said, “Mike arrived in South Africa on a three-year contract, but fell in love with the country and stayed on. I am sure you will share our sense of loss over his decision to return to the UK. As a founding shareholder of Carrick, he was hugely instrumental in our success. With his vast knowledge of the UK pension space, he launched Carrick’s pension transfer business and was also instrumental in establishing our virtual advisory business out of Mauritius (one of the most successful parts of the Carrick business).” Featherby will assume the Mike Potts, position of interim MD until Managing Director, a replacement is found. Carrick Wealth RisCura has announced the appointment of Isaac Ramputa as an executive director of RisCura Solutions (Pty) Ltd, the investment advisory subsidiary of RisCura in South Africa. According to a statement from the company, he brings with him a wealth of financial services industry experience, having served in executive roles at organisations such as the Financial Sector Transformation Council, Batseta – Council of Retirement Funds of South Africa, the Association of Savings and Investment in South Africa, Business Unity South Africa and the Insurance Sector Education and Training Authority. “Isaac’s experience and dedication to industry transformation strongly resonates with the mission of RisCura – investing with care – and he will contribute to our pioneering role in the responsible and impact investment space,” RisCura’s managing director Isaac Ramputa, in South Africa, Malcolm Executive Director, Fair, said. RisCura Solutions
NEWS & OPINION
31 January 2020
COERT KNOETZE Managing Director, Snap-It Cover
How brokers can make digital platforms part of their value proposition
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nsurTech is the current fourth industrial revolution, digitisation is the order of the day, computers are communicating without human intervention, and autonomous vehicles, microchip implants, machine learning robots, to mention a few, are all here to stay. We are living the reality of smart factories and a new dawn of technological innovations. At every conference, every broker breakfast we attend, every insurance magazine we open, InsurTech is mentioned. Conferences are being held around the globe, with InsurTech as the buzzword. Times are changing fast – even our strategic business partners are using apps and using virtual sales to complement their distribution channels. Trov’s platform is popping up all over the world, Hollard introduced us to Naked, while Compass and Bryte went fruitful with Pineapple and Granadilla, and Constantia came up with JaSure. What will follow next? Our own brokerages will become more proactive and less time will be wasted if we embrace the technology InsurTech is delivering. For the first time, technology will elevate revenue A TRULY GROUND- with relatively very little human BREAKING input required. OPPORTUNITY But that is on the HAS ARRIVED condition that you adopt the correct technology to enhance your expertise. The network of computers is a more efficient way to share information. The true power of Revolution 4.0 is upon us, whether we like it or not. A truly ground-breaking opportunity has arrived, a reality check in many ways, catering for the expectations of the “new” client. But speed is of the essence. The expression “first come, first served” has never been truer – our landscape has changed forever. How many insurers are there prepared to support your initiative? It is a short-term window of opportunity for insurers and brokers alike to
use digital platforms and make them part of their value proposition. Doing so will set them apart from the competition, thus creating a uniqueness in their offering. “Being out there from the start” needs no elaboration. Don’t be oblivious to the challenges, embrace them and optimise the offer with a proactive approach. Make this revolution your own. At Snap-It, we have captured the core of shortterm insurance, the offer, the service, the support and the promise we made. We have learned from practical involvement, we’ve been taught by our own mistakes and we’ve produced for you this amazing app. Snap-it is a white label app that can easily be changed to resemble any broker’s and insurer’s
look and feel – your own online app at a fraction of the cost. Insurance-on-the-go, on-demand… it doesn’t matter how you refer to it, it is insurance cover for when your client requires it. Your client can purchase daily, weekly or traditional monthly insurance – no more wasting premium where the risk is within your client’s ability to manage. We ventured out on your behalf, combined our experiences, summarised the intention of the competition, requested the input of many – and now we are ready to roll out and cater for the need. We are here to support you, not only in the supply of this awesome app but also as an alternative to the norm and one amazing business opportunity. Please see www.snapitcover.com and contact us at hello@snapitcover.com
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NEWS & OPINION
31 January 2020 Leanne Manas and Saray Khumalo
MARTEEN MICHAU Head: Fiduciary & Tax, Sanlam Private Wealth
How to protect trust assets
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rusts offer an efficient and flexible way of ensuring your assets are consolidated, preserved, protected, and managed objectively by the right people. But a trust can be a complex vehicle and should be set up to meet its specific objectives. How can you adequately protect trust assets? Here’s what you need to know. Assets held in trust can enjoy protection from: • Claims by your creditors • Claims by a spouse divorcing you • Claims for alleged malpractice against you • Non-financially astute children eroding family assets • Unscrupulous advisers misleading your spouse after your death • Your spouse spending your children’s education fund after your death • Your children’s spouses or in-laws getting their hands on your family assets • Unnecessary taxes on foreign assets • Political and country-specific risks • Delays associated with the deceased estate administration process • Executors’ fees of 3.99% on assets on your death • Capital gains tax of effectively up to 18% on the capital gains on your growth assets on your death • Estate duty of 20% (or even 25%) on certain of your assets on your death • Assets being frozen on your death in your own name with no access to liquidity for your surviving family members to pay the bills • Being a part of the consequences of a marital regime that is in community of property. How can you ensure that assets do indeed enjoy the appropriate protection? An offshore trust must be established as an irrevocable discretionary trust. This means the founder should not have the right to cancel the initial donation made to the trust, nor should the founder be able to revoke their instruction to create the trust.
AN INDEPENDENT TRUSTEE IS SOMEONE THAT IS NOT A BENEFICIARY OF THE TRUST AND NOT RELATED TO A TRUSTEE OR BENEFICIARY OF THE TRUST There must be no vesting of trust assets in you, either in terms of the trust deed or in terms of trustees’ resolutions. If you have the right to a percentage or share of trust capital or income, you have vested rights to that percentage or share. If the trust deed provides that the trustees have to distribute certain assets or a particular share of the capital or income to you, you most probably have vested rights to those assets or benefits. You must not have control over trust assets as if they are your own You may be seen to have control if: • As a trustee, you have a casting vote • You have the power to hire and fire trustees acting alone • You channel trust payments and receipts through your personal bank account • You use your personal assets as security for trust liabilities. Refrain from dealing with trust assets as if they are your own Examples include transacting on the trust bank account without having been authorised by the trustees to do so on their behalf, or giving instructions alone on an investment account without authorisation by the trustees to do so on their behalf. Appoint an independent trustee. Generally speaking, an independent trustee is someone that is not a beneficiary of the trust and not related to a trustee or beneficiary of the trust.
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A partnership to celebrate a journey to success
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omentum Multiply has announced that it will be partnering with Saray Khumalo as its official brand ambassador. Khumalo made history last year when she became the first black African woman to summit Mount Everest. CEO of Momentum Multiply, Zureida Ebrahim, says, “We are excited to partner with Saray and want to celebrate every step with her on her rewarding journey to success. Our brands support clients with personalised financial advice and quality product solutions. Momentum Multiply further rewards people for saving more, living healthier and being safer. We believe people should improve their wellness by doing the things they already do every day. Saray is one such individual and her journey inspired us to make the partnership official.” With this new partnership, Momentum Multiply also supports Khumalo, not only as a mountaineer but in all aspects of her life. “The journey to success is paved with many challenges and Saray is testament that one does not reach the top alone – she not only climbed with a professional support team but also with the backing of 57 million South Africans,” Ebrahim adds. At the launch of the partnership, Khumalo summited Mount Everest yet again – this time with members of the media in tow via virtual reality. Guests were able to retrace Khumalo’s climb as she guided them throughout the experience. She gave journalists key insights into her mental and physical state, her thoughts, feelings and the importance of support at each critical point leading to the summit. Khumalo highlighted the significance of this partnership. “Failure shapes success and ultimately shapes a person. Although it takes a lot of inner strength to conquer the challenges we face, it’s also important to draw on the strength of our support teams to overcome difficulties on our journeys. I’ve learnt that a quest such as this is impossible on my own, and I am excited to partner with Momentum Multiply.” Khumalo is now setting out to break more records, aiming to be the first African to complete the Explorer Grand Slam, which involves reaching the North Pole, the South Pole and all of the seven highest peaks on the seven continents. Having already summited four of the seven peaks, she has three summits and two poles to reach. There are only 67 people in the world who have completed this challenge to date. “As a business, we continuously strive to reach new heights – as such it is a privilege to be associated with someone who continues to conquer so much on her Saray Khumalo journey to success,” Ebrahim adds.
NEWS & OPINION
31 January 2020
Assisting clients with education goals
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he recent twitter hashtag Sometimes apathy is a symptom #SalaryDepression was of being overwhelmed. Financial an apt illustration of the intermediaries have the challenging collective low mood many people task of cutting through this by are experiencing when it comes to making educational savings goals money matters, as we feel financially tangible and attainable for clients. stretched to the limits. Sanlam has introduced Sanlam While a recent Sanlam survey Goal Manager to help. It enables shows most South Africans do intermediaries to assist people to prioritise saving set clear education for education, it’s goals and track their THE SURVEY WE often the end goal journeys to achieving COMMISSIONED that can seem these goals. insurmountable. Here, Magosha CLEARLY SHOWS This is exactly outlines five steps for SOUTH AFRICANS intermediaries to make where a financial intermediary can KNOW THE VALUE saving for education play an invaluable less overwhelming, so OF EDUCATION role in guiding dreams become reality: people with a plan and tools to track 1. Start with the goals. Multiple education savings goals. reports suggest many of the Prioritisation is critical. So is jobs of tomorrow don’t yet exist. simplification. When we’re feeling However, today’s qualifications overwhelmed, most of us want can serve as a guide to estimate clear, step-by-step directions and what savings your clients will need reassurance along the way. Kenosi to give their children options. Magosha, Head of Client Solutions The Sanlam survey suggests most Savings at Sanlam, says, “The survey South Africans want their children we commissioned clearly shows to have a university qualification. South Africans know the value If this is the case with your client, of education. Almost all of the respondents said they believe people will need to upskill and reskill in the future. About 9 in 10 believe their children will need more than one qualification to get ahead in tomorrow’s world of work. It can easily be overwhelming for parents as they consider how they will fund the future skilling and education for their children and possibly for themselves as well. We want the best for our children; we want them to thrive – whether working for someone else or starting their own thing. We want them to have options.” FPI-advert-PR.pdf
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start with this goal, then work backwards to unpack the journey to get to university. Ask whether they want to go the public or private school route. Then advise on what’s feasible in terms of what they can afford. Sanlam Goal Manager illustrates the cost of different types of school and tertiary institution courses. This gives a good guide to today’s cost of education and what you need to save each month to prepare financially for future costs. 2. Simplify, simplify, simplify. Set up an education goal for each child and, if you would like to save for high school and tertiary education, set up separate goals for those as well. These separate goals will break down a larger education savings pot into individual goals, which can also be seen as more achievable and helps with prioritisation. 3. Build in flexibility. Curveballs are common. Ensure that people know there’s flexibility to adjust goal amounts and monthly payment plans, should their circumstances become more favourable or unfavourable. Work through financial contingency plans to stay on track, e.g. contribute extra savings when you can without changing your goal. Sanlam Goal Manager will help you see the impact on the end goal in cases where you adjust contributions towards the goal. This can help with difficult decision-making as it makes goals more tangible. 4. Keep an eye on the prize. A Harvard Medical School article cites a study that shows how people who regularly kept an eye on daily food intake lost nearly
twice as much weight as those who didn’t. Keeping an eye on the prize – the goal – helps to keep a goal top of mind. The same psychology applies to an education savings goal. Monitoring progress towards a goal helps people feel more invested. There’s also an aspect of reassurance – nothing is left to chance. For example, Sanlam Goal Manager has a functionality to check progress made towards a goal, and automatically sends annual updates and recommended next steps for clients to stay on track to achieve their goals, e.g. monthly contribution adjustment if education inflation is very high. 5. Be human. It sounds strange, but even in an age of robots – perhaps more so because of it – people are seeking real human connection. One of the most valuable services you can offer is an empathetic ear. Seek out what drives clients, their aspirations and dreams to help them set goals and keep them motivated on their journey. Look for opportunities to understand what aspect of their educational savings journeys they’re most daunted by, and help with words of reassurance, plus a plan that feels doable. Check in regularly – a simple phone call or WhatsApp message goes a long way!
Kenosi Magosha, Head: Client Solutions Savings, Sanlam
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NEWS & OPINION
31 January 2020
Consumer awareness of FAIS Ombud must increase The Office of the FAIS Ombud has welcomed Advocate Nonkumbulo Tshombe as the Ombud for Financial Services Providers. MoneyMarketing speaks to her about her new role. Has enough been done in terms of the law to protect clients in the financial services industry? Like everything else, the law protecting clients in the financial services industry is evolving. Following the 2008 global financial crisis, wideranging reforms were made in the insurance industry, retirement and pension funds industry, the banking sector and the investment sector. Most important was the adoption of the concept of the Treating Customers Fairly paper, which seeks to ensure that the fair treatment of customers is embedded in the culture of financial firms. Secondly, the FSR Act saw South Africa adopt the ‘Twin Peaks’ model, with one peak providing stability to the financial system – an important aspect often overlooked when talking about consumer protection – and the second peak aimed at preventing misconduct and protecting consumers of financial products and services. Added to this is of course the Financial Advisory and Intermediary Services Act and its subordinate legislation, which are the legislative framework and pillars of protection
for customers in the financial services industry. In this legislative framework also lies the provisions creating the Ombud for Financial Services Providers, an office providing an important alternative dispute resolution mechanism that is free and constitutes a quick remedy for financial services customers. On the horizon we also have a new bill, the Conduct of Financial Institution Bill (COFI), which shall provide that financial institutions must at all times conduct business in a manner that prioritises fair outcomes for financial customers, and ensure that fair treatment is central to the corporate culture of the financial institutions. COFI will therefore bring enhanced implementation of the Treating Customers Fairly (TCF) principles. The challenge now is for institutions such as the FAIS Ombud to continue to effectively discharge its mandate in this regard and to promote greater awareness to increase access to justice for all South Africans. The FAIS Ombud’s Annual Report for 2017/2018 shows that over 10 000 complaints
were received – does this indicate that financial services providers have been behaving badly? 10 000 complaints is a significant number, and yes, there is still work to be done to get all FSPs to conduct themselves within the spirit of the law and to treat customers fairly, especially within the short-term insurance space, for example. It must, however, be appreciated that the number of complaints received by this Office is not a definitive indicator or barometer of how the industry as a whole is conducting itself. The truth is that despite being in existence since 2004, a lot more must still be done to improve awareness regarding the existence of this Office and the services it provides. As awareness grows, it may well see the level of complaints remaining at these levels, or even increasing. What do you view as challenges in your new role? As previously mentioned, increasing awareness to consumers about the existence of the FAIS Ombud –who is charged with providing a fair, informal, economical and expeditious mechanism for the resolution of their complaints – is extremely important and remains a challenge for an organisation such as the FAIS Ombud, with its limited resources and
centralised location. It is, however, a challenge that must be embraced via utilising all possible avenues for the creation of awareness on the part of financial services customers. Furthermore, this Office still has a significant number of complaints related to property syndication investments that require continued focus and attention to bring these long outstanding matters to finalisation. Do you hope to do anything different from your predecessors in your role as SA’s new FAIS Ombud? I will look to build upon the foundation laid by those that came before me and continue to strive to create awareness where this is most needed, provide a fair and efficient service ensuring that financial services customers have access to and are able to use this affordable alternative dispute resolution process, thereby contributing to consumer protection and to the integrity of the financial services industry, which is ultimately the mandate of this Office.
Advocate Nonkumbulo Tshombe, Ombud for Financial Services Providers
FAIS Ombud receives reduced number of complaints
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ast month, the Office of the FAIS Ombud (OFO) launched its Annual Report for the year 2018/2019. During the financial year, the OFO received a total of 9 323 new complaints, a reduction of 8.7% from the 10 211 received during the 2017/2018 financial year. However, the OFO finalised 9 954 complaints, 6.8% more than the total amount received during the financial year. “The heightened progress made was evident right through the year, with 92.9% of all new complaints finalised within a period of six months, and 99% of all complaints received closed within nine months,” the Report states. “Therefore, while the number of complaints received during the financial year was reduced, the OFO focused its energy and resources on the expeditious resolution of all active complaints.” Of the 9 323 complaints received during the financial year, a total of 5 589 fell within the OFO mandate and this equates to 60% of all complaints received during the financial year. Of the 9 323 complaints received, a total of 3 684 complaints were dismissed in favour of the respondents, and 2 770 complaints were referred to the appropriate fora.
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There was an increase in the number of complaints settled or resolved in favour of the complainant, which rose from 1 392 during 2017/2018 to 1 871, an increase of 34%. The Office’s settlement ratio, calculated on complaints that fell within the Office’s mandate, reached 30%, which compares favourably with industry standards. This in turn saw the settlement value increase from R60 889 786 during 2017/2018 to R66 668 302 during the 2018/2019 financial year, an increase of 9.5%. The number of complaints referred to other fora as mentioned above, represented 29.7% of all complaints received by the Office during the 2018/2019 financial year. “The referral of complaints to other fora remain an important aspect of the service provided by the OFO, as this demonstrates the continued commitment to appropriately assisting any person who refers a matter to the OFO,” the Report says. The number of complaints dismissed by the Office, which totalled 3 684, represented 39.5% of all complaints received by the OFO during the financial year. The Office is required by law to provide detailed reasons for any decision made inclusive
of the dismissal of complaints. Everyone who feels aggrieved by decisions taken by the Office can approach the Financial Services Tribunal. During the 2018/2019 financial year, a total of 154 applications were made to the Financial Services Tribunal, and of the 146 matters decided upon by the Tribunal as at 31 March 2019, 141 of those applications were dismissed with only five being referred back to the Office for further investigation. “The success rate of 96% constitutes confirmation of the level of fairness and impartiality exercised by the OFO in the investigating and adjudication of complaints,” the Report adds. Of the total number of complaints received during the financial year, the majority (32.31%), were from the short-term insurance industry. “The concerns surrounding the provision of short-term insurance policies and the failure of FSPs to embrace the provisions of the FAIS Act and its corresponding General Code of Conduct for Authorised Financial Services Providers and Representatives is well documented, and there remains much work to be done in this area,” the Report concludes.
NEWS & OPINION
31 January 2020
Personal finance mismanagement among employees can hit productivity
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hile many employers are careful to walk the fine line between their employees’ contractual obligations and their personal lives, attention to employee wellness is a core component of any business strategy. As such, many employers are beginning to realise that there are links between poor personal finance and unsatisfactory performance in the workplace. Sufficient leave, medical aid, shares and retirement contributions provide upliftment and additional wellbeing for employees, yet staff often fail to reap the full value of these benefits, through a lack of understanding of the financial policies they are involved in. Added to this, rising living costs and spiralling debt among South Africans are further impacting individuals’ budgeting and financial planning. 10X Investments’ recently released 2019 Retirement Reality Report (RRR19) identified claims by 55% of economically active South Africans that they are unable to save or invest, as they have no money left over at the end of any given month. This is a sign that more than half of South Africans whose monthly income exceeds R7 600 are essentially living from paycheque to paycheque. The RRR19 also found that 72% of South Africans across all demographics were either doing badly financially or are unsure of their predicament, 58% were struggling to afford their monthly living expenses,
and 64% were supporting a variety of dependants, many of them adults. Rising living costs and spiralling debt among South Africans, on the back of a contracting economy, saw consumer repayment defaults increase by 10% year-on-year from Q1 2018 to Q1 2019, according to the TransUnion SA Consumer Credit Index. Clark Gardner, CEO of Summit Financial Services, which provides financial education and debt restructuring for employees, believes it is important for firms to take a more protective stance towards their employees’ personal finance, noting that issues of debt and personal finance mismanagement among employees can directly impact productivity and subsequently employers’ pockets. “It’s important to get the employee wellness ball rolling, by offering employees the option of having a space to learn about personal finance, including debt management, budgeting, planning for emergencies and the like,” he says. “Teaching staff about the intricacies and value of their retirement contributions is an easy place to start.” The RRR19 showed that more than half of South Africans who have corporate retirement savings schemes know little about the value of their policies, while others have made the mistake of cashing them out when changing jobs. “Employers have a responsibility to provide their employees with this
information in clear and easy-tounderstand ways. Even informal ‘lunch and learn’ sessions are an effective, light-hearted way for employees to learn and fill in the gaps of their personal finance knowledge. The lack of financial literacy can have a devastating impact on personal relationships, work performance, and a consumer’s overall wellbeing. It’s also a key factor in workplace safety, ethical decision-making, and healthy labour relations. Debt and living from one pay cheque to the next without being able to set aside any money for a rainy day is a perpetual source of stress for any individual,” says Gardner. “When this occurs en masse and all under the same roof of a company, it can significantly reduce productivity – how can staff focus on their work if they are distracted by fears about their finances? This can also lead to absenteeism and an increasingly expensive workforce.” Gardner believes that customised, actionable and relevant financial literacy is key and an issue that needs to be addressed. Poor financial habits can result in a rapid downward spiral that affects every single avenue of an employee’s life. This ultimately impacts their co-workers and working environment. Knowing the dangers of borrowing, the power of emergency savings, how to set a monthly budget and where to cut unnecessary expenses, how to ensure that more money comes
into a household than goes out, and how to manage debt repayments, are crucial skills that are rarely taught in schools. More importantly, if this is done for the employee each month for three months, the employee starts to change behaviour. Employers battling to educate their staff in this regard also have more formalised avenues open to them, which can fast track direct personal finance education and intervention. “Many employees get swept away by the excitement of a new salary and spend recklessly,” says Gardner. “Once you start sinking into debt, it can seem almost impossible to climb out of and could negatively affect the rest of your career. We’ve assisted a number of companies in getting their employees’ financial situations corrected and it begins by empowering people with financial knowledge. “Once your employees have their financial affairs in order, you’ll quickly see productivity and morale improve. Financial wellness is certainly a worthy investment for employers,” he adds.
Clark Gardner, CEO, Summit Financial Services
Finding the bank with the lowest charges
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here was fierce competition among banks in the market of personal transaction accounts in 2019, according to the tenth annual edition of the Bank Charges Report issued by the Solidarity Research Institute (SRI). “Banks attempted to be winners in the market with a combination of better benefits and reduced bank charges,” explains Monica Mynhardt, Researcher at the Solidarity Research Institute. “In 2019, Capitec took back its title as the bank who offers the cheapest account to low-income users. Capitec is still the only bank that offers good interest rates on transactional accounts, which can help a user with a minimal balance in their bank account reduce their bank charges even more.” Regarding banks’ flagship accounts, a combination of bank charges and rewards programmes is starting to become the predominant factor for users. Capitec remains the cheapest bank for users who have no need to participate in a rewards programme. “For users seeking rewards programmes, FNB’s
Gold Cheque account will offer excellent value, with users getting access to FNB’s rewards programme, eBucks. It is also the only account in this category, besides Capitec’s, which offers reduced bank fees from last year. As a result of this reduction, FNB’s Gold Cheque account just passed Standard bank’s Elite Bundle account – the cheapest option with benefits of last year.” Transaction accounts for upper middleclass users are probably the most competitive. The types of benefits in this category are very similar across the spectrum of all the banks, and the difference in costs between the different banks are the smallest in this category. “However, FNB Premier Cheque and ABSA’s Premier account were the only two to offer a reduction in bank charges. ABSA’s Premier account is also the most affordable account in this category – the cost hereof is comparable to the most expensive accounts in the previous categories. Despite FNB also offering a reduction in bank charges, Standard Bank’s
Prestige Rebate account is the best option besides ABSA’s,” Mynhardt points out. The report includes an analysis of international accounts and foreign exchange amid local uncertainty and an often volatile rand. “The goal is to expose users to options to diversify by investing in foreign currency. These accounts are typically accounts that can be linked to an existing transaction account with no cost or minimum balance that allow users to purchase foreign currency. ABSA, FNB, Standard Bank and Nedbank all offer such an option, while Capitec is the only bank that does not offer this option,” Mynhardt says.
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NEWS & OPINION
31 January 2020
Liberty Life founder, Sir Donald Gordon, dies
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ributes have poured in for insurance pioneer and the founder of Liberty Life, Sir Donald Gordon, who passed away, aged 89, after a long illness on 21 November 2019 in Plettenburg Bay. In a statement, Liberty Holdings said, “We extend our condolences to his family and our thoughts and prayers are with them at this time. Sir Donald Gordon was a visionary leader, entrepreneur and philanthropist who made an immense contribution to our industry and country. In 1957 he founded Liberty on principles born of a deep belief in humanity and the desire to help people leave a legacy for their families. Liberty will continue to honour his vision by pursuing our purpose of improving people’s lives by making their financial freedom possible.” The SA Jewish Board of Deputies said in its tribute, “For his phenomenal
RICHARD RATTUE Managing Director, Compli-Serve SA
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new year begins, and with it, here’s a new set of compliance tips to see you through the year ahead. This year, being 2020, inspires me to focus on 20/20 vision, considering all the aspects of your FSP practice and ensuring you keep compliance, risk and governance near to top of mind. Touch base on tech (today, tomorrow, and two weeks from now…) No need to block out your diary but keeping an ear to the ground on how Fintech, Regtech and Suptech are shaping financial services should be a regular checkpoint. Failing to adapt could mean falling behind. The marketplace is evolving to ‘digital first’, and financial services is no exception. For example, we’re waiting for more formalised cryptocurrency regulation to come in, but digital currency development has outpaced the rules needed around it. Keep pace with how tech develops to stay on top of what your business may need to do to transition and thrive.
FAILING TO ADAPT COULD MEAN FALLING BEHIND
achievements in both the business and philanthropic fields, Donald Gordon was truly a living legend. As a business leader who founded the global insurance giant Liberty International, he was far-sighted, bold and innovative; as a philanthropist, his unstinting generosity led to the establishment of a range of outstanding institutions and foundations that have benefited countless people and numerous worthy causes the world over. Along with his innumerable services to the wider society, Gordon was a committed member of the Jewish community and contributed extensively over the decades to the welfare of its members and communal institutions. Donald Gordon has left a magnificent legacy that will live on long after his passing. The SAJBD pays fulsome tribute to the memory of this great South African and extends its condolences to his family.”
20/20 vision in financial services compliance Spring clean your data Ensure that you are following the POPI Act, even though we are still waiting for it to be enacted. Treating your customers’ data correctly is essential. Data is considered as the oil of the Fourth Industrial Revolution (4IR), but you need to follow the rules. Get your cybersecurity up to scratch As technology advances, so do cyber criminals. Your office printer is even at risk if you don’t clear the data on it (yes, every scan or print-out is kept on the memory of most machines). From a security perspective, this is a recipe for a possible data breach. Be clean and safe when upgrading office appliances and interacting online, insisting on properly removing or storing private data. Remember RDR Things may have gone quiet with this familiar acronym, but don’t fall asleep at the wheel! The Retail Distribution Review is progressing quietly in the background, but it’s not to be forgotten. While potential measures are still pending, it is best to be kept informed along the way. ‘C’ is for client conduct Statistics on complaints in the industry are mostly from clients who feel unloved. This is not a romantic
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mistype; it’s essential to touch base with your clients, giving them the proper attention they need to feel supported – as well as to advise them sufficiently. Also keep Know Your Customer (KYC) and Anti-Money Laundering (AML) practices in mind, particularly to keep FIC fit on the journey. Manage your market Market Conduct Risk is crucial to grasp. Any risk management plan in the new year should include this upfront. Management Information (MI) enables you to reach TCF outcomes. Interpreting data at the right level, so it can be used to better the customer experience, is an example of how your thinking should be. COFI cometh The draft COFI Bill released by
Treasury is in internal regulatory comment stage. Watch this space as the FSCA knocks down the current silos as we know them; but it’s for the best. Lighten up The economy is tough and there is a lot of pressure – due to negative market sentiment – for advisers to manage client expectations. Try to find time to have some fun, or risk experiencing the opposite effect. Don’t let hindsight be 20/20; take on 2020 with a positive attitude and consistently keep your compliance in check. Of course, working with a qualified and competent compliance officer is always recommended. All the best!
NEWS & OPINION
31 January 2020
Why study? The impact of education on perceived client value proposition
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he household savings rate in South Africa is dismally low. Does this mean that the South African consumer fails to acknowledge the value of the services offered by respected financial planners? Or is it a matter of the profession having to improve on how we articulate value to clients in a manner that will make it real and palpable? What is a client value proposition? A client value proposition articulates why the client must use your services as a financial planner. It should be communicated as a bundle of benefits and value-adds which distinguishes one business from another. It sets you apart. It becomes your identity with which clients want to be associated. What are the dimensions of a client value proposition? The table sets out five dimensions of a client value proposition financial planners should consider (as adapted from a study conducted by Maas & Graf (2007)).
Dimension
Aspects to consider
Company value
Business model, image or reputation and the general performance of the business.
an e-learning option, which we call ‘Distance Learning Online’. Students are required to work systematically through the material over Service value Know-how and competence of financial planners and the a six-week period. There is an assessment overall service delivery. at the end of every week to ensure that Social value Level of educational or intellectual competence and other all students remain on track with their social aspects clients can or want to associate with. studies. The exam is scheduled at the end of week eight and students then write-off Relationship value Trust, honesty and openness in the client-planner the modules as they complete each eightrelationship. week cycle. Product value The features, benefits, quality and price of the products A dedicated online lecturer guides being offered. students through each module. Online For each dimension, the relative social value. Validated competence, classes are available and students can view value assigned by the client differs from in the form of formal qualifications or the recordings at a time more convenient what the planner considers important. professional designations, will provide to them and ask questions on an online As the client moves through the client prospective clients with the required forum where the lecturer will assist. life cycle, what is considered important affirmation during the initial stages of The South African consumer is in changes. To illustrate, the company and engagement. Continuous learning will desperate need of the services offered by service value will be very important remain important throughout the client financial planners. It is time to decide on for prospective clients as they attempt life cycle. or refine your unique value proposition. to validate the quality of the intangible service offering of the financial planner. But, I do not have the discipline required to study? How important is education At Milpark Education, we address in the perceived client value the need of students to study in a Marilize Putter CFP® , proposition? disciplined manner, but anytime from Dean: Financial Planning Education impacts on three everywhere. We offer our Postgraduate and Insurance, Milpark dimensions: company, service and Diploma in Financial Planning as Education
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INVESTING
31 January 2020
Private equity’s leading ladies
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aving been criticised in the past for being a disproportionately male-dominated profession, the South African private equity (PE) industry is experiencing a muchwelcomed wave of accomplished female professionals rising through the ranks. Two such rising industry powerhouses are Polo Leteka, Executive Director and co-founder of IDF Capital, and Samantha Pokroy, founder and CEO of Sanari Capital, who both strategies, ideas and methodology of received Women Impact Awards at growing companies, and bringing the the 8th Annual Private Equity Awards required returns to limited partners,” Gala Dinner in London in October last she stated. “Through increased female year, which showcases their excellent participation in the industry, we can standards in deal-making on the also have a greater influence on the continent. transformation of investee Upon accepting the companies. As we work THE OUTCOME with talented women, special accolade, Leteka highlighted the need OF THIS FUND we know where to find for establishing more potential employees for WILL MEAN women-owned-andour investee companies THAT WOMEN who, like us, strive for led PE firms. “There is already a significant quality and exponential WILL BE number of women who ” TAKEN MORE growth. work for large maleDetermined to be a SERIOUSLY BY change-maker and raise owned PE firms, but we need to see more funds for female-led INVESTORS women in the industry businesses in this respect, who are establishing and leading their Leteka has played a principal role in the own firms. This will, in turn, attract first female-led African private equity more women entrepreneurs to this type fund, which closed on 11 November of capital, which has been proven to add 2019 and took centre stage at the significantly to the growth of businesses recent African Investment Forum in and the overall economy,” she said. Johannesburg. Echoing this sentiment is Mametja The brainchild of Alitheia IDF and Moshe, CEO of Moshe Capital. “More led by Leteka and Tokunboh Ishmael, female representation in the industry the fund is supported across three is critical for achieving diversity in continents and plans to leverage the
power of women as producers and consumers to radically transform the African economy and change lives. The outcome of this fund will mean that women will be taken more seriously by investors and will be seen as the innovators that they are. Explaining why this historic fund is necessary, Leteka, in her capacity as Principal Partner in South Africa, says, “With women making up the majority of the world’s population, Africa cannot afford for the majority of its citizens not to unlock the economic potential that we possess as a continent and as women. We take inter-regional trade seriously and want to unlock the economic potential of this to the future prosperity of our continent.” To see this happen in practice, Andrea Böhmert, Co-managing Partner at Knife Capital, believes that increased awareness is key. “We need to create awareness and demonstrate that there is a viable career path for women in our industry. To do this, we need an increased number of female fund managers so that the path to leadership becomes visible.”
Left to right: Polo Leteka, Executive Director and co-founder, IDF Capital; Samantha Pokroy, founder and CEO, Sanari Capital; Andrea Böhmert, Co-Managing Partner, Knife Capital and Mametja Moshe, CEO, Moshe Capital
When it comes to concerns about how this may affect the bottom line, Pokroy said that the proof is in the pudding. “Every bit of research shows that gender-diverse teams outperform. Most recently, a report released by IFC – a member of the World Bank Group – revealed that private equity and venture capital funds with genderbalanced senior investment teams generated up to 20% higher returns than funds with less diverse leadership. “This confirms our view that business cultures that promote, celebrate and capitalise on differences (gender, race, culture, religion, age, upbringing and educational disciplines) are the way of the future. We believe that businesses that do not embrace this will do so at their own peril,” Pokroy added.
SA private equity affirms its value in tough times
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n the face of high market volatility and lagging persisting low-return environment, South African economic growth, the latest RisCura-SAVCA private equity has managed to remain resilient South African Private Equity Performance Report for the most part. “The investment environment reveals that the South African private equity industry continues to be extremely challenging, but private outperformed listed equity over the short- and equity’s performance relative to the listed market medium-term, as of June 2019. remains favourable. This sustained outperformance The second quarter report, which tracks a demonstrates the value that the private equity asset representative basket of private class is able to bring to a portfolio equity funds in South Africa, amid extreme market volatility and PRIVATE EQUITY’S lagging economic growth.” shows out-performance across all three listed benchmarks According to the report, the 10-year, PERFORMANCE over the three-year and five-year and three-year ZAR IRRs RELATIVE TO five-year periods. Over the (internal rate of returns) declined from THE LISTED 10-year period, private equity 11.5%, 13% and 8.3% in Q1 2019 to underperformed across all MARKET REMAINS 9.9%, 12.1% and 7.9% in Q2 2019, three listed benchmarks. respectively. The 2013-2015 vintage FAVOURABLE The direct alpha earned by funds also saw a decline in their private equity relative to the performance since last quarter, ending ALSI TRI, FINDI TRI and the SWIX TRI is 1.6%, 4% the quarter at an IRR of 8.3%, compared to 8.7% in Q1 and 4.2%, respectively, over the three-year period. At 2019. The 2010-2012 vintage funds reported an IRR of Q1 2019, these results were comparable at 3.2%, 6.9% 4%, down from 5.1% in Q1 2019. and 5%, respectively. Similarly, the USD IRR weakened over the Tanya van Lill, SAVCA CEO, says that despite the five-year and 10-year periods, reaching 5.2% and
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3%, respectively, down from 5.6% and 6.1% in Q1 2019. Over the three-year period, however, the USD IRR improved from 10.1% in Q1 2019 to 10.3% in Q2 2019. Monwabisi Zikolo, a senior private equity analyst at RisCura, notes that certain figures were restated in this latest report. “The restatement transpired due to the removal of funds with a vintage year prior to 2004, as these funds operated under vastly different macroeconomic conditions.” Despite the sluggish level of national growth being exhibited, Van Lill believes that certain industries in South Africa remain ripe with opportunity for private equity capital. “We continue to see a lot of capital flowing into healthcare, education and infrastructure. Importantly, in addition to generating financial returns for investors, these investments also provide essential Tanya van products and services,” Lill, CEO, she adds. SAVCA
INVESTING
31 January 2020
KIM ZIETSMAN Head: Business Development and Marketing, Laurium Capital
Hedge funds can be a great diversifier
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n volatile times, when investors are not achieving returns out of traditional asset classes, hedge funds can be a great diversifier. While there has been a wide dispersion of returns in individual hedge funds, many performed extremely well in 2019. The new ASISA Hedge Fund Classification Standard comes into effect on 1 January 2020, with the aim of classifying all hedge fund portfolios, including hedge fund of fund portfolios, into different categories. The aim is to make it easier for investors to assess and compare funds and to select hedge funds appropriate for their risk profiles and investment portfolios. What makes hedge funds different from traditional investing? • Long-only fund managers analyse stocks, make decisions to buy, sell or hold • Hedge fund managers need to be able to do this well – and more. Hedge fund managers have a lot more tools in their toolbox. Hedge funds can use leverage, and other strategies such as shorting, which allows them to generate returns from both a positive and a negative view • Managing hedge funds can be more complex than long-only funds, and so requires a different skill set • Most hedge fund managers in SA have skin in the game and are prepared to invest a large proportion of their investable assets in their own funds. What are the benefits of investing in hedge funds? • Equity-like returns (after fees) with lower risk • Protection of capital • More investment options via a larger ‘toolbox’ • Diversification: better risk-adjusted returns • Highly regulated environment • SA has quality managers with long, consistent track records • Complement rather than replace long-only funds. Are hedge funds a high-risk investment? To label all hedge funds (and hedge fund managers) as high risk is misleading. The risk profile of a particular hedge fund depends on the mandate of that fund. Some mandates may be very aggressive, using leveraged positions, while others may be designed to focus on hedging and delivering low volatility returns. There are hedge fund mandates to accommodate a range of risk appetites.
What are the risks? Hedge funds are obviously not without risk, as history internationally has shown. Fortunately, hedge fund managers in SA have proven themselves to be more conservative than their international counterparts – there are some experienced managers that have long, consistent track records to prove it. Furthermore, hedge funds are now much more transparent and highly regulated by the FSCA. • Short positions increase more than long positions • Leverage can amplify the loss (and gains) • Liquidity in short positions is key • Choose a manager that has a solid track record and robust investment risk management. How much do you think should be allocated to non-traditional assets? At least 15-20% of an investor’s portfolio should be invested in assets that are non-correlated to traditional investments, which makes hedge funds a key part of any well-diversified portfolio. With the restrictive nature of Regulation 28, is there enough allocation within a retirement fund to effectively use a hedge fund to benefit the membership? Regulation 28 allows for a 10% total allocation to hedge funds (2.5% per fund). However, CISCA, the legislation that governs CIS funds (unit trusts) does not currently allow investments in hedge funds, even though they are now regulated by the FSCA under CISCA. We believe this should be amended as soon as possible to align with Regulation 28. Why do you think hedge fund assets in SA remain small (estimated R40bn) relative to CIS industry assets of over R2tn? There is a misconception that hedge funds are risky investments, when in fact SA hedge fund managers are relatively conservative, constraining downside performance and reducing volatility. We suspect this may also be due to the funds not being available to retail investors via LISPs, which are the primary channels used by financial advisers, and due to the fact that advisers and investors alike do not have a good enough understanding of their benefits to be able to invest with confidence. We believe that the introduction of daily priced, daily traded investment options on RIF hedge funds like the Laurium Long Short Fund and Laurium Market Neutral Fund will open new investment opportunities to allocators.
Values-based investing does not need to compromise returns
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n response to rising client demand for socially responsible investing, the UK investment division of international family office Stonehage Fleming has announced the launch of its Global Sustainable Investment Portfolios (GSIP), available to South African investors via a segregated discretionary mandate using their annual foreign investment allowance. GSIP utilises the Group’s existing multi-asset investment process, with the same investment and performance objectives, but applies additional socially responsible objectives. South African Head of the Investment Division, Reyneke van Wyk, says, “GSIP aligns specifically with socially responsible investing through constructive engagement with management to create positive change. That said, Stonehage Fleming has long embraced ESG criteria as part of its investment management philosophy and process, using the UN sustainable development goals as part of our due diligence research. While GSIP was built to be a standalone solution, South African investors may, however, prefer to include it as a component of a wider global portfolio, depending on their stance towards performance track record and preference for sustainability as an investment consideration.” Mona Shah, Director at Stonehage Fleming Investment Management, says that values-based investing does not need to compromise returns. “By launching our Global Sustainable Investment Portfolios, we are helping clients to achieve their maximum impact potential in line with their values. The managers we select will pass a high threshold of qualitative and quantitative analysis, of both their investment processes and their ESG credentials.” The overlap in funds between GSIP and the Group’s existing portfolios is very low as the Fund Managers selected will be required to overcome different and demanding hurdles to be included, such as their approach to Governance, and impact methodologies. GSIP will initially be focused on equities, fixed income, alternatives and cash. The headline asset allocation and the risk-adjusted targets will be very similar to the mainstream portfolios. “Equity investments will constitute the largest position in GSIP, but we are also excited by the opportunities within fixed income, which has been largely overlooked by ESG investors to date,” adds Graham Wainer, Chief Executive Officer and Head of Investments at Stonehage Fleming Investment Management. “Bond investors have longer time horizons than their equity peers, and more nuanced relationships with management teams and, critically, with governments. This will be an important asset class for GSIP.” Guy Hudson, Partner and Head of Group Marketing at Stonehage Fleming, says that the firm’s proprietary research piece, The Four Pillars of Capital (2018), showed that 75% of respondents wanted their values to be reflected in their investments but only 21% were actively taking this approach. “We see socially responsible investing as a vital expression of our clients’ ‘social capital’, or the way they engage with and contribute to wider society. In launching our Global Sustainable Investment Portfolios, we are responding to significantly increased client interest in using Reyneke Van their capital to effect positive Wyk, SA Head: change in the way companies Investment engage with the environment, Division, communities and their Stonehage Fleming shareholders.”
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INVESTING
31 January 2020
Investment Forum’s 10th anniversary conference packed with thoughtleadership insights
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he 2020 Investment Forum conference, now celebrating its 10th anniversary, promises to offer delegates the opportunity to listen and debate the views of various investment professionals on the state of domestic and international financial markets and investment return expectations for 2020. The conference will be held in Cape Town (Century City Convention Centre) on the 16th/17th March and in Sandton (Sandton Convention Centre) on the 19th/20th March 2020. There are many new innovations being brought into the 2020 conference. Some of these include: 1. A New CEO Forum – This Forum will be hosted by Kevin Lings from Stanlib and will feature a range of JSE-listed CEOs who will share their views on what their businesses are doing to grow and increase earnings during stagnant economic times. CEOs that will be participating on this panel include Mike Brown (Nedbank), Richard Brasher (Pick n Pay), Dr Chris van der Merwe (Curro Holdings) and Dr Leila Fourie (JSE). 2. New Breakaway Workstreams – Attendees can select from a range of various workstreams that they would like to participate in, based on their individual needs and requirements. These include multi-assets, equity building blocks, fixed income and property, new investment ideas, industry trends reshaping financial advice, rules-based investing, alternative investments strategies and real assets, Asia/China insights and discretionary fund management.
investment scenarios are rigorously debated by a diverse range of industry experts. This allows financial advisers to sift through a variety of investment views, thus providing a balanced perspective to manage their clients’ portfolios. The event is supported by 25 of the leading domestic and international investment management companies, where 43 investment professionals will be participating, including seven chief investment officers and two economists. Furthermore, the 2020 event has the highest number of female investment professionals in attendance ever, coming from financial centres around the world, including New York, London and Singapore.
THE 2020 EVENT HAS THE HIGHEST NUMBER OF FEMALE INVESTMENT PROFESSIONALS IN ATTENDANCE EVER The conference is only open to registered financial advisers who will need to register for the event by going to www.theinvestmentforum.co.za In 2019, the event was completely oversubscribed and sold out way in advance of the date. So, be sure to register soon if you want to secure your seat at South Africa’s premier investment management industry conference, and in so doing, secure your CPD points.
We all know that financial markets have been volatile and unpredictable, and investment returns have been elusive in the past five years. The Investment Forum is undoubtedly the leading conference where
Kevin Hinton, Director, The Collaborative Exchange
Ninety One announces new board
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nvestec Asset Management, which is on track to list as Ninety One pending shareholder approval, has announced the composition of its board of directors. Gareth Penny will assume the role of independent Non-Executive Chairman. “He brings a wealth of experience in chairing and serving on public and private company boards in both the UK and South Africa,” the company says. For the last twelve years, Penny served as Non-Executive Director (and Remuneration Committee Chairman) of Julius Bär Group, the Zurich-listed Swiss bank focused on wealth management. He is also Chairman of nickel and palladium producer, Norilsk Nickel, and of the Edcon Group, a private company and Southern Africa’s largest non-food retailer. He spent 22 years with De Beers, where he went on to become group CEO. “Investec Asset Management has a unique and impressive history and I am delighted to be part of what will be an equally exciting future for this quality company,” Penny says. Commenting on Penny’s appointment, Hendrik du Toit, founder of Investec Asset Management and Joint CEO of Investec, adds, “It is a privilege to welcome someone of Gareth’s calibre as Chairman of the soon to be listed Ninety One. We stand to benefit from his deep understanding of international business, particularly in emerging markets, and his substantial corporate governance experience.” The other independent non-executive directors joining Penny on the board are Colin Keogh, Busisiwe Mabuza, Idoya Basterrechea Aranda and Victoria Cochrane. Hendrik du Toit (who will assume the role of CEO of Ninety One upon listing), Kim McFarland (Finance Director of Ninety One) and Fani Titi (Joint CEO of Investec) complete the Ninety One board. “We have assembled a board that is strong, independent, diverse and experienced. We are confident that they will help us chart a successful future for Ninety One as an independent, global investment manager,” says Du Toit.
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INVESTING
31 January 2020
CLAIRE RENTZKE Chief Investment Officer, 27four Investment Managers
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Investing a lump sum in 2020
here are currently a litany risk tolerance that a client is able to of puns around 2020 and assume. Longer time horizons allow having 20/20 vision, but any for more short-term volatility and investment professional will tell you higher longer-term growth. that there is no perfect foresight But in a world turned on its when it comes to investing and it head – where over the last five years is only with hindsight that we ever interest-bearing assets and low-risk perfectly know what worked and money market investments have what didn’t. This doesn’t mean that generated inflation-beating returns when looking to locally, investors would invest a lump sum be remiss not to question THE FIRST STEP whether it is even worth in 2020 investors should go in blindly IN MAKING ANY considering risk assets without assessing as part of an investment INVESTMENT the probabilities of strategy. Post the Global future outcomes DECISION IS TO Financial Crisis of 2008, and their impacts. IDENTIFY WHAT the financial world has Critically, the first for 10 years been guided YOUR TIME step in making any by central banks – and investment decision easy money has become HORIZON IS is to identify what the norm, with significant your time horizon is. While there amounts of quantitative easing and may be a high probability of any low interest rates. event occurring, the timeframe in A significant proportion of which it is likely to occur will be developed market debt is trading crucial. Assessing the timeframe at negative yields as investors are will, more often than not, link to the so fearful of losses that they would
rather take a certain loss than face an unknown one. Negative interest rates do not feature in any of the finance textbooks we all studied, and the concept is bizarre and untested. In theory, what should happen with the printing of money and low interest rates is that inflation at some point should rise, causing a resultant increase in interest rates. While things may be topsy turvy in the short term and the future very much obscure, going back through history it is evident that markets do not move in a straight line, and shortterm deviations from the patterns of the past are part and parcel of the market. The greater the dislocation in markets, typically the shorter and sharper the snap back. We see this dislocation between growth and value stocks where growth has been by far the stronger performer for many years, despite the well-proven history of a value premium. When investing a lump sum, it would pay to look through the short-
term noise for medium to longer term investment horizons, and not be afraid of risk assets. Investors should also not fall into the trap of thinking that offshore markets will always continue to outperform local ones. Equity markets locally will bounce back. They always do. The timing is the only uncertainty. Be cognisant of the vehicle you use to access the market and the associated taxes and charges. Investors should ask – taking into account the size of the lump sum and the possibility of ongoing contribution – if tax-free savings vehicles would be appropriate, as they allow a maximum of R33 000 per annum to be invested with ongoing contributions to the value of R500 000 per lifetime. For retirement saving, preservation funds and retirement annuities help provide tax relief. Keep a check on investment management and administration costs too, as these will eat into lump sum growth. Then on into 2020 and beyond!
Weak local economy will continue to hamper domestic earnings wider choices of quality companies available with more attractive growth prospects. At the time of writing the S&P500 t’s very difficult to estimate what was up over 25% for the calendar returns the JSE will deliver in 2020. year 2019. It’s unlikely that we will The outlook for growth in the repeat anything like that. But, against world economy is subdued on fears a backdrop of accommodative central of a continuation of the uncertainties bank policies and low returns in the that characterised much of 2019 – fixed interest market (without the everything from the trade standoff threat of inflation), equities should between America and China to the still yield satisfactory returns. violent protests in The US election will Hong Kong. almost certainly affect Still, the belief is that AT THIS POINT, the market. A lot will the world will not enter depend on who wins OFFSHORE a recession, but growth, the Democrat party MARKETS inflation and interest nomination. Warren’s rates are expected to anti-business stand OFFER BETTER remain low, a condition and calls for wealth VALUE THAN that should support the taxes and increased THE JSE equity market. So, while industry regulation mining and offshore will rattle markets. industrial counters should hold their On the other hand, a Trump win own, a very weak local economy could embolden him to take more will continue to hamper domestic aggressive action on trade. It’s too earnings. At this point, offshore early to position oneself, but naturally markets offer better value than the JSE investors need to monitor the position for the simple reason that there are with care. BY DAVID SHAPIRO Deputy Chairman, Sasfin Securities
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INVESTING
31 January 2020
Gap between SA investors’ sustainable investment intentions and actions
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irroring a global trend, the proportion of South Africans who are actually investing sustainably is significantly lagging behind those who would like to invest sustainably, indicating that a gap exists between investors’ intentions and their tangible actions. This was revealed in the recently released Schroders Global Investor Study 2019, which surveyed over 25 000 investors across 32 locations around the world. The study has found that 22% of South Africans invest sustainably (higher than 16% globally), compared to 31% who are interested and would like to invest this way. This is on par with international study findings, where 32% of people globally are interested in sustainability and want to invest in a sustainable manner. Speaking at a recent event held in Sandton, Johannesburg, to unpack the study, Jessica Ground, Global Head of Stewardship at Schroders, said that the results indicate a gulf between people’s sustainable investment aspirations and the reality of how they prioritise these factors in their investment decision-making. “A significant proportion of investors clearly believe that sustainable investing is important, but this is yet to translate into tangible action for the majority. “This will unfortunately leave investors vulnerable to the global impacts caused by issues such as climate change. It is therefore important that asset managers and the broader industry – including the likes of policymakers globally – work with investors to ensure they can better identify the benefits of sustainable investment and, in turn, are able to access funds that will enable them to do so.” This vulnerability, Ground says, explains the high levels of excitement around the recent announcement that the Schroder ISF Global Sustainable Growth fund has been approved for distribution in South Africa. “Local investors can now invest their offshore investments in a dedicated fund focused on companies with strong Environment, Social and Corporate Governance (ESG) credentials.” Interestingly, the study found that many South Africans also feel strongly that all investment funds – not just those specifically designed as ‘sustainable investment funds’ – should consider sustainability factors. Almost a third (32%) of South African investors said that they strongly agree with this; 9% more than the global average (23%). Investors will therefore welcome the news that Schroders has announced its commitment to integrating ESG across all of its investment strategies by the end of 2020. This news was relayed at the event by Charles Somers, who is a coPortfolio Manager on the Schroder ISF Sustainable Growth Fund and a Global Sector Specialist focusing on the Consumer Staples and Consumer Discretionary sectors. Somers noted, however, that ESG integration
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is already embedded in Schroders’ culture and investment process. “As an active manager, we see sustainable investment as an integral and necessary part of our responsibility. Our clients are increasingly asking for ESG to be embedded into their portfolios and, in turn, we are also constantly seeking to improve how effectively we integrate ESG across Schroders’ investment desks. It is not just a tick-box process.” That being said, Somers made it clear that investing sustainably need not mean that investors must sacrifice on returns. As evidence of this, he referenced the fact that the three-year annualised performance (gross of fees) to September 2019 of the Schroder ISF Sustainable Growth Fund he manages was 14.1% versus the MSCI All Country World index benchmark return of 9.7% over the same period. Another noteworthy finding of the Global Investor Study was that Generation X (aged 3850) are more motivated by investing sustainably than other age groups, in contrast to the common consensus that millennials are driving sustainable investing efforts. This, Ground says, confirms that sustainable investing is far more than just a ‘millennial trend’, and will continue to increasingly impact future investment decisions across the globe. “We know the value that investment can create for society. That’s why we seek to integrate ESG considerations into our research and overall investment decisions across investment desks and asset classes.” Last year, Schroders’ commitment to responsible investing was recognised with the highest accolade for the fifth consecutive year. The Principles for
Responsible Investment (PRI), an influential United Nations-backed global investor initiative, awarded Schroders with an A+ rating for its overall strategy and governance in relation to sustainable investment. Just 25% of investment managers globally were awarded the A+ rating.
Going offshore for ESG investing Local investors can now place their offshore investments in a dedicated fund focused on companies with strong Environment, Social and Corporate Governance (ESG) credentials, as the Schroder ISF Global Sustainable Growth fund has been approved for distribution in South Africa.
Jessica Ground, Global Head of Stewardship, Schroders
Charles Somers, Co-Portfolio Manager, Schroders ISF Sustainable Growth Fund
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FEATURE RETIREMENT
31 January 2020
RAJEN NAIDOO Head: Income and Structured Solutions, Momentum Corporate
Help retirement fund members make the right choices at retirement
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embers of retirement funds make many options available into account, as well as the fund’s important financial decisions during their membership profile and members’ needs. working lifetime. Choosing the right Members are not automatically placed into annuity as they near retirement is one of the most the default annuity. They still need to ‘opt-in’ at critical decisions. This decision, which involves using retirement, or choose another annuity that might their hard-earned retirement savings to purchase be more suitable for their personal circumstances. an income for retirement, can have a Professional financial advice to guide major impact on their quality of life this process is critical. HOW CAN THE once retired. The fund should also offer One of the challenges financial MEMBER AVOID multi-channel benefit counselling, advisers specialising in employee which equips members with a basic RUNNING OUT OF knowledge of financial concepts benefits often face is providing MONEY DURING personalised advice to all members, and assists them to understand their especially when the workforce is employee benefits. Effective benefit RETIREMENT? large. Members’ general apathy counselling improves financial around their benefits and poor financial literacy literacy and lays a foundation for understanding add to this challenge. To help address this, financial benefits. Partnering with a fund that prioritises advisers should consider partnering with a forwardfinancial education allows you to build on an thinking umbrella retirement fund. already-established financial foundation with personalised financial advice. The right partner Your chosen retirement fund partner should comply Important factors to consider when fully with the default retirement fund regulations, guiding members in their annuity which includes a requirement for retirement funds choice to have a default annuity strategy. It’s important to • Will the initial monthly income cover the make sure that the fund’s default annuity strategy has individual and their household’s basic needs? been carefully developed, taking the various annuity • Does the annuity guarantee an income for life?
• How is the annuity income protected from inflation? • What options are there to make sure loved ones are covered should the member die? • How can the member avoid running out of money during retirement? With-profit annuities and living annuities are two popular types of annuities. A living annuity pays a regular retirement income based on the returns of a market-linked investment portfolio, chosen by the member. However, the income is not guaranteed. This means that if the level of income the member chooses to draw is consistently higher than the portfolio investment returns, the money in the living annuity may run out during retirement. The monthly retirement income paid from a with-profit annuity is guaranteed for life. Annual increases are granted based on the performance of the with-profit annuity investment portfolios. These increases help to maintain the purchasing power of the pension. Every time the pension increases, the new amount is guaranteed for life. Members who opt for a with-profit annuity need to understand that they are unable to change to another type of annuity later on.
Ensuring your retirement plan will succeed in volatile markets
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he last five years have been particularly disappointing for investors, due to below average market returns. As such, many savers are becoming increasingly concerned about not having enough capital to sustain their lifestyles when they retire. This is a valid concern as most retirement plans are held together using capital growth assumptions that are notoriously volatile while proving to be unrealistic. Marriott endeavours to bring more certainty to retirement planning with their income-focused investment style. Unlike traditional retirement plans, Marriott’s projections are based on future income production rather than a future capital value. As income is a more certain element of return, Marriott has differentiated itself from other product providers due to its ability to provide investors with a more accurate projection of how much income their savings will be able to produce at retirement. Bringing certainty to retirement planning with an income-focused approach Marriott invests in securities and
businesses that produce reliable income regardless of the economic conditions or market volatility. Typically, the type of investments that demonstrate this ability tend to be market leaders with strong brands and pricing power, they boast robust balance sheets and cash flows, and produce goods or services that are integral to the lives of their customers. Nestlè, Coca-Cola, Growthpoint and Sanlam are typical Marriott investments that display all of the above characteristics, which ultimately translate into reliable growing dividends over time as indicated in the charts. There is a clear correlation between income growth (blue bars) and the capital growth (red line) over time. This relation follows a business truth where the value of a business grows over time at the rate at which its profits grow. Investing exclusively in reliable dividend-paying stocks is what allows Marriott to accurately project how much income their investors’ portfolios will generate in the future. By considering the future level of income in today’s terms, it is possible to gauge early in a retirement plan whether contributions should be increased to achieve a desired
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Source: IRess & Bloomberg
lifestyle. To help investors monitor their progress and ensure that their retirement plan will be a success, Marriott has recently updated its Investment Planning Tool, as illustrated above. In summary, focusing on the income characteristics of an investment portfolio will significantly reduce the complexity
and unpredictability associated with retirement planning. For more information on an income-focused savings plan that provides investors with this information, please visit Marriott’s website at www.marriott.co.za and try Marriott’s simple and intuitive Investment Planning Tool.
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FEATURE RETIREMENT
31 January 2020
Discovery extends sharedvalue approach to investing
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iscovery has extended its “Governments around the world shared-value approach that see longevity as major problem and revolutionised medical aid some are increasing the retirement around the world to its investment age,” Sher says. products. The group is now rewarding its clients for investing longer, investing Fees reductions more, living well and withdrawing While the retirement industry focuses wisely, as people are inspired to make on fees reduction, this, says Sher, “will better choices if they see both a longonly get you so far”. He points out term and an immediate benefit. that there has been a lot of rhetoric in Craig Sher, Discovery Invest’s the market about fees, but an analysis Head of R&D, paints a grim picture carried out by Discovery Invest of retirement in the country. “94% shows that cheaper fees aren’t what of South Africans cannot afford changes an outcome for a client. “The retirement. It’s a well-known statistic real impact comes in making people that everybody has been quoting for change the way they save – and if they years,” he tells MoneyMarketing. save for longer, the impact dwarfs any Only four out of ten South Africans impact that lower fees make.” preserve their retirement savings when Kenny Rabson, CEO of Discovery switching jobs and, before age 30, it’s Invest, points out that when brokers closer to zero in ten. “And more often compare LISP platforms, they carry than ever before, people are changing out comparisons of what the platforms’ jobs – around every two or three years,” fees are, to ascertain which platforms Sher adds. are cheaper than others. In addition, savings terms have “Discovery Invest is an alternative been reduced and people spend much to all of that – and a LISP platform more time in retirement with a difference. than ever before as they We make sure THE RETIREMENT live longer. And when our fees are they’re in retirement, GAP IS BIGGER AND competitive and they draw down money at the end of the MORE UNCERTAIN day if people irresponsibly, with the THAN THOUGHT result that they run out want a generic of funds and become LISP, it’s there for reliant on the state, or on their children. them. But there is a different process “They think they have a large pot for advisers in terms of trying to of money but what they don’t realise change the outcome for their clients,” is that it has to last for 30 or 40 years,” he adds. Sher says. “You’d think that an initial “We need to do a lot more – and drawdown rate of 6.6% isn’t too bad – the industry and advisers need to do but that may only last around 12 years.” a lot more to give people a reasonable The retirement gap is bigger and retirement. This is an international more uncertain than thought. The issue and not unique to South Africa. number of people living beyond the “The move to passive investing age of 100 is doubling every decade. By has helped a bit in the United States 2050 it is estimated that there will be because companies went from 2% in over two million people older than 100 active fees to four basis points, and worldwide and lifestyle improvements that is going to make a difference over will extend longevity even further. In 20 years in a highly efficient market, addition, perception is a problem as but passive hasn’t done well in South people take only average life expectancy Africa because the cost saving is into consideration, which is variable, not nearly that dramatic and it’s so and many will live longer. dependent on what certain stocks within the index do.” He points out that Discovery Invest’s proposition is a very unique one in the South African market. “This is the same basis on which the business was launched in London.” Kenny Rabson, CEO, Discovery Invest
Shared value model Using the history of the Vitality programme, Discovery Invest knows that it can make people go to gym for a cup of coffee. “That’s how incentives work and through them we’ve seen real changes happening,” Rabson
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says. “Our offering isn’t just different product – it’s a different philosophy of how we’re trying to take a broker and client forward.” The retirement challenge is a behavioural one, Sher adds, referring to Harvard academic Michael Porter’s Shared Value business model where customers, society and the business all benefit. If people save sooner and more, then additional value arises. It means that Discovery Invest has assets under management for a longer period of time, and it is earning fees for a longer period of time. “The added value is then shared with the client, when profits are channelled towards rewards that encourage good investor behaviour,” Sher says, “and it’s exactly the same as the Vitality model we have in healthcare.” Clients are rewarded for investing early as Discovery Invest will then add a pot of its own money to the investment. “If you invest R100 000, we put in up to R25 000,” says Sher. “You just need to stay invested for the entire term and you keep all the growth of the R25 000.” He adds that when additional contributions are added, a boost of up to 30% will apply. If clients withdraw wisely and manage their health, they can receive a boost of up to 50%. Financial planning tool To help clients better understand the impact of living longer on their retirement savings, Discovery has, in collaboration with the University of Cambridge and RAND Europe, developed a financial planning tool that incorporates a personalised life expectancy algorithm. The Retirement Modeller clearly shows how behavioural choices influence life expectancy and retirement outcomes, and focuses on a client’s individual needs. “You put in your details and it calculates how long you are going to live, and then it works out your retirement plan so that your funds will last,” adds Sher. The Modeller brings people’s health into their financial planning and this makes it unique. Incentives are working and Discovery Invest has seen results. Savings terms have risen by three years on average, with additional investments into retirement plans increasing by 173%. After retirement, 3% less is withdrawn from living annuities each year.
Umbrella fund The shared value model has also been applied to Discovery’s umbrella fund, Rabson says. “We say if you bring across your umbrella fund to us as a company, each member will receive a boost based on their term to retirement – and through healthy living, employees can earn a boost of up to 15% on their monthly contributions.” Through digital intervention, employees can manage their own retirement. “Unlike traditional pension funds that don’t interact at all with employees, we have the ability to talk to the employee through an app. It becomes personalised as opposed to just contributing to a company pension fund.” Sher says the digital solution called the Contribution Optimiser allows employees to set their income goals, while also showing them how to meet those goals. “One fascinating feature is a single tap on the app to close their retirement gap. The app then sets up a personalised contribution plan that increases an employee’s contributions only when they have a salary increase, so they never experience a cut in take-home pay,” he adds. “One or two percent will be taken only when their salary is increasing so employees don’t feel that their salary is going down – they never feel like they’re contributing more – but it will totally change their retirement outcome.”
Craig Sher, Head: R&D, Discovery Invest
FEATURE RETIREMENT
31 January 2020
A guaranteed monthly income in retirement
DEANE MOORE CEO, Just SA
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ust Lifetime Income (JuLI) is a type of guaranteed life annuity known as a with-profit annuity. Designed to be closest to a salary, it converts retirement savings into a regular income for the rest of your life and can be used both to cover essential expenses in retirement and as a diversified investment. Income is taxed in the same way as a salary is taxed. Regardless of how long you live or the changing performance of investment markets, it provides a guaranteed income that will be paid for the full duration of your life. Increases To keep up with inflation in retirement, a withprofit annuity, like JuLI, provides annual payment increases that target inflation, or a percentage of inflation. What makes JuLI different to other with-profit annuities is that increases are linked to the performance of balanced investment portfolios managed by independent asset managers. There are currently three increase options available, which provide identical value for money over your life expectancy with varying annual
A BLENDED LIVING ANNUITY ALLOWS YOU TO SECURE A LEVEL OF INCOME FOR LIFE
increases and starting income: • JuLI HiGro offers higher annual increases and begins with a lower starting income • JuLI StableGro offers moderate increases and a moderate starting income • JuLI HiYield begins with a higher starting income and offers lower annual increases. Income legacy An income legacy gives you the ability to provide for your spouse and family when you pass away. On death, you can choose for your retirement income to continue to be paid to your spouse, or that the income is paid for a minimum period. • Minimum payment period – income from JuLI will be paid for a minimum payment period between five and 20 years, regardless of when you, your spouse or dependants pass away. It is also possible for the remaining payments to be converted into a lump sum paid to your named dependants. • Spouse’s income – 50% to 100% of the full monthly income will be paid for the remainder of your spouse’s life when you pass away. It is important to note that the higher the income legacy (longer minimum payment periods or higher spouse’s income), the lower the income that will be paid while you are alive.
Underwriting A unique feature of JuLI is the optional underwriting at retirement, which can improve your starting income. By declaring your full illness history, you could qualify for a higher income based on your specific personal health and lifestyle factors. While your starting income may increase, it will never decrease as a result of underwriting. Blended living annuity A blended living annuity allows you to secure a level of income for life, while maintaining discretion over the rest of your assets to provide for unexpected events and/or leave to beneficiaries. Just CEO Deane Moore says, “Just Lifetime Income was developed to help retirees reduce the risk of outliving their retirement capital. In South Africa, where most retirement savings are invested in living annuities, retirees find themselves exposed to the risk of running out of retirement income due to investment market volatility and rising inflation. Just’s latest study revealed a strong preference among retirees for a guaranteed monthly income in retirement and JuLI provides just this, as well as the flexibility to leave any remaining capital as an income legacy to loved ones.”
Second edition of popular retirement guide published
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he second edition of the Ultimate Guide to Retirement in South Africa, by authors Wouter Fourie and Bruce Cameron, is now available at bookstores nationwide. The new edition of this very popular guide to retirement features updates to several chapters and all relevant tax and retirement tables. It also features a new chapter on the recently introduced default strategy for retirement funds. The Ultimate Guide to Retirement in South Africa was first launched in 2018 and, with sales in excess of 10 000 copies, became a South African bestseller. It builds on the original guide – Retire Right – that was authored by Cameron and which is credited as the first comprehensive guide to retirement in South Africa. While the Ultimate Guide to Retirement in South Africa was written for a lay audience, it has been approved by the Financial Planning Institute (FPI) as reading material that can earn the reader Continued Professional Development (CPD) hours. “We are delighted that the FPI has recognised this book as an exhaustive
guide to retirement and retirement planning in South Africa. With this new status, financial planners will be able to earn 14 CPD points if they purchase the book and complete the relevant retirement planning course, as approved by the Compliance Institute of South Africa,” says Wouter Fourie. Fourie explains that financial planning professionals can log on to the website www.retirementplanning.co.za after purchasing the book. Here they will be able to register for the course and complete the online modules on the book’s various chapters offered by Growth in Motion. “While there are many benefits for professional financial planners who purchase the book and complete the online course, we have created the website to be useful to people of all levels of knowledge and competence,” says Fourie. In the second edition, Fourie and Cameron focus on the practical and psychological aspects of retirement planning and retirement in general. As such, the authors have included chapters on basic steps, such as buying
a pension, understanding the default pension option, calculating your tax at retirement and planning your estate. Similarly, the authors consider the psychological aspects of retirement by including chapters on topics such as the threats to a secure retirement and the psychology of investment. The second edition also features chapters on civil service pensions, healthcare in retirement, investing for an income and on where to stay in retirement, to name but a few. “Planning for retirement is crucial for all South Africans, yet research shows that less than 10% of people can retire with enough money to be financially independent. It is with this in mind that we wrote the Ultimate Guide to Retirement in South Africa to not only give the reader a good oversight of the aspects that he or she has to consider, but also act as a comprehensive guide for people who want step-by-step help,” says Fourie. Fourie is a Certified Financial Planner (CFP®), the CEO of Ascor Independent Wealth Managers, and the winner of the 2015/16 FPI
Financial Planner of the Year Award. He holds advanced post-graduate qualifications in financial planning, tax, investment planning and estate planning. Bruce Cameron is an awardwinning journalist and author. He is the author of national bestsellers such as Retire Right, Financial Freedom for Women and Getting Started: Money Matters for Under-25s. He has won over 50 journalism and industry awards in his career to date, including the Citadel Words on Money Journalism Award and the Sanlam Financial Journalist of the Year Award. He was also the joint winner of the Vodacom Journalist of the Year Award.
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FEATURE RETIREMENT
INVESTING
Protected equity fund removes preretirement dilemma Using structured products technology, the Investec Specialist Investments (ISI) I BCI Protected Equity Fund removes many of the risks investors face as they approach retirement and immediately after retirement, while still delivering meaningful upside participation in the equity market.
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he years approaching retirement can be tricky for investors. While a high exposure to equities over one’s working career has historically been the best strategy to building an asset base for retirement, ideally investors will want to remove some of the volatility inherent in equity markets in the last few years nearer to retirement. Typical life stage models will often do this “de-risking” job for investors in the years approaching retirement, switching steadily and systematically from high equity portfolios and into income type investments. While this will certainly do a great job in removing risk, the fear is that many life stage models can be too conservative in, say, the last five years before retirement. In other words, this de-risking approach will work well if equity markets fail to perform in the years approaching retirement, but will work less well if the converse is true. Should equities have a strong run in those five years, investors would suffer the opportunity cost of not capturing that performance in their lump sum. This can have a significant impact on the amount available for their postretirement investment needs, particularly with human lifespans increasing – investors now face lengthier periods in retirement than previous generations and therefore need to have built up a large enough lump sum to suit their living and investing requirements after retirement. Fortunately for investors, there are investments available that are designed to address this dilemma. The Investec Specialist Investments Equity Structured Products (QI) Hedge Fund and its CIS equivalent, the ISI BCI Protected Equity Fund, are designed to provide capital protection along with meaningful uncapped upside to the SA equity market. ISI’s Glen Copans explains that the Funds invest in structured product type technology in order to deliver the core value proposition that investors in structured products enjoy, namely capital protection and asymmetric returns to the equity market. So in practical terms, the Fund provides protection against adverse movements in the stock market in the medium term, while giving 80% to 90% of the upside movement in the markets. “The Fund is ideal for investors who want equity market exposure, but without wanting to carry all of the downside risks should equity markets fall significantly in the years before retirement,” he says. “Volatility is about a third lower than that of the underlying equity market. “In an age of increasing longevity, investors want to ensure a good mix of capital growth and income into what is likely to be a longer retirement. Funds such as these work well for retirees who in the past would have switched into low volatility, high income type investments. In this way they can capture the bulk of the returns should markets perform prior to and at retirement, but with peace of mind should markets fall sharply in that time. Furthermore, within a living annuity, the Funds play an effective role in providing capital preservation, along Glen Copans, with participation in the equity market Investec Specialist upside,” concludes Copans. Investments
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31 January 2020
Beyond a Moody’s downgrade
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t’s unlikely that South African fiscal Portfolio Manager, John Orford, policy will be enough to convince agrees, pointing out that while a Moody’s not to downgrade the downgrade to junk status is almost country’s sovereign credit rating to guaranteed, we are seeing some junk status. However, with a subpositive steps forward from a more investment grade eventuality already reform-minded Government, with priced into the markets, and with investment opportunities still to be slow and steady reforms underway, a found within a sub-investment grade Moody’s downgrade is not the disaster environment. that many expect it to be. This is “South Africa continues to according to Old Mutual Investment see political and governance Group market and economic improvements like the impact of commentators who believe that while various commissions of inquiry and 2020 is still likely to see weak growth, more high-profile prosecutions that the foundations being built are better are at last starting to get underway. for 2021 and beyond. “There have also been incremental Speaking last month at the asset reforms, although no clear plan yet manager’s fourth quarterly media on how to cut Government spending investment briefing for 2019, Old and resolve Eskom’s debt problem. Mutual Investment Group Chief Examples of reforms undertaken Economist, Johann Els, says that a include the introduction of a secret Moody’s ratings strike ballot taking downgrade is now labour a step in the more likely than right direction; a WHILE 2020 IS ever, unless the planned introduction STILL LIKELY February budget of teacher assessments, TO SEE WEAK moves the dial which is positive for substantially. education; and gameGROWTH, THE “Despite what changing energy FOUNDATIONS we saw in the reforms envisaged in disappointing the IRP 2019, shifting BEING BUILT ARE medium-term BETTER FOR 2021 to a ‘least cost’ basis for budget, expenditure energy procurement, AND BEYOND cuts could still be which will see a on the cards, but much greater role for they would have to be significant to renewables in energy production. make any kind of impact.” Also underway is Eskom’s sensible Els adds that it would be difficult restructuring plan – although to make meaningful expenditure detail on debt restructuring and cuts without addressing the Wage operational improvement is still largely Bill. “Limiting growth in the Wage absent, as well as the finalisation of Bill is probably going to be easier Government’s spectrum policy. Lastly, than cutting jobs or freezing wage it is clear that there is some warming increases. This could lead to a lower within the ANC towards a greater role Budget deficit fairly quickly. Limiting of the private sector,” he adds. growth to 4% per annum could mean However, Orford says this is all cumulative savings of R104bn and probably too little too late for Moody’s. a deficit of -5.1%, compared to the “With SA already rated sub-investment Mini Budget target of -5.9,” he points by Fitch and S&P, markets will hardly out. “How likely is this to happen, be surprised by Moody’s downgrading however?” of South Africa.” What we could see is a levy on income tax as a trade-off for some kind of wage freeze in the public sector, says Els. “While February’s Budget will Johann likely see a serious attempt to rein in Els, Chief Economist, the deficit and stabilise debt through Old Mutual combined expenditure and revenue Investment measures, this is not going to be Group enough to satisfy Moody’s,” he says. “A ratings downgrade in sub-investment grade is therefore our base case for early 2020, but this is widely expected. A downgrade will not derail the John Orford, economy, attempts at reform or fiscal Portfolio Manager, improvement for 2020 and beyond.” Old Mutual Old Mutual Investment Group Investment Group
INVESTING
31 January 2020
DINO ZUCCOLLO AND JONTI OSHER Co-Heads - Section 12J, Westbrooke Alternative Asset Management
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ollowing a significant take-up in 2016, Section 12J (12J) investments managed by established, reputable asset managers are fast becoming a standard allocation in client’s portfolios. Key to this is that a 12J investment is 100% tax deductible in the year of investment (provided that a client holds his/her shares for a minimum period of five years) as well as the attractiveness of the underlying investment. Since July 2019, there is a limit to the amount that a taxpayer may invest in a 12J company, of R2.5m per individual/trust per annum and R5m per company per annum (the 12J deduction was previously uncapped). Certain larger 12J managers have welcomed this change, pointing out that it highlights the increasing popularity of the asset class and is likely to open up 12J investments to a wider base of investors. Financial advisers, in particular, have been quick to recognise the attractiveness of 12J investments (which include a 100% tax deduction, an uncorrelated underlying investment, attractive returns, and the ability to stimulate the SA economy and create jobs). Some of the most popular uses of 12J investments for the upcoming February 2020 tax year include:
Financial advisers’ top Section 12J investment strategies
• An alternative / complementary investment alongside a retirement annuity (RA): When compared to a RA, a 12J investment has a larger annual investment cap (R350 000 per annum for RAs), can be exited after a minimum five year lockup period (RAs require the investor to be over 55) and provide the investor with the potential to make an uncorrelated, private-equity style underlying investment that may pay an annual dividend (whereas RAs are limited by regulation 28). The tough local investment environment and associated appetite for alternative investments has further increased interest among wealth advisers. • A tax-efficient annual investment for high-income earners: High-income earners such as lawyers, accountants, bankers, doctors, entrepreneurs, etc. can work with their wealth managers to efficiently manage their investable assets and (if required) a portion can then be invested in 12J companies at the end of each tax year. • The Naspers / Prosus share split: On 25 March 2019, Naspers announced its intention to list its international internet assets separately through a European-listed entity named Prosus. Investors were given the option to take up an allocation of either Prosus shares or to receive
additional Naspers shares. Many financial advisers recommended that their clients take the option of receiving Prosus shares, which resulted in these clients triggering a capital gains tax event equal to approximately 10% of their initial Naspers’ shareholdings at the time. Financial advisers can make use of 12J investments as a mechanism to shield this adverse tax consequence for their client’s tax years ended 29 February 2020. • Other capital gains tax events: In addition to the Naspers event, many financial advisers have successfully used 12J investments to shield onceoff capital gains tax, including sales of properties, shares, businesses and other assets. Capital gains tax events are subject to a 40% inclusion rate for individuals, and an 80% inclusion rate for corporates and certain trusts – as such, investors are able to invest less than their cash proceeds while still effectively shielding their tax using 12J. Financial advisers should conduct an extensive due diligence on the range of 12J managers in the market (including an analysis of each manager’s track record, skill and experience in managing third party capital) prior to advising their clients to invest.
Foreign residency: Unlock more benefits than just emigration
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oreign residency and citizenship tax efficiency, investment and business by investment (RCBI) opportunities, improved lifestyles, programmes have become education options and greater freedom increasingly popular in South Africa of movement. in recent years, as people look for a “There is a common misconception second residency or citizenship for that individuals invest in RCBI personal and business reasons. But few programmes with the sole intention people and advisers are aware of the full of enabling their families to emigrate. range of lifestyle, business, investment While this is a requirement of certain and tax benefits to be gained when the programmes – the UK and US, for programmes are utilised correctly. example – in most instances this is The ‘citizenship by investment’ not the case. Most people who invest industry started in 1984, when the in government-authorised RCBI Caribbean nation programmes do so to of St Kitts & benefit from the flexibility A HOST OF Nevis launched its and freedom they provide programme. But it and to receive additional COUNTRIES only really started benefits that are not OFFER gaining traction with currently available to RESIDENCY AND them,” Mertens adds. the introduction of the first European Portugal is popular CITIZENSHIP BY citizenship with many South Africans INVESTMENT programme, in looking for a path to Cyprus, in 2011. Today, a host of European Union residency – and countries offer residency and citizenship ultimately, citizenship – for themselves by investment, including Portugal, and their families. Portuguese residency Mauritius, Malta and Gibraltar. unlocks visa-free mobility across Tim Mertens, Chairman of Sovereign the entire European Schengen area, Trust SA, says Portugal and Mauritius and offers an excellent quality of life are emerging as two of the most with relatively low tax burdens and popular destinations for South Africans investment barriers. While there are not only looking for a so-called ‘Plan B’, several routes to obtain Portuguese but also looking to benefit from greater residency, real estate investment remains
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one of the easiest, with a minimum investment of €350 000. Mauritius is wooing a growing number of local investors through its relatively close proximity to South Africa, attractive tax regime and laid-back lifestyle. Occupation and residence permits are freely available to foreigners wishing to work, invest, live or retire in Mauritius. Part of the attraction of Mauritius for foreign investors has always been its simple taxation system: company, personal income, capital gains and dividend incomes are all taxed at a rate of 15%, with further tax concessions available. Mauritian tax residents are taxed on Mauritius-sourced income only, and there is no capital gains tax, no property tax and no inheritance tax. In addition, there are no foreign exchange controls. South Africans are among the
leading foreign buyers of property on the island, says Mertens. Setting up a business there is quick and easy, and there’s already a sizeable community of South African expats, making it familiar and easily accessible. “The most important thing is not to make life-changing decisions based on a friend’s recommendation. You have to take advice from the experts, who can unpack the various country and investment options available to you based on your specific needs. That way, you can end up unlocking a range of benefits you didn’t know were even possible,” says Mertens.
Tim Mertens, Chairman, Sovereign Trust SA
INVESTING
31 January 2020
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ey drivers of 2019’s late-cycle bull market gains are expected to shift as global markets enter the new year, according to BofA Merrill Lynch Global Research. In its year-ahead outlook, the research team forecasts a bottoming of economic growth in the first half of the year as trade war tensions ease, as well as relatively low recession risk. • Stocks are expected to outperform bonds handily in 2020 as the global economy bottoms out in the first quarter, while monetary policy remains accommodative. The conventional idea of allocating 60% to equities and 40% to bonds is unlikely to survive into the 2020s. • An interim, skinny US-China trade deal should temporarily relieve trade concerns ahead of the US presidential election and pave the way for a midyear mini-boost in global growth led by US rates and a weaker dollar. • A rebound in US corporate earnings should spur a long-awaited uptick in capital spending and lift the S&P 500 to another year-end high of 3 300, or 6% above current levels. In a reversal of trend, US stock returns are expected to lag gains forecast for Europe and emerging market stocks next year. • The potential for 6% total returns on high-grade bonds makes US corporate credit particularly attractive in a world facing $12tn of negativeyielding debt. Inflows from foreign investors are expected to remain strong, supported by favourable spreads, but the ‘bond market bubble’ could become the markets’ biggest vulnerability. “The new year and decade begin near the tail end of the longest bull market on record, and despite recent strong gains, investor anxiety remains at a high level,” says Candace Browning, head of BofA Merrill Lynch Global Research. “Many of the driving factors – central bank policy, globalisation, oil – have peaked, and new economic paradigms are emerging in response to a different set of challenges facing BUSINESS-ASthe world’s social, USUAL INVESTING environment, IS LIKELY TO political and economic systems. COME TO AN END Rather than focusing on the downside, we think the opportunity for investors will be found in what happens next.” At the annual Bank of America Merrill Lynch Year Ahead Outlook presentation last month in New York City, the firm’s top strategists and economists discussed the overarching themes that are transforming economies and investing paradigms in the year ahead and throughout the 2020s. Notable among these is the transition to stronger local and regional economic ties, following three decades of economic growth fuelled by the benefits of globalisation – an unchecked, crossborder free flow of goods, people and capital that rewarded cheap labour and low consumer prices. The shift from globalisation to localisation and
What 2020 could bring for the markets other global macro trends underpins much of Bank of America Merrill Lynch’s outlook on the markets and economy in 2020. Key macro calls made for the markets and economy this year are: • Slowing global growth: Global GDP is forecast to slow from 3.8% in 2018 to just over 3% in 2019 and 2020. Europe should stabilise at around 1%, while a below-consensus call on China assumes growth slowing from 6.1% to 5.6%. Inflation is likely to inch lower from 3.1% percent last year to 2.7% by 2021, while policy rates remain flat and fiscal policy stays frozen. • US economic slowdown despite strong fundamentals: US GDP is expected to slow to trend, with growth averaging 1.7% over the next two years. On the positive side, inflation should be muted, with core PCE inflation at around 2% by the end of 2020. The Federal Reserve is not expected to take further rate action for the foreseeable future, unless a material shift in outlook triggers such a move. Given the Fed’s focus on avoiding a recession, the risk of further cutting outweighs hikes. • Modest gains in US stocks, with greater upside outside US: S&P earnings per share are forecast to grow 8% to $177 at year-end, and returns will likely be driven solely by corporate earnings vs. price-toearnings multiple expansions. Emerging markets and Europe could offer more upside in 2020: crowded positioning in the US vs. the rest of the world, and estimate revisions abroad outpacing those in the US support a rotation into global equities. Three significant tactical rotations call for allocation shifts from growth to value, from large cap to small cap, and from the US to the rest of the world. • Rates on pause as support from monetary policy wanes: US rates are expected to lead the way in 2020, with downside risks somewhat diminished and higher repricing likely. 10-year rates are expected to move from 2% at the end of 2019 to 1.8% in 2020.The yield curve remains vulnerable to a paring back of Fed easing expectations in the near term, while the swap curve is expected to flatten. Fed actions freed other central banks to ease, and with the exception of China, many are also expected to put rate actions on hold next year. • Credit cycle rolls on: Despite weaker global growth, US investment grade corporate earnings growth of 9% is expected, up from 1% in 2019, with spreads tightening by 10 basis points and total returns of 4 to 6%. Gross issuance will likely be down 4% to $1.137tn, with net issuance declining 21% to $399bn. In 2020, the 11-year high-yield credit cycle is expected to keep on rolling, though earnings will be the biggest risk. Default rates should stabilise at 4%, as spreads gravitate to 450 basis points. Key tactical rotations call for smaller over larger issuers, longer over shorter spread duration, and more cyclical sectors. • Emerging markets recovery contingent on trade: The outcome of the US-China trade war is crucial
to the outlook for emerging markets in 2020. Total emerging market returns of 7.1% in local debt are forecast, but only 2.6% for external debt. Latin America is mounting a cyclical recovery, likely led by Brazil and Andean economies, while Argentina’s new government faces extreme economic challenges. Idiosyncratic factors will dominate in emerging EMEA, with Egyptian and Russian local markets and Kenyan and Nigerian external debt favoured. • Weakening dollar: The US dollar is expected to weaken in 2020 with diminishing policy uncertainty. The euro and sterling also should benefit from a resolution of Brexit uncertainty, with EUR/USD and GBP/USD rising to 1.15 and 1.39 respectively. Stronger global growth and a weaker dollar will help support emerging markets. USD/JPY is expected to decline to 103, while AUD/JPY and ASEAN FX should appreciate sharply on global reflation. • Modest growth in commodities hedge inflation risks: A positive roll yield should support modest commodity returns in 2020, with dispersion expected within energy, metals and agriculture. Brent crude could hit $70 per barrel by midyear, while diesel may near $100/bbl. Summer US natural gas prices could fall below $2/million British thermal units, as forward balances continue to weaken after the winter. Cyclical raw materials should benefit from a potential inventory restocking cycle, easier Fed policy, and an interim China trade deal, providing an attractive inflation hedge. While copper and nickel are likely to rally in 2020, the outlook for gold and precious metals is more cautious. • Sector weights and rotations: Amid emerging signs of an inflection in the manufacturing economy and interim trade deal, the recommended sector weighting for industrials has moved to overweight from market-weight. Given the likelihood that the trade war re-escalates after the 2020 US presidential election and morphs from a trade war to a tech war, Information Technology moves from overweight to market-weight. • Overweight: Financials, Consumer Discretionary, Industrials, Utilities • Market-weight: Technology, Communication Services, Healthcare, Energy • Underweight: Real Estate, Consumer Staples, Materials. Given macro trends impacting the markets, business-as-usual investing is likely to come to an end. Localisation, rather than globalisation, has major implications for global growth, and a rise in moral capitalism is changing corporate behaviour, shifting the focus from shareholders to stakeholders. Investors should consider several longer-term trends for 2020 and beyond: (1) from global to local, (2) from trade war to tech war, (3) from bonds to stocks, and (4) from short-term gains to long-term growth, where environmental, social and governance (ESG) considerations can help isolate the long-term growth stories.
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INVESTING
31 January 2020
BENEDICT MONGALO Chief Investment Officer, Novare Investments
How multi-manager funds optimise returns
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etirement fund trustees and annual savings rate since 2012 and other investors are often faced there’s a view that low returns and the with the unenviable task of complexity of financial products could determining where to invest members’ be among the factors contributing to money, with their primary objective the decline. being to enhance returns. This task We hold the view that to optimise involves deciding which asset classes returns, investors should consider are best positioned to provide the multi-manager funds. desired investment outcomes in line In simple terms, a multi-manager with the fund’s risk tolerance. fund is a single fund made up of This process of determining the asset multiple underlying fund managers. classes most suitable to achieve certain These vehicles, sometimes referred to pre-determined investment outcomes, as funds of funds, are structured as a often referred to as asset allocation, single portfolio, making it easy to invest is by itself complex even for seasoned in one fund while obtaining exposure investment professionals. to multiple underlying managers. Once the appropriate asset classes The administrative burden of have been decided, the next equally submitting multiple application forms daunting step is and know your to select the fund customer (KYC) THE PRIMARY managers to oversee documents to the investment multiple managers REASON FOR portfolio in line is eliminated, as is AN INVESTOR with the chosen researching each asset classes. This manager to establish TO CONSIDER involves choosing MULTI-MANAGED their suitability. equity managers, Novare FUNDS IS LARGELY Investments, an fixed income managers to handle authorised financial UNDERPINNED bond and money services provider BY THE markets, and fund under the regulatory DIVERSIFICATION oversight of the managers to invest in alternative assets like Financial Sector BENEFIT private equity. Conduct Authority, Just how difficult the process manages various multi-manager of choosing fund managers is, is solutions, including domestic longillustrated by the fact that most only funds, domestic fund of hedge managers do not achieve their funds, and offshore fund of funds. requisite performance benchmarks. The key benefits to investing in these The research and rating agency multi-managed products include: Standard & Poor’s (S&P) publishes the • Diversification – The primary S&P Indices Versus Active (SPIVA) reason for an investor to consider scorecard, which indicates that over multi-managed funds is largely 62% of South African active equity underpinned by the diversification funds failed to outperform the market benefit. The old saying to never put over a one-year period ending 30 June all your eggs in one basket because 2019. That figure rises to 74% when you could lose all is perhaps an ideal observed over a five-year period. explanation of how multi-managed Considering the poor performance funds operate. They provide by most managers, and the costs investors with access to multiple incurred by investors when using professional money managers active fund managers, it is not who typically hold different views surprising that the investment about markets and prospects for management industry is grappling different asset classes. The multiwith the question of which investment manager proposition therefore strategy is better, active or passive. provides an investor with pooled Poor performance by active expertise and the diverse views of managers is arguably also the reason investment managers in a single why relatively cost-effective passive fund. The idea is that whereas some products such as exchange traded managers may underperform given funds (ETFs) have gained prominence, their investment style or economic enjoying increased inflows in the circumstances, other managers in recent past. the portfolio will outperform, thus The Investec GIBS Savings Index providing the investor with downside suggests that South Africa’s gross protection. The key consideration in savings rate declined to 14.4% of GDP the multi-manager fund’s portfolio as at the end of 2018. This is the lowest construction process is to ensure
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that the performance of managers making up the fund is not correlated. • Cost-efficiency and access –Multimanager funds typically pool assets. Given the size of assets under their management, funds enjoy a degree of bargaining power to negotiate lower fees with underlying managers, consequently benefiting the investor. Multi-manager funds also give access to funds that relatively smaller investors would not have otherwise been able to invest in. Some funds, specifically offshore funds, have minimum investment threshold amounts that are high for an individual investor. They can, however, gain access to those funds through a multimanager product offering. • Manager research – There are hundreds of investment managers, making it very difficult for even institutional investors to identify and conduct a comprehensive due diligence investigation on fund managers. Investors typically rely on publicly available information to research managers. Multi-manager funds, on the other hand, employ the services of suitably qualified teams to conduct in-depth and rigorous due diligence investigation on fund managers. This includes analysis of the fund manager’s investment philosophy, investment process, the quality of its team and compliance parameters, among others. Only managers with no adverse due diligence outcomes are added to the portfolio. • Post investment monitoring – While the process of regularly monitoring manager performance
can be cumbersome, multimanagers monitor underlying managers on a regular basis, typically daily. In instances where a manager is underperforming or deviating from the initial philosophy and strategy, changes are made to ensure the fund always maintains an optimal position. At Novare Investments, our multimanager philosophy is reinforced by an active investment and risk management process, designed to deliver consistent and superior long-term, risk-adjusted returns. We use an active management investment approach, with our efforts dedicated to researching, identifying, blending and managing multi-manager funds to give clients access to the best fund managers. We use an exclusive research structure that incorporates traditional and alternative asset classes into a unique range of products, allowing the group to combine the best investment ideas from the most experienced fund managers into its funds. This method of diversifying across asset classes and fund managers lowers risk and smooths returns through volatile markets. Novare Investments’ offering includes a range of multi-manager funds with clearly-defined investment objectives, risk levels and investment returns. Each fund is designed to achieve maximum performance with minimal risk. As the first financial services group in South Africa to launch regulated funds of hedge funds to local retail investors, Novare has also blended some of South Africa’s best hedge fund managers into a suite of multi-manager funds.
INVESTING
31 January 2020
MICHAEL KRUGER, CFA Investment Analyst for Morningstar Investment Management
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What’s the ideal asset allocation for a TFSA?
s the old saying goes, only two things in life are certain: death and taxes. While most people avoid the topic like the plague, tax remains a key consideration for all individuals earning an income in South Africa. In 2015, National Treasury introduced tax-free savings accounts (TFSAs) to improve the overall savings rate of South African citizens. It’s not often you get a gift from government, especially in the form of a tax-saving, so it is best to make the most of it. The basics of a TFSA A TFSA allows an individual to invest in various asset classes without having to pay income tax, dividends tax or capital gains tax on the returns from these investments. These accounts can be opened with various banks, asset managers, life insurers and stockbrokers. The annual limit for individual investors in the product is currently R33 000 and the lifetime limit per investor is R500 000. It is essential that contributions do not exceed the annual individual limit of R33 000, as any contributions over and above this amount are taxed at a rate of 40%. A TFSA is a long-term investment The term ‘savings account’ is rather unfortunate, given the fact that most individuals would associate this with something that is short-term in nature and easily accessible to fund any unexpected expenses. At Morningstar, we view these investments as long-term savings vehicles, with returns maximised through capital and income growth and compounding over extended periods of time. Something to keep in mind is that, although you may not be taxed on the withdrawals from a TSFA, once you withdraw an amount, it is taken off your lifetime limit. A TFSA allows for tax-efficient diversification and asset allocation Another benefit of these accounts is that they are not subject to any regulatory limits in terms of where the money can be invested. A TFSA, therefore, allows an individual to diversify away from South African specific risks through a highly tax-efficient product,
Source: Morningstar Investment Management
without restrictions in how the money is invested. What is apparent when comparing the The question that we often get asked is, “If I returns of the two different products is that the can invest in any asset class, what’s the ideal asset compounding effect of the tax saving is quite allocation for a TFSA?” We recommend that small initially, but over a period of 30 years, the investors think of a TFSA as a minimum of a 15cumulative difference in returns is significant. year investment (i.e. using your annual allowance The taxable series grows to a value of just every year but not exceeding the R500 000 lifetime over R3.2m after 30 years, while the TFSA limit). While risk tolerance is likely to be different series grows to a value of close to R4.4m – a for each investor and based on their individual substantial difference of R1.2m. circumstances, the nature of the product, however, At Morningstar, we view a TFSA as a means that investors will gain the most benefit from long-term savings product, especially as the significant allocations to growth assets, including compounding effect of the tax saving is only both equities and listed property. This would be felt after extended periods of time. This would mainly based on the long-term outperformance require meaningful allocations to equity and of these asset classes against more conservative listed property, which deliver higher real (after allocations, such as fixed income and cash. inflation) returns than cash and bonds. What is more complicated is the decision between If we compare the average return and risk how much should be allocated to of the different South Africa versus global exposure. ASISA categories A TFSA, THEREFORE, South Africa makes up less than 1% over the past 15 of global stock market capitalisation ALLOWS AN INDIVIDUAL years to 31 August and, therefore, it makes sense to make 2019, the benefit of TO DIVERSIFY AWAY use of the large range of opportunities higher allocations FROM SOUTH AFRICAN available globally, especially those to equities should sectors not represented on the be clear. Investors SPECIFIC RISKS JSE. Investors that have significant are compensated allocations in their retirement products to South for taking on more risk (as indicated by the African equities may want to diversify their exposure standard deviation), with higher returns. More by allocating the majority of their TFSA to global aggressive asset allocations result in higher equities. returns over longer periods of time, ranging from the SA Multi-Asset Income category Unit trust versus TFSA (lowest risk and lowest return) to the SA Equity The tax benefit accrued from investing in a TFSA General category (highest risk and highest is highly dependent on the individual in question, return). This includes the last five years where however, it is worth looking at a real-life example. investors have not been compensated for taking Let’s compare the returns generated from a TFSA on risk. and a normal unit trust based on the following assumptions: In closing TFSAs provide South African citizens with Annual contribution a tax-efficient vehicle to save, with the most R33 000 (at the end of each year) benefit realised from compounding over long holding periods. We would encourage investors Total contributions R500 000 to consider these investments as an important (achieved after 15 years) component of their overall savings plans. It Effective tax rate on returns is important for individuals to consider their 30% (combination of income and capital gain) personal circumstances when deciding on Annual return 10% different investment options.
Source: Morningstar Direct
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RISK
31 January 2020
New decade, new opportunities… protecting the early earner
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020 – the start of a new decade and time for a sharper way of thinking. Top of the agenda for us at FMI (a Division of Bidvest Life Ltd) going into 2020 is to address the alarming number of income earners currently uninsured in the South African market. ASISA’s latest 2019 Gap Study indicates that income earners under the age of 30 make up the largest insurance gap in the market with only 38% of the disability cover they need in place. And yet it’s at this stage, when individuals are just starting their careers, that the need for Income Protection is at its most critical, and young earners are at their most vulnerable. The average 25-year-old, for example, has a 96% chance of a temporary injury or illness that will stop them from working for more than two weeks during their working career1. One of the key drivers influencing this insurance gap is that Early
Earners* generally don’t consider life insurance to be a priority. The misconception is that life insurance is only about covering death and permanent disability. According to FMI’s 2018 #RealityCheck consumer survey, 48% of South Africans think that life insurance is death cover only. Unfortunately, temporary risks are too often overlooked, and insuring themselves accordingly isn’t even on a young earner’s radar.
AS AN ADVISER, YOU MAY THINK THE EARLY EARNER IS A CHALLENGING MARKET TO CRACK That’s why financial advisers play such an important role in closing this insurance gap, by opening the eyes of young South Africans to the importance of protecting
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their income from the day they start working. Product offerings and the whole decision-making process can feel quite intimidating and complicated. With this type of conversation, the first step, as an adviser, is to connect with your clients on a human level. Being straight-forward, open and personable is important to engage young earners. Talking Income First helps you do just that – it’s easy to understand and easy for your clients to relate to. In a recent qualitative research session, FMI found that most young people want someone to explain the ins-and-outs and cut through the technical jargon. They typically accept financial advisers as experts and would prefer a one-onone conversation over attempting to navigate this decision online, alone. This is contrary to popular belief that young customers would rather choose the tech route than engage face-to-face, and it presents a
welcome opportunity for advisers. By connecting with your young clients early on, guiding them through the complex world of risk planning and long-term insurance and arming them with the right advice from day one, you can grow with your clients as their needs evolve, ultimately securing a client for life. As an adviser, you may think the Early Earner is a challenging market to crack, but it offers the greatest opportunity for growth. It’s simply a matter of shifting conversations from death cover to living insurance; from life cover and lump sum benefits, to Income Protection with FMI, the Income First way.
*FMI defines Early Earners as individuals just starting out in their career, with no dependants. 1 FMI Risk Stats 2019. Risk stats calculated on probability for 25-year old female non-smoker before retirement age of 70.
RISK
31 January 2020
Gamechanger that offers clients peace of mind
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hen we meet our customers’ needs, we deliver results. This is the basis of sustainable success for any insurer. That’s why coming up with a solution that addresses the safety aspect of clients’ lives is good business practice. It indicates a willingness to partner with them to find ways to address their deepest concerns, says Etienne du Toit, Momentum Shortterm Insurance Chief Commercial Officer. In September 2019, Momentum Short-term Insurance introduced Safety Alert, an innovative emergency panic button linked to armed response units. It’s a move that has been well received by clients and financial advisers alike. Safety Alert transforms users’ cell phones into a panic button when they feel their personal safety, a family member’s or even a stranger’s safety is being threatened. Du Toit says many South Africans face crime or high-risk situations on a daily basis. “Monthly security fees can be prohibitive for many people, who are trying to stay financially afloat in clients has been incredibly positive. particularly trying economic times. “Out of the positive feedback we “Available on the Momentum have received, a few comments stand app, Safety Alert is a game changer out for me. One person said that the as it offers Momentum Short-term feature gives her tremendous peace Insurance Car and Home Insurance of mind, especially as she is a senior clients’ peace of mind at no additional citizen and lives alone. cost for a limited period offer,” he adds. “Another person was delighted The app is not solely for use with the service she received after at home, but can be used while her car broke down in Johannesburg driving or walking. It is supported one morning and left her feeling by a contact centre 24/7, 365 days unsafe. After using the new safety a year. Trained personnel respond alert function on the Momentum immediately when the panic button is App, she related how she received a activated, for safety or security related call from the centre within 10 seconds incidents. of activating the alarm and was Safety Alert accompanied is linked to by two security more than personnel ADVISERS ARE 1 500 armed within four DELIGHTED WITH THE responders minutes, RESPONSES THEY HAVE throughout waiting with her South Africa. until roadside RECEIVED FROM THEIR Activating it on assist arrived. CLIENTS REGARDING THE Her comment: a smartphone allows for the SAFETY ALERT FEATURE “From the immediate agent in the call pinpointing of a location and the centre, to the security guards, who dispatch of an armed response unit. only left after everything was sorted This cuts out many of the delays out – you guys did a wonderful job.” that are typically encountered when Safety Alert is one of several safety having to call someone, explain the benefits by Momentum Short-Term situation and give address details. Insurance to provide clients with Users must, however, ensure their peace of mind. Among others, it also location setting is active when offers HomeDrive and Momentum initiating Safety Alert. Assist, which are aimed at enhancing Du Toit says the response from personal, road and home safety. This
bouquet of benefits was developed to help Momentum Short-term Insurance clients avoid risk or minimise the impact if a risk event does occur. The Safety Alert feature fits well with HomeDrive and Momentum Assist and other solutions such as Safety Score and Safe DayzTM, which were launched in 2017. We believe in the importance of innovation and finding smarter ways to help our clients not only to be safe, but also to reward them for doing so. The Safe Dayz™ feature allocates points to clients based on their good driving behaviour and smarter driving choices or taking the Gautrain. Clients can get up to 30% cash back on their yearly premiums, even if they claim. Du Toit says financial advisers have voiced their delight with the responses they have received from their clients regarding the Safety Alert feature. “It is not only deemed an excellent value-add, but clients see it as a necessity, especially given the recently launched crime statistics.” He says Safety Alert is a strong selling point for financial advisers. “It supports the Momentum Short-term Insurance value proposition, which is underpinned by two main pillars – safety and convenience. “This year, Consulta South African Customer Satisfaction Index (SA-csi)
for Short Term Insurance identified Momentum Short-term Insurance as one of three insurers currently meeting customer expectations, giving credence to our ability to deliver on these brand promises.” He concludes by saying that Safety Alert offers an additional layer of safety to clients. “It speaks to client-centricity and addresses our clients’ need for convenience, real time channels, self-service options and overall peace of mind from us. Technology is the key enabler of this type of offering and insurers who don’t evolve and diversify will be out of sync with consumer trends.
Etienne du Toit, Chief Commercial Officer, Momentum Short-term Insurance
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RISK
31 January 2020
Vehicle tracking devices increase chance of recovery by up to 80%
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hile Toyota and Volkswagen remain the most hijacked car makes in South Africa – with 5 253 and 2 877 hijackings occurring respectively over the past financial year – the latest national crime statistics reveal that among the cars stolen from 1 April 2018 to 31 March 2019 were 19 Lexus, nine Porsches and eight Jaguars. Further dispelling the misconception that high-end cars are safe from hijackings, Christelle Colman, Managing Director of Elite Risk Acceptances, says the insurer recently picked up its first major stolen vehicle claim – a Bentley to the value of R4.7m. “Unfortunately, this car did not have a tracking device installed, which means the odds of ever recovering the vehicle are extremely low,” says Colman. “Considering that at least one motorist is hijacked every 32 minutes in South Africa, and 67% of hijacked vehicles are less than 10 years old, local motorists should be taking advantage of increased technological reforms, such as installing tracking devices into their vehicles.”
Ron Knott-Craig, Executive: Operational Services from Tracker, explains just how drastically such a device increases the odds of recovering a stolen vehicle. “Without a stolen vehicle recovery service, there is only a 5-10% chance of recovering a vehicle, whereas this increases to more than 80% with the subscription to a stolen vehicle recovery service.” Despite these impressive statistics, Knott-Craig says that some luxury car owners remain hesitant to install a tracker because they worry it will interfere with the electronics of the car. “As vehicles have evolved and become more sophisticated, power management has become a critical issue for original equipment manufacturers (OEMs) to consider. Vehicles have more electronics than ever before, and this means less battery capacity for the tracking device, among other aftermarket fitments. “OEMs allow up to 50 milliamperes (mA) in total for aftermarket fitments over 24 hours. It’s not a fixed rule, but any more would drain the battery power within a few days. A tracking device should use 2mA or less in 24
hours and these limitations apply only when the vehicle is switched off. “Tracker’s units use one mA or less. They do this through engaging ultralow power mode for most of the day. The units will only draw more current under certain circumstances, for instance when detecting unauthorised movement of the vehicle or when transmitting during a stolen vehicle recovery activation. With a drain of only one mA or less during a 24-hour period, a vehicle battery would last for months, perhaps even years, depending on its size,” Knott-Craig explains. According to company research, Knott-Craig reveals that approximately 30% of vehicles (approx. 3.5 million) are installed with tracking devices in SA (including fleet vehicles). “The most prevalent tracking device at the moment is a GPS/GSM device, which determines the location of the vehicle by GPS, and communicates that location to the tracking company via the GSM network.” Encouragingly, Tracker notes that there has been an increase in demand for tracking devices in South Africa over recent years. “Not only do these devices
provide stolen vehicle recovery services, they also offer solutions that help to care for and protect your loved ones – depending on the service you sign up for – with features such as share my journey, in-app car guard, andan assist button, to name just a few,” Knott-Craig adds. “With the significant difference that tracking devices make in recovering vehicles, coupled with the low battery drain of new devices, there really is no reason not to install them,” says Colman. “Recovering a vehicle is always preferential to replacing it and generally causes much less disruption to the vehicle owner’s life. Furthermore, the increased use of tracking devices should act as a deterrent for criminals, which should ultimately result in fewer hijackings occurring, not to mention the peace of mind for enhanced personal safety.”
Christelle Colman, Managing Director, Elite Risk Acceptances
Upsurge in kidnappings drives awareness of kidnap and ransom insurance
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ecently released statistics have revealed a sharp there is no sum too high. Coming up with the ransom upsurge in kidnappings in South Africa. This funds can, however, be financially crippling, which is comes while news of the rescue of high-profile why we strongly urge organisations (including schools) kidnapping victim, Sandra Moonsamy, is still fresh in to familiarise themselves with kidnap and ransom South Africa’s collective memory. insurance products.” Official police statistics show that kidnapping cases Honeyman highlights that the real value behind have increased by 139% over the past decade, with having kidnap and ransom insurance is not only opportunistic abductions accounting for the greatest having the policyholder reimbursed for the cost of number of incidents. South African the ransom, it also provides unlimited businesses must therefore be vigilant in access to a team of specialised response ensuring the safety of their employees consultants. These are highly trained OFFICIAL when travelling on business. It is also and qualified individuals who have POLICE advisable to have a kidnap and ransom primarily had careers in the military, STATISTICS insurance policy in place to cover costs police, intelligence and diplomatic for retrieving individuals safely. services. The consultants provide SHOW THAT This is according to Dave Honeyman, valuable kidnap response advice KIDNAPPING Managing Executive: Accident & Health services, as well as dedicated support to CASES HAVE at SHA Specialist Underwriters, who secure the hostage’s safe release. says that employees are often at greater “Proper management of a kidnapping INCREASED BY risk of falling victim to opportunistic by highly trained individuals is essential 139% OVER THE to protecting the life and well-being of abductions when traveling to cities that PAST DECADE they are unfamiliar with and may be at the victim, as well as the organisation’s risk of being snatched by kidnappers assets. With that said, there is one caveat who believe they can extort money from their families.” to keep in mind: when companies take out a kidnap In addition to this, Honeyman says that the and ransom insurance policy, there is a clear condition abduction of school-aged children is also becoming in the policy that obliges the insured company to increasingly prevalent. It is believed that there have take reasonable steps to restrict knowledge of the been numerous incidents where schools and parents insurance as far as possible. In other words, the insured have been victims of extortion following the abduction organisation should ensure that only key employees are of a child. When faced with the choice of saving a life, aware that the cover is in place.”
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In addition to the reimbursement of ransom money, kidnap and ransom insurance also covers the destruction, loss, confiscation or wrongful appropriation of money in transit to the kidnapper. It also reimburses the costs incurred in attempting to mitigate physical disfigurement or emotional harm suffered as a result of a kidnapping, as well as judgements and legal expenses incurred by the insured company due to legal action taken by the victims or their families. “Whilst kidnapping cannot be prevented, businesses can secure the appropriate insurance cover to alleviate the damage caused and assist both the hostage as well as their family on the road to recovery,” says Honeyman. “The sad reality is that kidnappings are on the rise in South Africa, and business owners, school administrators and parents alike, need to be prepared to deal with it in the correct and safest manner,” he adds. Businesses and schools have a responsibility to those in their care, and this cover should be considered as part of every organisation’s overall insurance armoury.” Dave Honeyman, Managing Executive: Accident & Health, SHA Specialist Underwriters
EDITOR’S BOOKSHELF
31 January 2020
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