31 October 2019 | www.moneymarketing.co.za
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Moody’s is the last of the top three ratings agencies to still rank SA’s debt at investment grade
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Assets managed by blackowned companies growing For just over a decade, 27four Investment Managers has published BEE.conomics, an annual socio-economic research study that provides data-driven evidence and analysis of the state of financial inclusion in South Africa’s savings and investment sector. MoneyMarketing spoke to managing director, Fatima Vawda, at the company’s stylish offices in the Firestation building in Rosebank, just prior to the release of this year’s edition of the study.
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We started the survey 11 years ago in 2009, and over the years the narrative and the dialogue has consistently changed,” Vawda tells MoneyMarketing. “In the first edition of the survey, the focus was really on bringing black investment professionals and independently owned black firms into the market. It was a good narrative to introduce at the time, because back then there was very little to no participation of blacks in the asset management industry.” This same narrative continued for seven to eight years after 2009, with the survey creating awareness in the industry, in the media and among asset owners. “If we fast forward to today, the situation has been turned entirely on its back,” Vawda says, “because we now have a significant amount of players who have grown into a sizeable part of
the market. Legislation that was slow to kick in has now taken effect, and we’re beginning to see normalisation in the industry.” A new edition to the latest BEE.conomics research study has been Prescient Investment Management, following its empowerment transaction. “Eventually, we’ll reach a situation where all South African companies in the industry are transformed. Established mature firms that have been around a long time are now transforming their composition at board, ownership and investment team levels. I’d like to see the entire industry included in our survey because they meet the criteria.” She points out that the narrative around transformation has also evolved. “There’s been significant criticism of the industry and whether it’s adding value to its end customers.
Fatima Vawda, MD, 27four Investment Managers
Are the costs, nature and design of the products and services that we offer only for the middle class – or do they relate to all South Africans?” She believes that transformation is not just about making a few black individual fund managers wealthy. “As fund managers we are not large employers of people, so when we talk about the impact of transformation in financial services, we also talk about how we are deploying the large pools of capital that we have access to. Are they generating returns for our clients and are we also adding value to our economy in this particular environment where everything is struggling?” Continued on page 3
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NEWS & OPINION
31 October 2019
Continued from page 1
EDITOR’S NOTE
Vawda believes that asset managers should more successful at raising capital through the sit back and reflect on whether or not what has private equity market. worked historically – what she calls the western “As soon as you are a listed company, you way of doing things – is the best way forward, or have the quarterly pressure of earnings, and if innovative thinking is needed. then there is the cost of being a listed company The latest BEE.conomics study shows that – it’s outrageous. In SA, the benefits of listing assets managed by black-owned companies are only for the ‘big boys’. Small caps are paying have grown from R91bn to R579bn in the last around R5m a year to be listed on the JSE and 10 years, with black market share of the total aren’t getting any benefits.” estimated South African savings and investment Vawda says that private equity is now picking pool at 7%. up momentum in SA, and refers to the private Vawda says the study has consistently public partnership created when the National demonstrated that companies and asset Treasury’s Jobs Fund decided to contribute allocators that have embraced transformation R200m to 27four’s Black Business Growth Fund. perform better financially, lending credence to “The money is to be used to create jobs the thesis that good transformation practices through providing funding to black private make good business sense. equity fund managers focussed on investing in This year’s research also mid-market, privately-owned speaks to the shifts in companies for growth. 27four ASSETS MANAGED investor appetite that has has in turn committed to seen black asset managers raising more than R1bn in BY BLACK-OWNED moving into private matched funding.” COMPANIES HAVE equity and infrastructure She explains that the Jobs investments. GROWN FROM R91BN Fund contribution will help The number of companies accelerate investment from TO R579BN IN THE listed on the JSE Limited other investors into black LAST 10 YEARS has halved, from its peak in private equity with all of the 1990 of 696 to 354 currently. capital committed to 27four’s From the peak of the ‘Ramaphoria’ era to the fund invested by six to eight black-owned assetend of June 2019, foreigners have been net management firms. This will ultimately reach sellers of both South African equities and bonds between 40 and 60 companies in total, helping to the tune of R85bn and R75bn respectively, them to grow, transform and very importantly, and over the same period, volumes traded on create jobs – a win-win situation for all. the JSE have fallen by a staggering 44% and Vawda notes that over the past 10 years, the performance has been sub-par. largest JSE companies have wasted billions on This, Vawda explains, has created somewhat of failed investments outside SA, when the money a vacuum on domestic equity markets, depleting could have been better spent in the country on liquidity and preventing shares lower down on the creating jobs. market capitalisation spectrum from receiving any Turning to the prescribed assets, she says notable bids for a sustained rerating. that 27four views the issue more from an “The pension funds are worried about impact investing perspective, and not from a investment returns and they are the largest perspective of giving money to Eskom. investors with black asset managers. They need “More impact investing is needed and to grow their members’ money above inflation retirement funds have been slow to adopt this – but this money hasn’t been growing, so they kind of investing. If government says to us that are now looking at different ways of investing, 5-10% of regulation 28 funds should go towards like private equity, where they can get inflationimpact investing, that’s fine,” she adds. beating returns.” She explains that globally companies aren’t The survey had 35 public market participants going to market to list because they have been and 15 private market participants.
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ast month, one of the several conferences I attended was the Alexander Forbes Investment Indaba. Predictably, the topic of prescribed assets was addressed, this time by Elias Masilela, former CEO of the Public Investment Corporation, and what he had to say was both interesting and important. Masilela warned that in order to avoid social unrest in the country, more money needs to be directed at developmental projects. He explained that while the private sector had committed to allocate 5% of its capital towards development at the National Economic Development and Labour Council, not many firms had kept their word. Of the pension funds, only a handful had allocated over 10% of their assets towards developmental schemes. This, he said, is why the government is looking into prescribed assets and, while Masilela doesn’t regard prescription as the panacea for the country’s economic ills, he urged companies in the financial sector to ask themselves whether or not they have done enough for the social good of South Africa. Mabatho Seeiso, MD of The Bridge, a women’s empowerment organisation, told the conference that while trustees like the idea of developmental schemes, they regard prescribed assets with misgivings because as yet, no one has any idea what a prescribed assets policy will involve. The prescribed assets discussion has not nearly run its course and conversations of this sort really need to take place. The argument that companies should make social investment one of their priorities in order to avoid prescription, and to achieve a more stable South Africa, appears to be gaining momentum. Janice janice.roberts@newmedia.co.za @MMMagza www.moneymarketing.co.za
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NEWS & OPINION
PROFILE
31 October 2019
CLAIRE WOOD MANAGING DIRECTOR, INNOSYS
How did you get into the tech industry and was this something you always wanted to do? I wish I was one of the cool kids and could say I’d been coding since high school, but actually I was all set to become a chartered accountant. That was until I encountered Professor Louise Whittaker who was lecturing in the Information Systems department at WITS. Not only was she a woman holding her own in a comparatively new field, she also had her own laptop! I was sold, added information systems as a major, and the rest is history. Two decades on, I wouldn’t be anywhere else. Technology is the most powerful catalyst for change and there’s nothing more satisfying than seeing the positive impact our work has on our clients’ businesses.
Has the number of women in the tech industry increased over the last five years?
We’ve definitely seen an increase but there’s no time to rest. Ten years ago, the problem was convincing women that STEM careers weren’t just for men. Having made progress on that front, we’re facing a new set of challenges in gender parity, one of which is keeping women in these industries. Up to 83% of women in STEM will leave their chosen field before retirement age. The reasons for this are many and varied, from the persistent gender pay gap to technology companies being especially bad at supporting work/life balance. The result of this exodus is a dire lack of experienced mentors, which in turn means younger women THE INSURANCE that entering the industry INDUSTRY are less likely to stay. It isn’t enough to HAD ITSELF encourage women COMPLETELY into STEM careers, CONVINCED we now have to work hard at making these THAT IT industries good DIDN'T NEED places to be – for everyone. TECHNOLOGY
VERY BRIEFLY
Just how much has the local insurance industry embraced digitalisation when compared to the rest of the world? For the longest time, the insurance industry had itself completely convinced that it didn’t need technology because it was a relationship business. A growing millennial consumer base and the global financial crisis forced insurers everywhere to take stock of both products and distribution chains. We obviously don’t see the same levels of activity in the insurtech start-up space as the developed markets but the local industry is certainly getting on board with digitalisation and automation. There is definitely a better understanding that the customer experience bar is being set by the tech and retail giants, and insurers have no choice but to offer the same or better.
What advice do you have for young people wanting to enter the tech industry?
With so much focus on getting young people coding, we can forget that there is more to software development. If you are interested in technology but also have visual design skills, user interface and user experience design might be for you. If EMS and accounting or a humanities field, like psychology, is your thing, you might be a future business analyst or project manager. There are so many different roles, all as important as coding in delivering good quality software. Be open to the possibilities!
What books are you currently reading that you’d recommend to those interested in technology?
Being in software development means that reading to keep current with technology is an inherent part of the job, so I do try to choose books on a broader range of topics, even if still related to what we do. I believe strongly that good EQ is vital for software teams so I am really enjoying Kim Scott’s book, Radical Candor, which looks at how to balance empathy and honesty to get the best out of a team.
UPS & DOWNS
The Southern African Customs Union, including SA, on the one hand, and the UK on the other, have in principle now concluded a new trade deal to cater for the aftermath of Brexit on October 31. NWU Business School Economist, Professor Raymond Parsons, says the deal injects more certainty and predictability into SA-UK future mutual trading relations, whatever happens. “The deal therefore helps to ensure that business between the UK and SA can continue as normal and as far as possible be ‘business as usual’ after Brexit,” he adds.
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The RMB/BER Business Confidence Index for the third quarter of 2019 fell to a 20-year low of 21 index points from 28 index points in the second quarter of 2019. A reading of 21 shows that eight out of every 10 respondents were unsatisfied with current business conditions. RMB says, “Not even during the height of the global financial crisis in 2009 have executives been this downbeat. In fact, the last time the BCI was at similar levels was in the 1998-1999 Emerging Market debt crisis.”
PSG Wealth Hyde Park in Johannesburg has welcomed wealth manager Greg Heine to the team. Heine holds a Post-graduate Diploma in Financial Planning, a Graduate Diploma in Investment Analysis, Portfolio Management and Investments, as well as a BCom Business Management Degree in Strategic Management. His career in finance started in 2006 and he brings with him expert professional knowledge on private banking, stockbroking and portfolio management, as well as risk management and estate planning. “The extensive experience and undivided dedication to client satisfaction that Greg has, makes him a true asset to our office offering,” says Ian Schmidt, Principal at PSG Wealth Hyde Park. Greg Heine
HSBC has named South African Julian Wentzel as its Head of Global Banking UK and International Europe, effective immediately. This newly created, expanded role will see Wentzel leading HSBC Corporate Banking and Corporate Finance from a global platform. Wentzel has been mandated to drive the growth of HSBC Global Banking business in the UK, Bermuda, Israel, Russia and South Africa. Wentzel joined HSBC in London in 2015 before transferring to Johannesburg in 2016 to head up HSBC Global Banking’s African business. Under his leadership, HSBC gained substantial growth and recognition within the region. Before joining HSBC in 2015, Wentzel spent 10 years at Macquarie as Head of Equities for EMEA. Prior to that, he worked at JPM Cazenove where he held several senior investment banking positions including Head of Equities, South Africa. Wentzel will relocate to London, reporting to Philippe Henry, HSBC’s Head of Global Banking EMEA. Julian Wentzel
Grobank has announce the appointment of Patrick Mathidi as a non-executive director of the Bank, following approval by the South African Reserve Bank. A founding member and Head of Equity and multi-asset strategies at Aluwani Capital Partners, he qualified as an accountant and practised as an investment professional in the financial sector. Of his almost two decades in financial services, the last ten years saw him in asset management, responsible for pensions and various institutional clients’ investments. Patrick Mathidi
NEWS & OPINION
31 October 2019
Beware of 45% tax on restricted shares in start-ups
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ounders, directors and employees of start-up companies in South Africa should be aware that acquiring or owning shares carrying restrictions such as ‘lock-ins’ could land them with a tax liability of 45%. “If you hold restricted shares, you pay a much higher tax rate when you exit or when the restrictions lift – at the marginal tax rate of 45% compared to capital gains tax of 18% on unrestricted shares,” say Michael Rudnicki, Executive: Tax at Bowmans. The wide gap between tax on restricted versus unrestricted shares is an often-overlooked fact tucked away in Section 8C of the Income Tax Act, which deals with equity instruments acquired because of employment or holding a director position, or purely because a taxpayer is employed or holds the office of director. “Founders ask how this is possible … but the law is what it is,” Rudnicki says. “If you acquire a restricted equity instrument in connection
with employment or even as a result all if there are restrictions.” of being an employee or director, it He says there are several legislated may fall into Section 8C.” In a typical restrictions that will result in the start-up phase of a business where holder of restricted shares being taxed capital has not been raised, it may be at 45% when disposing of them or that restrictions on shares do not exist when such restrictions are lifted, one and are only negotiated at a later stage of the most common being ‘lockwhen capital is raised. ins’. An example is where an investor This section can have favourable tax awards shares to a founder, director implications for or employee as an those who acquire incentive to stay in THE WIDE GAP unrestricted shares the business for a BETWEEN TAX ON in the company minimum period, and pay the tax RESTRICTED VERSUS during which he upfront. “It can or she may not sell UNRESTRICTED be a great thing the shares. if there are no Compulsory SHARES IS AN OFTENrestrictions and share disposal OVERLOOKED FACT you can dispose requirements, of them freely. If the value is low, you and even conditions set for ‘good pay tax based on the market value leavers’ or ‘bad leavers’, may also well at the time, which may be nominal, be considered a restriction that would and you cannot be re-taxed later trigger 45% tax on exit, Rudnicki adds. as an employee or director, when He states that tax at 45% would not restrictions are imposed. But falling only be triggered when the holder of into Section 8C is not a good thing at restricted shares sells them, but also
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when the restrictions on the shares are lifted. “That has implications for the employer as well,” he says, referring to the employer’s obligations to withhold employees’ tax. Should SARS challenge the way this has – or has not – been done, it could result in the employer having to pay penalties. Rudnicki urges the founders of start-up companies to be aware of the consequences of Section 8C when seeking investment funds. “Often, when founders commence with their activities, the focus is not on the consequences of this particular piece of legislation. As a result, it is often forgotten or overlooked until there is a disposal or the restrictions are lifted, triggering tax at the higher rate.” Michael Rudnicki, Executive: Tax, Bowmans
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The following entities are licensed Financial Services Providers (FSPs) within Old Mutual Investment Group (Pty) Ltd Holdings approved by the Financial Sector Conduct Authority (www.fsca.co.za) to provide advisory and/or intermediary services in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. These entities are wholly owned subsidiaries of Old Mutual Investment Group Holdings (Pty) Ltd and are members of the Old Mutual Investment Group. Old Mutual Investment Group (Pty) Ltd (Reg No 1993/003023/07), FSP No:604. | Old Mutual Alternative Investments (Pty) Ltd (Reg No 2013/113833/07), FSP No:45255. | African Infrastructure Investment Managers (Pty) Ltd (Reg No 2005/028675/07), FSP No:4307. | Futuregrowth Asset Management (Pty) Ltd (Reg No 1996/18222/07), FSP No:520. Figures as at 31 December 2018 unless otherwise stated. Sources: Old Mutual Alternative Investments; African Infrastructure Investment Managers (AIIM); Old Mutual Specialised Finance; Futuregrowth Asset Management.
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NEWS & OPINION
31 October 2019
No bad news expected from Moody’s…yet
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outh Africa isn’t expecting bad “SA’s outlook is stable, so that tells news from Moody’s Investors one that a change in the rating is not Service – not yet, anyway, if likely in the next 12 to 18 months,” the mood at the ratings agency’s Villa added. Moody’s is expected to Sub-Saharan Africa Summit in publish a review of the country’s rating Johannesburg last month is anything on 1 November. A downgrade would to go by. lead to a selloff of billions of rand of Presently, Moody’s is the last of bonds, as well as push up already steep the top three ratings agencies to still government borrowing costs. rank SA’s debt at Moody’s has cut investment grade its 2019 economic MOODY’S IS THE (Baa3 with a stable growth expectations LAST OF THE TOP outlook). S&P for SA to 0.7% from Global Ratings and its forecast of 1% in THREE RATINGS Fitch Ratings both June, as it sees policy AGENCIES TO STILL uncertainty (mainly downgraded the country’s debt to RANK SA’S DEBT AT around the plan to junk in 2017. INVESTMENT GRADE break up Eskom) At a media remaining and the briefing on the side lines of the implementation of structural reforms Summit, Lucie Villa, the ratings slow. However, the ratings agency does agency’s lead analyst for SA, told expect economic growth to pick up journalists that it would be unusual next year to 1.5%. for Moody’s to move from a stable “At the political level, as things stand outlook to a ratings change either in terms of policy orientation, we still up or down, before first signalling a see a very reform-oriented executive change of outlook. and that is why we think there are
prospects for a pick-up in growth.” For Villa, much depends on the trajectory of SA’s debt ratio and the ability of the government to move the country to higher growth and a lower fiscal deficit. She does, however, not expect implementation to happen overnight. “We don’t foresee a revolutionary U-turn but we expect improvement. If the chance for improvement fades, we would then move.” She added that social tensions make it more difficult to institute reforms needed to fix the country’s economy. Meanwhile, Moody’s believes that governance at institutions like the SA Revenue Service has improved. It also sees Finance Minister Tito Mboweni’s recently published discussion paper on the economy
as a positive step (although its implementation is an issue). The day after the conference, MoneyMarketing spoke to several economists and the consensus appears to be that for now, President Cyril Ramaphosa and his government have been given some breathing room. However, much depends upon SA’s proposal to break up the lossmaking Eskom – currently facing around R450bn in debt – into three separate entities to make it financially viable. Moody’s has made it clear that it wants to see an Eskom plan that has been agreed to by all stakeholders. If that plan is delayed or seen as insufficient, economists expect the ratings agency to downgrade SA.
Lucie Villa, Lead Analyst: SA, Moody’s Investors Service
Old Mutual Albaraka Balanced Fund wins Islamic Finance Award
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Saleigh Salaam (pictured in the middle) receiving the GIFA award on behalf of Old Mutual Investment Group
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he Old Mutual Albaraka Balanced Fund won the Best Islamic Balanced Fund 2019 Award at the Global Islamic Finance Awards (GIFA) ceremony held in Cape Town last month. GIFA has become a highly coveted, market-led recognition of excellence in Islamic banking across the world. Saliegh Salaam, Portfolio Manager at Old Mutual Investment Group, said both he and his team were honoured to receive the accolade from GIFA. “GIFA is one of the most highly sought-after Islamic banking and finance accolades in the world, highlighting that the Old Mutual Albaraka Balanced Fund and Old Mutual’s Shari’ah compliant fund range are world-class investments.” The Old Mutual Albaraka Balanced Fund offers investors a Regulation 28-accredited ethical investment solution that delivers steady, long-term capital growth to meet clients’ retirement needs. “We are also guided by Old Mutual Investment Group’s Responsible Investment policy that encourages us to integrate Environmental, Social and Governance factors across all our
investments,” Salaam added. GIFA winners were selected on a 25-point system, which considered product innovation, the breadth and depth of the product, the provision of products and services that have transcended international borders, and the promotion of growth in the industry. According to GIFA, their awards are a prestigious label of excellence that recognises governments, institutions and individuals who have exhibited outstanding achievements in their respective fields, contributing to the sustainability of Islamic banking and finance as a viable system within the global international financial architecture. The Old Mutual Albaraka Balanced Fund is a collective investment scheme established in partnership with Old Mutual and Albaraka Bank. “Old Mutual is one of the oldest financial institutions in South Africa and Albaraka Bank is the oldest independent Islamic Bank in the country, and this award attests to our collective expertise and our efforts toward achieving excellence in this sector,” Salaam said.
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NEWS & OPINION
NADIA VERAPPEN Compliance Officer, Compli-Serve SA
Not the time to smell the roses
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he POPI Act represents a very serious of a breach. Some of the possible punitive shift in financial services and beyond. measures for non-compliance will include Hardly a time to smell the roses – or a fine or imprisonment – either charging rather the ‘poppies’ in this instance – the between R1m and R10m, or one to ten Protection of Personal Information Act years in jail, depending on the severity of demands attention and lays down the rules the offence. regarding the way businesses will manage, Businesses may also suffer reputational handle and use information. Though we damage for breaches or non-compliance, the are still waiting for an enaction date, the cost of which cannot be precisely measured, Act sets out some very and the effects thereafter may serious rules, flagging linger long into the future. But THE ACT COMPELS all attempts are not futile as how essential compliance will be. It’s better to avoid the Act focuses largely on the BUSINESSES TO becoming complacent concept of reasonability and RECOGNISE THE while waiting for POPI to practicality. IMPORTANCE OF bloom, so here are some While it will be impossible important reminders, to keep all information secure DATA PRIVACY particularly for FSPs. all the time, one is required to take all reasonable measures to ensure that Finding a balance data is protected and handled in accordance The Act compels businesses to recognise with legislative requirements. the importance of data privacy, as well as to establish the delicate balance between Doing right by data safeguarding personal information, and at POPI compliance may seem daunting now, the same time allowing for the free flow of but businesses should remember that data information as required in business processes. protection is the right thing to do for all The socialisation of POPI within a business parties involved. is essential to address. A breach may well By recognising the importance of occur as the result of human error, due to data protection, not only is South Africa negligence or a general lack of understanding. positioned in line with global standards, but To mitigate this, management and training also remains lucrative for foreign investment. needs to take place, and then be repeated. Focusing on having the correct data, stored Space to grow in the correct place, for the correct reasons, Putting data safety first in turn provides an accessible by the correct people, is the opportunity for businesses to exhibit good best approach to follow when dealing with governance and to grow their market share personal information. through demonstrating their commitment to data privacy. As consumer – and It will cost if you fail to comply consequently data – protection increasingly The Information Regulator may order become the central goal within financial financial compensation to data subjects services, it’s best to sow the seeds you can now for any damages they may suffer as a result compliance success ahead. CPD-annualrefresher.pdf 1 2019/09/13 for09:44
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31 October 2019
SA venture capital industry grows
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he emerging South African venture capital (VC) industry continued to experience robust growth in 2018, with 181 new VC deals reported – an increase of 13.8% from the 159 deals reported in 2017. This is according to the newly released SAVCA 2019 Venture Capital Industry Survey, which also shows a substantial increase in the overall value of all deals, up from the R1bn invested in 2017 to just over R1.5bn in 2018. The report, which provides valuable insights for fund managers, investors, entrepreneurs and policy makers about the South African VC landscape, was carried out in collaboration with research partner Venture Solutions, and features data gathered from 56 fund managers as well as other industry investors. Tanya van Lill, CEO of the Southern African Venture Capital and Private Equity Association (SAVCA), says it is especially encouraging to see this continued industry growth in the face of a tough economic climate. “The continued expansion in VC activity over the past decade is evident when comparing the average of 129 deals per year from 2014 to 2018, to the average number of deals per year from 2009 to 2013, a meagre 26.” Van Lill highlights that, of all the new deals reported in 2018 (by value), 41% were categorised as start-up capital. “If taken by number of deals, this proportion jumps to almost half of all deals reported (47%),” she adds. “Likewise, the total number of active deals invested through seed or startup capital amounts to almost 60% of all deals to date. This highlights the increasingly important role that venture capital continues to play in South Africa as an essential source of funding for scalable start-ups.” As in previous years, Independent VC fund managers comprise the largest share of active portfolios (35.1%), with Captive Government Funds and Angel Investors increasing investment activity, fuelling the growth of early stage investments, notes Van Lill.
Tanya van Lill, CEO, SAVCA
INVESTING
31 October 2019
MIKE TITLEY Business Development, Laurium Capital
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he South African listed equity universe is a relatively small investment environment, constituting less than 1% of total global equity markets. The FTSE JSE ALSI comprises around 163 listed shares spread across the large (Top40), mid- and small-market capitalisation categories of the index. Within this narrow universe, there are several small- and mid-cap shares that trade infrequently and in small volumes. This makes it difficult to buy into and sell out of positions within portfolios. The result of this low liquidity is that a large investor can push up the price of a stock by trying to hastily fill a position. Alternatively, it may not be possible to find a seller or a buyer to trade with, missing the opportunity to trade on the investment idea. The reality for asset management firms is that as one’s equity assets under management grow, the breadth of the investment universe to select South African shares from, reduces. As an asset manager’s equity portfolio grows in size, a material position of between 2% and 10% of the fund means purchasing a greater percentage of a company’s outstanding stock. For larger managers, higher demand faces the headwinds of lack of supply, higher number of days to trade, and ownership limits within a company. Ownership limits may be imposed internally by the asset manager to avoid legal ownership obligations. An example of this is implementing a limit below the 35% ownership threshold, which triggers a mandatory requirement for the asset manager to
In SA equity markets, size matters
make an offer to minority shareholders to buy out their shares. In certain cases, investment managers have an equity ‘House View’, which flows through the equity component of their various portfolios. Although position sizing may differ, the respective portfolios should be traded with a fair allocation to the stock, thus increasing the overall order size. There are several asset managers in the South African arena who have grown to the point that their investment universe has shrunk to within the Top40 shares or less. Holding stocks beyond the Top40 may have little impact on their performance due to the small position sizing in a large portfolio. The chart below illustrates the one-year rolling performance of four of the larger, well-established funds in the ASISA South African General Equity universe. The black dots referenced off the right-
hand axis illustrate the combined assets under management (AUM) of these four equity funds over time. A few notable features can be inferred from the chart above: • The funds generated most of their significant alpha in their early years when their combined assets were smaller • Alpha generation has had a negative correlation to AUM growth over time • As the funds grew, they behaved more like the index, shown by the low alpha generation in later years • At a certain point in 2015, appetite for these funds became saturated and through a combination of performance and flows, the combined AUM growth tapered off. Over the past year to 2 September 2019, 66% of the mid- and smallcap stocks within the ALSI have
Source: Morningstar, 1 October 1998 – 31 July 2019
underperformed the index, with most of these deriving their earnings from the beleaguered South African economy. In this case, the larger managers have been protected from these underperforming stocks due to their inability to invest in them. One would expect that their returns should have received a relative tailwind when compared to the ALSI – however, as can be seen from the chart, their alpha generation has been muted. In an environment where more of the midand small-cap companies perform, boutiques may have the upper hand. Many allocators and investors in South Africa have tended to cornerstone their portfolios to at least one, and in some case many, of these larger funds. We would argue that as an investor in the narrow South African investment universe, one should seek out managers who are able to invest in the broader South African universe efficiently, implementing their best ideas in high conviction positions. The structural headwinds faced by the larger funds will persist until such a time as they become relatively smaller, one way or another. South Africa is currently spoilt for choice with the next generation of skilled, established boutique asset managers coming to the forefront. When the new dawn eventually raises its head above the horizon and markets rebound, boutiques like Laurium Capital will be nimbler and more capable of positioning themselves in the mid and smaller listed SA companies, which are currently sitting on multiyear low multiples.
US increases minimum investment amount
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he United States EB-5 visa, or EB-5 Foreign Investor Visa Program, was created in 1990 by the Immigration Act of 1990. It provides a method for eligible immigrant investors from countries all over the world to become lawful permanent residents in the US – informally known as ‘green card’ holders – by investing $500 000 in a new commercial business enterprise. This amount will increase after November 21 to $900 000. MoneyMarketing asked Daniel D Ryan, the MD of Atlantic American Partners, a company that assists individuals and families with immigration to the US, about the increase. “The US EB-5 Foreign Investor Visa program has been in existence for 28 years and there has never been an increase over this extensive time period in the investment principal amount required to qualify for the visa,” Ryan says. “The United States Congress and US Immigration Services (USCIS) for several years have been evaluating this issue and recently
decided to increase the amount; taking into account inflation over the 28-year period; and to bring the US visa investor scheme amount more in line with other competing country’s similar investor visa programs.” Green card According to Ryan, Atlantic American Partners has an excellent approval track record in receiving conditional and permanent green cards for clients. “Each case is individual and unique but, on average, once the initial I-526 EB-5 application is submitted to USCIS and the full principal investment is made, the Temporary/Conditional Green Card is processed, approved and issued within an 18 to 24-month period from a fully completed and accepted application by USCIS,” Ryan explains. Once the Conditional/Temporary Green Cards are received, the investor can move to the United States immediately and start a business, work for a company, go to school, buy a home, travel, retire,
etc., and begin a new life. The investor must land on US soil within six months after receiving the notice of the I-526/temporary/conditional green card approval to show intent and desire to live and work and integrate into the US. The second step of the process is known as the Permanent Green Card, which is connected to what is referred to as the I-829 application. “In general, after a petitioner/investor receives their I-526 Conditional Green Card approval and the applicant has move to the United states, after a brief waiting period, the I-829 Permanent Green Card Application is submitted, reviewed, processed, approved and received by the investor within 24-36 months thereafter,” Ryan adds.
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INVESTING
31 October 2019
NICK KIRRAGE Value Equity Fund Manager, Schroders
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nvestors unfamiliar with our philosophy may, reasonably enough, be wondering why they should adopt a value approach to investing and, greeted by an initial response of, say, “Because over the longer term it works,” might then equally reasonably enquire, “So why does it work?” At which point we would direct their attention to the following chart, which is, in essence, the North Star of value investing. Past performance is not a guide to future performance and may not be repeated Using data going back to the late 1800s, this shows the 10-year annualised returns of US equities, grouped by
Why value investing works – in a single chart valuation, and as such is the visual embodiment of the basic principle of value investing – that, if you buy cheap companies then, on average and over the longer term, you will make money and, if you buy expensive companies then, on average and over the longer term, you will not. The thing that is so enduring and powerful about this chart is that it talks about nothing other than the price you pay – no macroeconomics, thematics, politics, profits or anything else. That is an important lesson but one that so many people manage to look past – possibly because the more problematic aspect of the chart is that, while it makes it very clear where you ought to invest, it
10-YEAR ANNUALISED RETURN BY STARTING CYCLICALLY ADJUSTED P/E (CAPE)
*Source: Stock market data used in “Irrational Exuberance” Princeton University Press, 2017, updated. Robert J. Shiller. Based on US Equity market – since 1871
PETER BROOKE Head of MacroSolutions, Old Mutual Investment Group
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he global macroeconomic environment is treacherous at the moment. The shift to populism and the resultant risks have brought politics front and centre. This is inherently unpredictable. At the same time, extreme monetary policy action has de-emphasised the standard cycle. In this world, it is prudent to focus more on valuation (price) and to hold macro views lightly, while focusing on building portfolios that are well diversified. Our expected returns across SA assets have generally been revised up, while global bonds have once again deteriorated and are now expensive. On a relative basis, the investment case is pushing harder towards SA and away from global assets. SA assets have de-rated; in other words, they’ve become cheaper and are now offering better value. To this end, we have increased our longer-term expected returns for SA equity and property and have maintained our outlook for SA bonds, which are particularly attractive in a global context. SA equity We have increased our expected real (after inflation) returns for SA equity by 50 basis points (bps) to 6% a year over the next five years, up from 5.5% in January and 5% this time last year. This is driven off a 4.3% forward dividend yield and a relatively
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is far easier said than done. In fact, humans are pretty much hardwired to do the opposite of what the chart advises because the companies that live on the right-hand side seem exciting and attractive while those on the left look dull and scary. In Lord of the Rings terms, it is akin to choosing between staying in The Shire or taking a trip to Mordor – most would pick The Shire but, of course, if Frodo had stayed home, the story could have had an unhappy ending. Ultimately, here in the value team at Schroders, the way we make money is not by looking to forecast any of the factors that matter so much to other investors – those macroeconomics, thematics, politics, profits and so on. No, it is by counting on the one thing we believe will not change over time – the only aspect of investing that we can see has remained consistent over the last 150 or so years. And that is human behaviour. We may like to think we are more sophisticated than we were 150 years ago but the evidence would suggest otherwise – that, in effect, in the short term, we learn a lot; in the medium term we learn a bit; and, in the long
term, we learn almost nothing. Yes, that is pretty depressing but it also contains a hugely important lesson that can help us make money for our investors. The reality is that most investors behave in a very consistent pattern – a predictable cycle of emotional responses, any of which we are likely to witness on an almost daily basis (a full cycle of emotions can be found on our blog). While this cycle may sound depressing, it is also something value investors can trade off. Amid all the change of the last century and more, one thing has stayed the same. Us. Human beings are the constant – markets are cheap when we are fearful; and they are expensive when we are greedy. We are what is underpinning value’s ‘North Star’ chart and we are systematically exploitable. And value investing is the system. Important Information: For professional investors and advisers only. The material is not suitable for retail clients. We define ‘Professional investors’ as those who have the appropriate expertise and knowledge e.g. asset managers, distributors and financial intermediaries. Past performance is not a guide to future performance and may not be repeated. Schroders Investment Management Ltd is an authorised financial services provider FSP No: 48998, registration number: 01893220
Local assets to yield a better return depressed earnings base, which provides a good platform for better growth into the future. However, this improved outlook will require a turnaround in the local economy.
no underlying inflation, we think further interest rate cuts from the South African Reserve Bank (SARB) are appropriate. With cash yields falling, it forces investors to look at other assets.
SA property Our expected real return has increased by 50 bps to a mouth-watering 7% a year, up from 6.5% six months ago. This is backed by a very high dividend yield, despite a negative expectation on growth. We remain pessimistic about the trading outlook for these companies, but with such high yields we cannot ignore the value.
Global equity The global equity market is schizophrenic, with the US equity market and growth shares expensive, while the rest of the world and value stocks are cheap. Longer term, there is no alternative to equity, but we are concerned about profits as we expect them to fall. As a result, we are cautiously positioned on global equity and have revised our five-year real return outlook down to 5%.
SA bonds Local bonds continue to offer high real returns and are very attractive in a global context. While, over the long term, we expect SA to be downgraded to junk status, we are comfortable investing in the bonds because they have been priced for this. Our five-year real return outlook for local bonds remains 4% a year. SA cash A big change in our asset class outlook is that interest rates in SA are now falling and we expect cash to deliver a real return of just 1.5% a year going forward. With the economy on its knees and
Global bonds Following a stellar six-month period, global bonds are once again priced to give negative real returns. In fact, the whole of the German bond curve now offers negative yields! Our five-year outlook on global bonds has further deteriorated to -1% a year. Global cash We also expect global cash to deliver negative returns going forward. To combat the trade war-induced global slowdown, central banks have swung to easier monetary policy. We hope they are successful, but monetary policy is starting to run into its limits.
INVESTING
31 October 2019
Hedge funds deliver positive performances in 2018, despite headwinds But total net outflows rise as hedge fund assets decline to R47bn
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n a year when local equities lost 8.53% on a total return basis, all size categories of hedge funds delivered positive average returns for the 12-month period ending 31 December 2018 – highlighting the diversification benefits this asset class brings to investment portfolios. The 15th annual Novare Hedge Funds Survey shares findings relating to asset size, performance and fees for the year ending December 2018. Through the newly introduced industry thermometer, the survey gathered further insight into how hedge fund managers feel about the industry and what they envisage for its future. “Overall, hedge funds performed well relative to the market, despite a notable wider dispersion of returns. Hedge fund managers highlighted that the absence of high volatility in capital markets, coupled with regulatory changes, were key challenges faced by the industry during the period,” says Kagiso Mathole, Portfolio Manager at Novare. Hedge fund assets by size Total net outflows for the industry in 2018 were R15bn as hedge fund assets declined to R47bn. The industry continued to be dominated by large hedge funds with assets over R2bn. They represent 42% of total hedge fund assets after growing by a further 4% since Novare’s review of the industry in 2017. However, funds with assets between R500m to R1bn, and R1bn to R2bn, lost industry share, with the latter category dropping from 25% to 14% of total hedge fund assets. Consequently, this led to increased market share for funds with assets below R500m and those with assets over R2bn. Small net inflows were observed in only two areas – R1.87bn in the categories of hedge funds with assets between R100m and R200m, as well as R1.69bn in funds managing less than R100m. Outflows were experienced in all categories of funds with assets under management (AUM) between R500m and R2bn, with the largest asset losses in the R1bn to R2bn category. The least net outflows (R1.5bn) were observed in funds with an AUM of between R200m and R500m. “In the past, the proliferation of South African hedge fund assets happened without significant inflows to the industry. This infers that growth, in terms of assets, was mostly driven by good returns,” says Mathole. Average performance by fund size All fund categories by size delivered positive returns on average for the 12-month period ending 31 December 2018. Within each category at least 50% of funds achieved positive returns despite headwinds. “A number of macro-economic factors negatively impacted fund performance in 2018. These were less supportive for emerging markets with the International Monetary Fund (IMF) citing several risks for these economies,” says Mathole. Risk factors included the prospect of central banks in developed economies raising interest
assets posted an annual return of 2.7%, while the performance of funds with less than R100m was flat.
rates, and the adverse impact of the US-China trade dispute on global economic growth. Other institutions, including the World Bank, held the same view regarding global risk factors, which led to the downward revision of global growth forecasts. Subsequently, South Africa’s growth forecast was also downgraded from 1.4% to 1%. Local bond yields drifted higher as the rand reacted negatively to budget projections for 2019 and inflation remained within the SARB’s target band. Local equities ended the year on a volatile note as global growth concerns, geopolitics and uncertainty over trade policy sent markets gyrating. Local equities fell in line with global sentiment, bringing the year’s losses to a negative 8.53% on a total return basis, as per Iress data. On average, funds managing more than R2bn of
Management and performance fees “Investors are placing greater emphasis on hedge fund fee structures, with the issue of fees having come to the fore in recent years. Constantly under regulatory scrutiny, hedge fund investors are increasingly concerned about the impact of fees on investments, especially during times of muted returns. In a climate of subdued returns, investors often opt to scale down on fees and invest in passive strategies,” Mathole adds. Despite these pressures, there was a spike in fund managers charging annual fees of between 1.25% and 1.5% in 2018. There was a slight decrease in funds charging 1%, while those charging 2% per annum dropped significantly. However, performance fees did see some changes in approach. Approximately 87.0% of funds charge a performance fee of 20%, denoting a 6% decrease from 2017, with 75% of managers employing a cash plus hurdle. Notably, managers charging a 15% performance fee doubled to 10.9% in 2018 with more managers considering a hard hurdle. There has also been a rise in ‘other’ performance fee hurdle rates not previously viewed as ‘traditional’ hurdle rates. In 2016, almost no funds instituted a cap on performance. However, in 2017, 17.1% of funds reported having a cap on performance fees. Based on the 39 hedge fund managers that responded to this question in the survey, the number of funds that apply a cap on performance fees dropped to 5.6% for the 2018 calendar year. Pressures around fees, especially when performance is negative, coincided with the new regulation requiring hedge funds to disclose their Total Expense Ratios (TER). Respondents cited fee pressures as one of the main headwinds facing the industry during the period. Mathole says Novare remained optimistic about growth prospects for the industry as hedge funds remain an effective alternative tool for risk mitigation and portfolio diversification. “Last year was undoubtedly difficult for the industry. However, looking ahead, survey participants expect flows to increase into 2019.” Orbis will be presenting at the Allan Gray Investment Summit in Johannesburg and Cape Town in July 2019. To book tickets, visit www.investmentsummit.co.za
Kagiso Mathole, Portfolio Manager, Novare
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INVESTING
31 October 2019
Smart ways to invest tax-free
HAYLEY BROWN Executive: Business Development, PPS Investments
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Remains a popular choice Research conducted by PPS Investments shows that around 87% of financial advisers recommend tax-free investments to their clients. It appears that investors are typically using tax-free investments as part of their overall financial planning strategy. An encouraging finding is that the majority are using tax-free as a vehicle to save towards their retirement. Tax-free investments in a nutshell The second most common goal in this category is The key characteristics of tax-free investing for their children, while investments are the following: another 25% are investing towards • Tax-free growth – you do not pay other goals, such as a house or a AROUND 87% any income tax, dividends tax or holiday. OF FINANCIAL capital gains tax on the returns The most popular option among • You can contribute up to financial advisers is to recommend ADVISERS R33 000 per tax year for each that clients invest in equity or RECOMMEND individual across one or more multi-asset high-equity unit trust TAX-FREE tax-free account(s). Breaching the funds, which correlates to the contribution limit leads to a 40% INVESTMENTS TO savings goal of retirement. Gaining tax penalty on the excess funds offshore exposure through tax-free THEIR CLIENTS • You can transfer your tax-free investments has also seemed to gain investments without affecting traction in the market. your annual limit • You can contribute up to a maximum of R500 000 Using tax-free investments during your lifetime to build wealth • You’ll have unrestricted access to your investment Like discretionary investments, tax-free investments at any time. Keep in mind that any withdrawals are not required to adhere to Regulation 28. This cannot be replenished, and unused limits fall away allows investors to put money into unit trusts that • There are no initial fees, exit penalties or invest offshore, as well as having a high exposure to administration fees with tax-free investment growth assets. This can be used as a tax-efficient way accounts. of mitigating the restrictions of Regulation 28 within your retirement annuity. ax-free investments were launched in 2015 as part of a Government initiative to stimulate the dismal savings levels in South Africa. Four years later, has the uptake of these investments aligned to their well-intentioned purpose? Here is a snapshot of insights from financial advisers around tax-free investment usage in the industry.
NIKOLAY MLADENOV Portfolio Manager, Ashburton Investments
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here is no universal recipe as to what your portfolio should look like in order to achieve your investment goals. Asset allocation should be based on the individual’s needs in terms of investment horizon, how much money is needed, and risk tolerance. The ability to take risks is largely a function of time, and the longer the time horizon, the more likely a riskier portfolio will be able to weather the occasional market turbulence associated with riskier investments. The objective is to target higher equity returns in the form of capital appreciation with less emphasis on income generation. The reality is that over longer time horizons, returns associated with equities historically have outperformed those of fixed income and money market instruments. So, investors looking for long-term investments with growth potential should consider offshore investments when diversifying their portfolio.
Family limits South Africans of all ages are eligible to invest tax free. For many, one of the disadvantages of tax-free investing is the annual limit of R33 000 per individual per tax year. One way to maximise the allowance is to look at the approach from a consolidated view, in that a family of four could invest up to R2m (4 x R500 000) during their lifetime, or R132 000 for the year. However, it is important to weigh up the cost benefit of utilising your child’s tax-free allowance during the years when they are not liable to pay tax. Once breached, your child will not be able to replenish his/her lifetime contribution limit. Best poised over the long term While tax-free vehicles offer tax benefits over any time horizon, the net result over the longer term ensures that you gain from the compounding effect and more time in the market. A further tax benefit can be derived by using your tax-free investment to supplement your income once retired. Withdrawals from your tax-free investment are not taxed and thus can lower your overall tax burden when combined with your living annuity income.
A place for offshore equity ETFs in portfolio construction
However, due to their inherent risks, investments in offshore equities are considered riskier relative to some other asset classes, but this does not make them less relevant in an asset allocation process. Depending on the time horizon and risk appetite, allocation to offshore equities can make a significant difference in portfolio returns. To illustrate by way of example, an investment in the Ashburton Global 1200 Equity ETF over a one year period (August 2018 - July 2019) would have generated a total return of 10.29%. Over the same period, SA equities went up by a mere 2.19%, SA government bonds returned 7.65%, and short-term money market paper generated a positive 7.33%. Some allocation to the offshore ETF during this period would have enhanced the overall portfolio return made up of local assets only. During this period, the rand weakened significantly
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against the US dollar and a basket of other currencies, and the US equity markets outperformed their global counterparts. Of course, the opposite can be observed in times of rand strength and relative outperformance of local assets. Therefore, it is important to consider a well-diversified portfolio strategy and carefully select each building block with their specific risk/reward characteristics in mind. As the saying goes, don’t put all your eggs in one basket. About the Ashburton Global 1200 Equity Exchange Traded Fund The Ashburton Global 1200 Equity ETF was launched in October 2017 and it covers the largest 1 200 stocks, representing 70% of the global market cap. The fund is suitable for investors seeking offshore equity exposure to developed and emerging equity markets. It is designed to track the
performance of the S&P Global 1200 Composite Index, and it invests in the underlying equities of the index in their respective weightings on an optimised basis. By investing in the Ashburton Global 1200 Equity ETF, investors get exposure to emerging and developed markets across the US, Eurozone, Japan, Australia, Canada and Latin America, as well as the currency fluctuations of the rand and the respective regional currencies. Investors also get cost-efficient access to the performance of the largest technology companies such as Apple, Microsoft, Amazon etc. through a single rand-denominated investment, without making use of their offshore allowance. The ETF is traded on the Johannesburg Stock Exchange under the ticker ASHGEQ and is also accessible through a number of Linked Investment Service Platforms (LISPs).
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FEATURE RETIREMENT
31 October 2019
NASHALIN PORTRAG Head: FundsAtWork, Momentum Corporate
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t is a harsh reality that many South Africans face a bleak retirement because they are either not saving enough, cash out their retirement savings when changing jobs or they are following an inappropriate investment strategy. To make matters worse, unexpected life events such as illness and disability or the death of a spouse can further compromise their lifestyle during retirement. The impact of disability and critical illness Disability is one of the major influencers that negatively impact retirement outcome. Momentum Corporate’s claims analysis reveals that disability in South Africa is rising at an alarming rate, with cancer and psychiatric claims leading across all sectors and types of disability cover. We’ve seen an overall increase in cancer claims of 48% since 2012, representing 15% of all disability benefit claims in 2018. Employees younger than 40 years make up 21% of all claims. The costs associated with treatment for cancer continues to rise, which estimates the typical medical costs for treatment to be as high as R1m. Over and above these medical costs, which may normally be covered to some extent by one’s
Make clients’ employees aware of potential hurdles on the journey to retirement medical scheme, there are also many non-medicalrelated or lifestyle expenses associated with cancer, such as transport cost to chemotherapy, home nursing care and equipment, and certain lifestyle adjustment expenses. Members of retirement funds may therefore be tempted to decrease their retirement contribution rates or pensionable salaries in an attempt to increase their take-home pay to cover their normal expenses as well as these non-medical costs. This will seriously impact their retirement outcomes.
cash out their preservation fund savings to cover their expenses.
An integrated and comprehensive approach can help The impact of pre-retirement risk factors on retirement outcomes highlights the important role that financial advisers play in ensuring their clients’ employees’ retirement planning stays on track despite unforeseen life events. Partnering with the right umbrella fund will promote a holistic approach to financial planning that will reduce the inherent conflict between saving The impact of a partner’s death for retirement and making sure members’ insurance The death of a life partner or spouse can have a cover is at the right level for their needs. severe impact on the retirement outcomes of the A highly integrated and flexible umbrella fund surviving partner. Due to the loss of an additional income, the cost of a funeral and other related costs, solution that is coupled with a rewards programme encourages a healthy lifestyle that leads to improved they may find themselves under severe cashflow pressure if their partner was not adequately covered. physical health, reduces the risk of disability and critical illness, reduces medical expenses and Besides most South Africans being underinsured and only able to replace approximately 38% of their insurance costs, and will generate financial returns that can be channelled towards retirement savings. salaries in the event of death, many do not take out With the right umbrella fund, all parts work spouse’s life cover. together to fill the financial gaps that are associated This insurance gap may force members to dip with pre-retirement risk factors such as death, into their savings or to reduce their retirement disability and critical illness. contributions or pensionable salaries, and even
You can achieve above-inflation returns and be cautious
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isk-averse investors, including those approaching or in retirement, tend to shy away from equities due to their volatile performance, in favour of cash. But this has implications for the long-term sustainability of their investments. Bank savings accounts offer returns ranging from less than 1% to a potential 9% if you’re willing to lock in your money for an agreed period. The median return is barely keeping pace with the current inflation rate, which was 4.3% year on year in August 2019, up from 4.0% in July. Consequently, the purchasing power of your capital, when saving in a bank account, will most likely be eroded by inflation over time. “Equities are known to outperform inflation over the long term. However, with the potential for greater returns comes the increased risk of capital loss, as well as increased short-term volatility,” say Radhesen Naidoo and Stephan Bernard of Allan Gray. Naidoo states that generally equity funds, or balanced funds with equities, meet the needs of long-term investors and can withstand volatility, but they must be balanced with the investor’s
personal circumstances. For the more risk-averse investor, one option to consider is a ‘defensive’ or ‘stable’ unit trust from the Multi Asset - Low Equity unit trust category of the Association for Savings and Investment South Africa (ASISA). These unit trusts can invest in a full range of assets. However, they are restricted to a maximum equity exposure of 40%, and 25% for property. As a result, they usually display lower short-term volatility and aim to provide long-term capital growth. These unit trusts are a good option for investors seeking inflationbeating returns with less volatility. Within this category, the asset mix for any particular unit trust will depend on the unit trust’s specific mandate and the investment managers’ opinions on where they’re finding value at the time. According to Bernard, the Allan Gray Stable Fund is one example of a lower equity unit trust available in ASISA’s Multi Asset - Low Equity category. It is suitable for investors who are risk averse and require capital stability, but seek above-inflation returns over the long term. The Fund’s net equity
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exposure was as low as 12.4% in January 2010. However, compared to its average of 25.1%, the Fund currently holds a relatively high 35.8% (as at 31 August 2019). “Our portfolio managers hand-pick the Stable Fund’s assets. The Fund is built from the bottom up, which means every asset is compared to cash and the risk/reward profile is examined. We focus on how much an asset is likely to return compared to cash,” he explains. “As the prices of our favoured shares move further below what we believe is their true value, the risk of permanent capital loss decreases. Therefore, we may increase the Fund’s exposure to equities when we are able to identify more cheap shares through our bottom-up investment process, and vice versa.” The Stable Fund also invests a portion of its assets offshore, which adds the benefit of diversification and protects investors against potential rand weakness. Says Naidoo, “We recognise that a higher exposure to equities and foreign assets may increase short-term volatility. If we measure risk in terms of shortterm return volatility, risk may appear
higher than in the past. However, measuring risk in terms of protecting your investment against long-term loss of purchasing power, it is quite the opposite, in our view.” Despite the consensus that one cannot beat inflation without exposure to growth assets, it is comforting to know that there is a middle ground for investors who aren’t comfortable with too much short-term volatility.
Radhesen Naidoo, Business Analyst, Allan Gray
Stephan Bernard, Business Analyst, Allan Gray
DSY_DBI_MoneyMarketing_PrintAd_85x305mm_curves.pdf
31 October 2019
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SHORT-TERM INSURANCE SUPPLEMENT
THE TALE OF THE TAIL: CLAIMS-MADE MEDICAL MALPRACTICE INSURANCE
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edical malpractice insurance is a special type of professional indemnity insurance – a form of liability insurance. It provides insurance for healthcare professionals and healthcare facility operators for their legal liability to a third party, for losses proximately caused by their negligence in the conduct of their professional business. Like any liability insurance, it does not absolve the practitioner or facility of their liability to the third party. It is, however, a way of shifting the financial burden of any liability subject to the limit of indemnity and payment of any deductible. Traditionally, medical malpractice cover has been provided through a claims-made policy, which covers claims, as defined, arising after the start and retroactive dates of the policy in force, first brought against the insured while the policy is in force. Various claims-made policies may provide for extended reporting periods and deeming provisions where an event is first notified while the policy is in force, but the claim is made against the insured after the policy is ended. There is also available occurrence-based cover, which provides cover for events that occur during the period of insurance, even though the claim is made after the end of the insurance. An occurrence-based policy protects against claims arising from incidents occurring while the policy is in force, no matter when they are reported, even if the claim occurs years after the end of the insurance. Under a claims-made policy, the insured is protected for incidents, which both occur, and are reported, while the policy is in force. Whether the policy will respond to a claim will be informed by the terms of the policy, the retroactive date, any notification obligations of the insured to the insurer, any deeming provisions and any extended notification periods. Medical malpractice claims are usually made by a patient (or their dependants) against the healthcare practitioner or healthcare facility sometime after the treatment is provided and an adverse health event occurs. The ‘tail’ refers to the time period between the adverse event occurring and it being reported, and a medical malpractice claim being made. There may be a delay between the adverse incident occurring and the patient becoming aware that they have suffered harm and have a claim. Adult patients have three years within which to institute a claim. The running of the three years commences on the date on which the patient becomes aware that they have suffered harm and are aware of the identity of their debtor. It is rare that claims are made soon after the adverse event occurs. To protect the insured under a claimsmade policy, this delay is dealt with by way of ‘tail’ cover or ‘run-off ’ cover – or under
extended reporting provisions in the event of the insured’s death, permanent retirement, immigration or ceasing to work due to permanent ailment or ceasing to practice as a healthcare practitioner. An extended reporting period usually may be obtained without payment of additional premiums. Where there is tail cover, there is the benefit of protection in perpetuity for claims arising from that particular period of practice without the need to acquire, with or without an additional charge, the run-off cover. It is possible to move between claims-made insurers without purchasing a tail where the new insurer will take over the predecessor’s insurance responsibility for writing the policy retroactively over the previous insurer. It picks up the retroactive date offered by the previous insurers. Where the new insurers provide protection for a former practice, it is known as nose coverage. Tail coverage refers to medical malpractice coverage for a claim that may arise a given number of years after that practitioner discontinues the medical malpractice insurance policy. The retroactive date is the date from which the insured held uninterrupted indemnity insurance, even if the insured has changed insurers in that time, or from the date where the insurer has agreed to cover the insured. Any claim that arises prior to the retroactive date would not be covered. The retroactive date would normally be from the first day the healthcare practitioner or facility started practicing or, if the insurer has changed and there is an existing professional indemnity policy in place, the date that the existing policy started. The start date of the policy is the inception date, but work done by the healthcare practitioner/facility before the inception date of the policy with the insurer, back to the first date of the retroactive period, would be included under the cover. Under a claims-made policy, the retroactive date serves to exclude claims for events which occur prior to that date, even if the claim is first made during the policy period and may be used to eliminate coverage for events that give rise to claims in the future and to prevent obsolete claims which arise from events following the past. Where a claims-made policy is renewed or insurers change, it is important to preserve the policy’s original retroactive date. Tail coverage does not cover the healthcare practitioner or facility for active practice but for events that occurred while the policy, since discontinued, was active. It is usually a built-in feature of occurrence-based policies.
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Donald Dinnie, Director, Norton Rose Fulbright South Africa Inc
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SHORT-TERM INSURANCE SUPPLEMENT
ROSS SIBBALD Commercial Director, Striata Africa
INSURERS NEED TO EMBRACE CUSTOMER COMMUNICATION
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raditionally, insurers have lagged behind other industries when it comes to customer communication. If customers did receive communications from their insurer, it would most likely be after they’d filed a claim, or if it was time to renew their policy. But in a world where customers are used to other companies placing them at the centre of their experience, that’s no longer viable. If established insurers want to avoid being usurped by new, disruptive players, they need to embrace customer communication. Importantly, that messaging needs to be highly personalised and tailored to each customer. Fortunately, technology means that it’s possible to provide that kind of personalisation in a way that’s automated and, more importantly, effective. The need for improvement The insurance industry’s issues with customer communication aren’t just related to the infrequency. Stats show that more than 90% of insurers worldwide do not communicate with their customers even once a year and that 20% to 40% of their customer base will not receive a single communication all year. Even when insurers send an appropriate amount of communication, they often send out the wrong kind of messaging. According to Oliver Borner, principal business solutions manager for global customer intelligence at SAS, “The typical insurer’s customer communications are 90% to 99% sales-focused and 1% to 10% service-focused, but the goal should be 70% of communications directed at serving the customer and building trust, and only 30% aimed at sales.” With new, disruptive players – who understand the need for customer communication – entering the insurance space, business as usual simply isn’t an option for traditional insurers. The power of personalisation The most important step insurers can take when it comes to improving customer communication is using the considerable data at their disposal to ensure that messages are as personalised as possible.
MESSAGING NEEDS TO BE HIGHLY PERSONALISED
That doesn’t just mean knowing a customer’s name, or what products are best suited to their needs. It also means being able to communicate with them on the channels they’re most comfortable with and that they can access at any time. Insurance customers want to interact at a time and via a channel of their preference. They require real value from the interactions they have with their insurers. They expect both marketing and services to be highly personalised, from content to pricing. Communication must be seamlessly crosschannel, consistent and delivered in real-time. Embracing automation Of course, this kind of personalised communication wouldn’t be viable if it had to be done manually. Automation, enhanced by artificial intelligence (AI) and machine learning (ML), allows even the biggest insurers to provide their customers with personalised, relevant communication. This combination of automation and personalisation has the chance to fundamentally change the way insurance works. It’s already possible, for example, to have an automated buying experience, using chatbots that can pull on customers’ geographic and social data for personalised interactions. Carriers will also allow users to customise coverage for specific items and events (known as on-demand insurance). According to McKinsey, automated customer service apps that handle most policyholder interactions through voice and text will ensure that claims are resolved in minutes rather than days. People-centred insurance Ultimately, combining personalisation with automation results in insurers that aren’t just customer-centric, but people-centric. Insurers who embrace this approach must, however, commit themselves to a cycle of continuous interaction with constant adaptation. Those who get it right stand the chance to realise serious benefits, turning customer experience into a significant competitive advantage. As Commercial Director of Striata Africa, Ross Sibbald is focused on leveraging the power of digital communication to achieve the desired results for Striata clients. Ross is also responsible for guiding and managing client retention and growth, defining strategy and execution plans, resourcing and incentivising appropriately and managing performance against business goals.
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31 October 2019
GROWING LIABILITY RISKS THREATEN BUSINESS SUSTAINABILITY
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he liability risks that South African businesses face as a result of possible product defects are increasing by orders of magnitude with each passing year, and SHA’s Specialist Risk Review has revealed that as many as 21% of businesses have been faced with a product liability claim in the past five years. Nevertheless, many businesses are still not applying appropriate risk management measures against possible liabilities. This is according to Manisha Chiman Executive Head: Liability Underwriting at SHA Specialist Underwriters, who says the market is becoming increasingly litigious, and that claim amounts have steadily increased in recent years. “The advent of the Consumer Protection Act and the rise of social media have had a particularly significant effect on this trend. Customers are not only becoming more aware of their rights in the event that they suffer damages, but social media platforms have enabled individuals to connect and become involved in class-action suits at an unprecedented rate.” Looking at examples from SHA’s own claim data, Chiman says that product liability claims have shot up from an average of R1.65m per claim in 2016, to around R14.25m in 2018. “During that same time span, personal injury claims have grown from an average of R172 600 per claim in 2016, to R270 690 in 2018.” With this in mind, Chiman says that it is absolutely vital for businesses to make sure that their liability risks are adequately managed. “A single liability incident has the potential to cripple a company, which is why having adequate insurance cover in place is critically important. In addition to broad-form liability cover, product liability cover (which only an estimated 30% of businesses currently have) is crucial as well.” She adds that businesses have an obligation to mitigate their risk of incurring liabilities as much as possible, by putting the correct procedures in place within their organisations. “SHA’s research has found that just 44% of businesses conduct their own quality-control audits and only 43% ensure that their supplier and client risks are managed through adequately worded contracts, and even fewer (36%) conduct due diligence to confirm that their suppliers have sufficient liability cover. These measures are absolutely vital in protecting one’s business interests and insurers are increasingly going to insist on seeing proof that their policyholders are doing that.” Having a product recall strategy is another often neglected element of risk management that insurers will increasingly focus on. According to Chiman, it is still far too common to see businesses with no recall strategy in place, with the prevailing sentiment being that one only needs to think about it when it happens. However, when there is a major product defect that could cause litigation in future, recalls need to be put into effect as rapidly as possible, leaving no time to develop a plan. “Liability is currently the biggest risk to the long-term survival of any business, and having a single insurance policy in place to cover the growing risk landscape is simply not good enough anymore. Business owners need to have the conversation of broad-form liability with their broker on a regular basis, Manisha Chiman, and ensure that all necessary Executive Head: Liability risk management measures Underwriting, are effectively implemented,” SHA Specialist Chiman says. Underwriters
SHORT-TERM INSURANCE SUPPLEMENT
31 October 2019
DEX MACHIDA Senior Manager: Insuretech Management Consulting, KPMG
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ew mobility models like ride hailing will impact personal car ownership. Ride hailing services like Uber and Taxify processed over two million rides between them in South Africa last year. The average SA consumer is estimated to save R14 000 annually by utilising mobility services like Uber. Insurance plays a critical role in enabling both consumers and corporations to engage with the mobility ecosystem. It is vital that insurers recognise the needs within the market and transform to cater for the shift from asset to access-based mobility. Despite the expected decline in personal ownership, the need for personal mobility remains and will be satisfied by other service providers. It is incumbent on financial services companies to identify these segments and design appropriate products. Fewer insurable cars and lower margins are expected from increased competition for insurers competing for a declining insurable pool. Also, the declining use of current vehicles will negatively impact newer insurance models like usagebased insurance. However, there is potential for developing alternative insurance models,
THE IMPLICATIONS OF NEW MOBILITY MODELS ON INSURANCE especially those that leverage technology to determine risks at a granular and personal level. Although the use of telematics for individual driver behaviour is well known, it is also possible to create specific profiles of segments with similar driving characteristics. Telematics can measure the length of time spent in different risk-rated areas – hence be able to measure risk more accurately at a granular level. These risks are dynamically adjusted and reflected in pricing. Drivers will now be able to decrease their premiums by changing their driving behaviour – which leads to more accurate risk rating than generic actuarial calculations. A natural consequence is the ability to transparently calculate month-to-date premiums in real time; which provides an additional incentive to modify driver behaviour. Driver-assisted technologies are expected to reduce the number and severity of accidents – which may also drive down premiums. These cars are sensor-rich and have detecting abilities that are superior to the average human and it is expected that there will be a significant reduction in accidents. Together with increased ride-hailing
trends and shared ownership, it is inevitable that premiums will decrease, presenting a challenge for insurers. This may be counterbalanced by insurance companies using technology to drive down costs of assessment, e.g. use of drones for assessing accident damage. It follows then that with reduced personal car ownership, cars used for ride hailing will be on the road for a lot longer every day, creating the need for preventing and estimating the risk of accident, breakdowns and theft. The pricing of insurance for automated vehicles is challenging. The moral debate of who is ultimately responsible for accidents and collateral damage is complex – how does one apportion or attribute negligence to an autonomous vehicle, which effectively is the equivalent of a robot? Or is it shared between the owner, the operator and the manufacturer of the vehicle itself? New models will need to be developed that move away from the traditional notion of personal liability. This is best described as a scenario where two identical autonomous vehicles crash into each other, due to a malfunction in one of them. A possible scenario would be a no-fault incident where each ‘driver’ is responsible for their own damages.
In an uncertain financial climate, our client-centric approach of developing strong relationships with partners and clients, while boasting a deep understanding of their business, helps us to create unique solutions. With expertise in Alternative Risk Finance, UMA’s and Alternative Distribution / Affinity Solutions, it’s little wonder why so many companies are using us for their insurance solutions.
PARTNER WITH AN INSURER YOU CAN TRUST.
011 268 6490 | www.centriq.co.za Centriq’s insurance subsidiaries are authorised financial services providers
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SHORT-TERM INSURANCE SUPPLEMENT
31 October 2019
EVERYTHING IN ITS PLACE: TECHNOLOGY VS THE HUMAN TOUCH
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hen Unimate, the world’s first programmable robot, was sold to General Motors in the early 1960s to handle hot metal, a world swept up in the Space Race fell hard for the idea that a robot could be used whenever and wherever the task was too dangerous for a person. The romance quickly faded; in fact, the more dangerous a situation, the more likely you were to need a person calling the shots. Sixty years on and we find ourselves in a similar place. We have the most phenomenal automation and artificial intelligence technology available to us: from chatbots to robotic surgeons to machines writing their own languages. But there are still some very real limits to what technology can do, and if the likes of Amazon are publicly admitting to having problems with their own artificial intelligence implementations, how on earth does an ordinary South African small Innosys ad.pdf
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business decide what calls for smart technology and when to leave things in the hands of a good old-fashioned human? • Value, not cost. Just because technology can reduce the cost of a business process, doesn’t mean that it will necessarily improve the process or the result. If having a person rather than a bot means you will produce better value for the customer, and ultimately your business, have the person. • If a customer is upset, the robot can’t pass the tissues. When Honda tasked its ASIMO robot with leading museum tours, it failed dismally because it wasn’t able to differentiate between people raising their hands to ask a question and people waving hello to it. Technology is bad at correctly handling abstract concepts and emotions. In any scenario where your customer is likely to be 16:56
upset (complaints or claims), giving immediate and easy access to a welltrained person will do far more for a positive customer experience than a prompt auto-reply purporting to be sorry for their loss. • Fifty shades of (decision-making) grey. As good as software is at handling complexity, the sorts of systems we work with in the business environment are not yet adept at understanding nuance. Situations that ask for equal parts rule book and judgement, like the underwriting of large and nonstandard risks, are best left to the professionals for now. • Meet or manage expectations to exceed them. I don’t mind chatting to a service bot, I don’t mind if it’s been given a human persona, but I do like to know it’s not a real person on the other side of the messenger box when I start the conversation. If your customer would otherwise be
expecting to interact with a person and you’ve introduced technology, or even vice versa, make sure to set their expectations correctly, and in advance. Zero value is achieved for anyone if the customer abandons an interaction. You don’t need super intelligence, artificial or otherwise, to spot the theme in the points above: your customer. If you keep focus on providing them with the best possible value, and the most positive experience, choosing between humans and machines becomes much easier.
Claire Wood, Managing Director, Innosys
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FEATURE RETIREMENT
31 October 2019
JOHN ANDERSON Head of Strategic Development, Alexander Forbes Group
New requirements for default investment strategies Regulations that require all funds to have default investment strategies in place came into effect on 1 March 2019. The default investment portfolio(s) should now take a number of key principles into account. Among others, the regulations state the following: “… the design of the default investment portfolio, … takes account, as far as is reasonable, of the likely characteristics and needs of that category of members whose retirement savings are or will be invested in the default investment portfolio…” In other words, the default investment strategies should take into account as much information as possible relating to the members but within practical boundaries. Default investment strategies in the past Until now, most funds have only taken the age of a member into account in constructing a default investment strategy. This approach was first introduced in the 1990s and has since become the most popular form of default investment strategy for retirement funds. Such approaches are designed for the average member. The typical approach assumes a target income of 75% of final salary at retirement,
Personalised retirement income strategies as defaults – moving with the times irrespective of the fund’s default contribution rate. It also assumes that males and females live as long, and that all members contribute for a full 40 years to retirement. The approach is implemented with a static asset allocation as well as a de-risking portfolio, which typically does not respond to changes in the cost of securing the desired default annuity after retirement. Personalised investment strategies However, times have changed. More sophisticated techniques and administration systems have become available, allowing more refined approaches to be adopted. Today, it’s possible to provide members of retirement funds with a more personalised investment strategy as the default. The benefit of a more personalised approach is that it focuses on each individual’s income goals. With the fund’s chosen default annuity strategy, it constructs a personalised investment portfolio for each member, based on data readily available from their retirement fund administrator’s data. The individual portfolio constructed has the highest likelihood of meeting the required income goal, taking into account a person’s age, gender, market conditions, the cost of securing the chosen default annuity, accumulated savings and expected future savings. It therefore represents a significant enhancement
to the traditional life-stage approach, where only an individual’s age is taken into account in structuring a default investment strategy. The communication provided to a member is also more personalised and easily understood, showing what income they are on track for, as well as the various options available to improve their income. In implementing the individualised approach, research – as well as our own analysis using South African data – demonstrates that individuals using this approach are expected to be more likely to meet their income goals. Benefits of a personalised approach Where the approach has been implemented, we have observed an increase in member engagement and positive behaviour in the form of increased saving for retirement. The approach used by Alexander Forbes has been applied in other jurisdictions for over a decade, weathered the great recession well, and was developed (and continues to be endorsed) by Professor Robert Merton, a Nobel Laureate. It has been applied successfully using different distribution models, in various geographies, each with its own regulatory regime. We believe that these approaches are a step change for the industry as a whole, resulting in improved retirement outcomes.
What the ASISA RSC Disclosure Standard means for employers and trustees
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he ASISA Retirement Savings Cost (RSC) Disclosure Standard came into effect on 1 March 2019 and, as from the beginning of last month, ASISA members who sponsor commercial umbrella funds have to present a comprehensive and standardised cost disclosure at the point of sale that illustrates all charges and costs over four investment timeframes. Further disclosure is required to illustrate the impact of all charges and costs on individual members, assuming different salaries and different retirement savings balances. The new disclosure standard aims to improve the disclosure of charges and costs and facilitate comparison of umbrella funds on a like-for-like basis, with all charges and costs expressed as a percentage of assets. “This is excellent news for employers and for employee benefit consultants, who are expected to regularly review their clients’ umbrella fund arrangements,” says Duane Naicker, Head of Sygnia Umbrella Retirement Funds. This disclosure is only relevant to employers and trustees and not for members. ASISA has, however,
developed a standardised member-level cost disclosure for implementation from 1 October 2020. The new disclosure requires umbrella funds to be completely transparent about all charges and costs. From 1 September 2019, umbrella funds have to disclose the following four charges to prospective participating employers – individually and in aggregate – over four periods: Investment management charges: The new disclosure standard requires the total investment cost (TIC) to be disclosed, which includes the investment management fee, portfolio expenses and transaction costs. Employers and consultants will now have a complete picture of the total charges incurred in managing investment portfolios. Advice charges: Consultants usually charge a payroll-based or asset-based fee for their advice. All such charges (excluding commission on insured risk benefits) must be included in the RSC disclosure. Administration charges: Umbrella fund sponsors and administrators typically charge a fee for rendering administration services. These charges must be reflected separately
as a percentage of assets in the RSC disclosure. Other charges: Peripheral charges associated with the regulatory compliance and governance of retirement funds must also be brought to light under the new cost disclosure. Fees matter “The RSC Disclosure Standard is a necessary and welcome initiative for the financial services sector, and particularly for the umbrella funds industry. More disclosure will lead to improved awareness and better interrogation of charges and costs, resulting in lower charges and costs – either through more effective fee negotiations or by switching to an umbrella fund that makes more financial sense,” Naicker adds. Consultants can now make recommendations to their clients based on a standardised assessment of charges and costs. What should employers and trustees do? • Spend time with your umbrella fund providers and understand every charge and cost. If you are not already,
become a product expert so that you can strip away fancy marketing to reveal important detail • Understand the relationship between investment management fees, portfolio expenses and transaction costs. Compare Total Investment Charges (TICs), not only investment management fees. Fortunately, the new disclosure ensures this • The RSC disclosure isolates advice fees from other charges and costs, and consultants (much like umbrella fund providers and administrators) must therefore be equipped to explain their value-add relative to the fees they charge • Understand how umbrella fund providers calculate charges and costs over the various periods – focus on the explanatory notes, where important details will be disclosed. “This new industry standard is a massive leap forward for the consumer and will drive transparency around hidden fees in the financial services sector, and charges and costs should now be one of the easiest factors to compare across competing umbrella retirement funds. This will also allow employers, boards of trustees and employee benefit consultants to spend more time comparing other areas of value across umbrella funds to identify the best offering for their members,” says Naicker.
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FEATURE TECHNOLOGY
31 October 2019
FRANCOIS DU TOIT, CFP® Francois du Toit Consulting and Technology
Using the right digital tools can enhance a financial advice practice
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or an adviser’s business to be truly others need time to consider. It is free successful, it needs to deliver to trial and then cheap to run thereafter, consistent, valued-added services and allows you to shortcut the time it to clients while maintaining valuable, takes to build a trusted relationship long-term relationships with them. between you and your clients.” For wealth managers looking for Other software options include Slack new ways to introduce efficiencies for effective team communication, into their operating model and who Less Annoying CRM to help store, are willing to put in the care and effort organise and act on all of the required to develop these deep, longinformation you have about your term relationships, there are many clients, and Box, which you can use digital tools that can assist. to manage content and share files. For “Choosing the right technology productivity improvements and task for your practice can tracking, you could try make a huge difference Monday.com, which offers CHOOSING to the efficiency and endless possibilities for cost of running your configuration that suits THE RIGHT business,” explains your business. For larger TECHNOLOGY Caroline Naylor-Renn, businesses, a combination FOR YOUR Chief Operating of a tracking system such Officer at investment PRACTICE CAN as Confluence and Jira platform INN8. might be right for you. MAKE A HUGE “There is a wide Look out for solutions that range of solutions offer integration into other DIFFERENCE available in the systems you may already South African market, from financial be using, as having your systems ‘talk planning tools and CRM solutions to to each other’ will make your life easier aggregation engines for commission in the long run. statements that can help the adviser It makes sense to start small, take run their business. up a free trial on a simple system “One downfall is that they don’t and see how it works for you before often integrate with each other and expending significant time and money so can require a lot of re-keying of on a complicated system that may be data and swivel-chairing between overkill for your needs. applications.” If you’re a wealth manager of the There can also be issues around future, you’re already thinking outside costs and complexity as is the case the box, and you understand that with many of the bigger software the ability to adapt is crucial to the applications. However, all you need to growth of any business. Adopting new get started is something simple that technology tools and implementing provides basic functionality for good them in innovative ways will prove value for money. invaluable to your digital (r)evolution. “For example, I love Crystal Knows,” Naylor-Renn says. “For anyone unsure about how to effectively communicate with clients, it has the ability to assess a client’s personality based on their online presence and allows an adviser to tailor their communication style to fit them. Some clients like lots of detail, Caroline Naylor-Renn, others prefer high-level bullet points, Chief Operating Officer, some make quick decisions, while INN8
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Determine your needs before implementing technology
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inancial advice and wealth management firms dream of one system that can do and manage everything their business needs – but no such system exists. Instead, advisers mostly choose a system based either on a recommendation from their peers or on price. This kind of approach often leads to advisers trying to adapt their practice to fit the system, i.e. changing the way they work and causing much frustration in the process – or they simply do not use all the system’s functionality to its fullest extent. While some advisers embark on a journey to design and develop their own software, this isn’t their core business, resulting in many of these projects being abandoned. Some advisers have the luxury to determine which system covers most of their needs and then integrate it with other systems through custom development, adding additional cost and complexity to the mix. Advisers can – to suit their unique needs and way of work – create their own technology stack, i.e. two or more pieces of software that work together seamlessly. Each piece of software in the stack is best-of-breed and fulfils a specialised function. It is, however, vital for every adviser and every advice practice to determine their needs before implementing technology. Technology must fit the practice. It must enable the practice. It must be an investment, not a cost. When it comes to financial planning, there is a belief that technology will save the adviser time. A recent study undertaken by US-based Kitces Research (The Kitces Report Volume 2, 2018) determined that technology does not speed up the financial planning process. What it does do, however, is allow for more in-depth and complex analysis, helping advisers “go deeper into planning, not faster through it”. The study further found that the aspect that has the biggest impact on the time it takes to do planning, is financial planning training. It does not have much to do with the software itself. In South Africa we have found the same set of circumstances. We are fortunate to work with all the major homegrown financial planning and CRM systems, and in our sessions it becomes clear that there is a gap between TECHNOLOGY using the system and the financial planning knowledge and skills required to effectively MUST BE AN understand and interpret such a system and INVESTMENT, its outputs. Learning ‘what goes where’ in the system can only take you so far. NOT A COST It is vital that all users of financial planning tools and software become proficient in financial planning, which includes income tax, capital gains tax, estate planning, cash-flow management, investment principles and more. Another aspect often overlooked is that of client engagement. The biggest challenge is the output from these systems. They are mostly built and designed for advisers and even those systems producing impressive reports are often so technical that they are beyond clients’ understanding. We still see so many advisers having to run through reports with clients – in some instances ‘losing’ the client from the very first page. The technical language is no indication of the value delivered by an adviser. A better measure would be how much a client takes part in the conversation regarding their financial planning and what they ask to retain at the end of the meeting.
FEATURE TECHNOLOGY
31 October 2019
KOBUS BARNARD Managing Director, Allegiance Consulting
Power up your financial game with technology
What if you could read your client’s mind? Can you imagine your advantage if you knew what your client was thinking? Can you imagine the powerful connection you’ll be able to make if you could just peek into the thoughts of your client? Well, you can. There’s a secret tip you can apply to take a peek and tap into a client’s deepest dreams and desires. The gamechanger When it comes to systems, advisers have choice. The right technology and system can have a significant impact on the business of being an adviser. The one thing advisers underestimate is how much of an impact the right system can have on their business. So, what changes the game? Comparing apples with diamonds Adviser A sits next to Jabu. They look at how Jabu’s plan can work, but the discussion is very different. “Jabu, what do you want to do with your life?” asks Adviser A. Jabu is slightly taken aback. Then they start talking about his hopes and dreams. They talk about the life that Jabu wants to live. Jabu is interested, gets excited, and starts to engage. He’s talking about what inspires him, something that 2019/09/11 12:36:28 moves himAvalon_print.pdf on a deeply1 emotional level. He dreams
of funding his kid’s education, visiting New York, climbing Kilimanjaro, and a range of other goals and experiences. As his plan takes form in front of him, something magical happens. Jabu is now fully engaged, co-creating his financial plan with the guidance of Adviser A. Jabu starts to engage with what-ifs, seeing the trade-offs of each of his financial decisions. His plan comes alive. It’s Jabu’s plan, not the adviser’s plan. Jabu is the author of his own destiny. He’s taking co-responsibility for his journey. Adviser A sells products, but it was never the focus of the discussion. It was incidental. Avalon empowers the adviser We redesigned Avalon to facilitate this discussion. We believe that a fourth-generation system should empower the adviser by doing the following:
• Advice narrative. It all starts with a client-centric advice narrative. If you meet with a client and talk products, markets and portfolios before your coffee is even cold, you’ll create a disconnect and lose the client. If you talk about the goals and dreams of a client and help the client to enable and protect those goals and dreams, you’ll have the power to look deep into the client’s mind. • Co-planning. Avalon allows the client to be the co-author of his/her financial destiny. The adviser naturally evolves into a coach. This means you can sit next to your client and play with a couple of sliders to mimic the short- and long-term implications of their financial decisions. Advanced Financial Reality Modelling™ allows the client to see the short- and long-term implications of their financial decisions. So, you don’t have to be a mind reader? You don’t have to be a mind reader. Experience the mind of your client open when you change your narrative. At Allegiance we have one singular purpose: empowering advisers to help clients make better financial decisions. Avalon is the way we accomplish that. Hey, we know change can be a little scary, but pop in for a cappuccino and a demo. It might just change your life.
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RISK
31 October 2019
Critical illness: Are your children covered?
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he World Health Organisation names cancer as a leading cause of death for children, with 300 000 new cases diagnosed worldwide each year. There are a number of genetic and environmental causes for cancer in children, such as a genetic predisposition, but leukaemia remains the most prevalent type of cancer among children in South Africa. The diagnosis of a critical illness creates an instant crisis in the family and reactions can vary from panic to complete disbelief. According to George Kolbe, Head of Marketing for Momentum Retail Life Insurance, by planning for the unforeseen and having critical illness cover in place, parents can be in a financial position where they can provide the best possible medical care for their children, especially when medical schemes only provide cover up to a certain point. Momentum’s critical illness cover for children includes 13 child-specific conditions. This becomes very relevant if one considers that an estimated 11 000 South African children are born each year with congenital heart disease, as stated in a South African Medical Journal article regarding local paediatric AN ESTIMATED cardiac services. In line with this, 13% of 11 000 SOUTH Momentum’s child critical AFRICAN illness pay-outs in 2018 were CHILDREN ARE for congenital anomaly repairs, including cleft palate repair, BORN EACH juvenile arthritis, cancers and YEAR WITH metabolic conditions, as the cover was in place for the duration of the CONGENITAL HEART DISEASE pregnancy. Since Momentum’s critical illness cover for children equals 10% of the parents’ benefit amount with a maximum pay-out of R250 000 per parent policy for child critical illness, nine children, including an eight-month old baby, benefitted from dual pay-outs during 2018 because both their parents had critical illness cover in place. Kolbe also advises that parents should carefully consider their choice of critical illness benefits as this will determine the pay-out level for which their family qualifies. Comprehensive critical illness cover makes provision for child cover at no additional cost to the parents. This cover pays out a tax-free lump sum amount that can be used to pay for additional medical expenses and lifestyle adjustments. Also, any critical illness claim pay-out for children does not reduce the parents’ cover in any way. Each child is treated as a separate life policy, which means that a claim for one child will not reduce the existing cover for another child. “Modern ‘best of breed’ critical illness benefits should offer unsurpassed breadth of cover for both clients and their children and be simple to understand so they can focus on recovery instead of medical bills,” Kolbe adds.
George Kolbe, Head: Marketing, Momentum Retail Life Insurance
FRANCIS ALDRICH CFP® Technical Marketing Specialist, PPS
PPS expands its disability benefits with functional disability cover
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o truly be the leader in the graduate professional market, we need to ensure we have a broad range of benefits available to cover all the diverse needs of PPS members. We are proud to say that PPS members can now obtain disability cover, irrespective of their occupation, with the launch of the new PPS Functional Disability provider. What does this enhancement entail? The Functional Disability provider is a new option available under the PPS Professional Disability Provider or Accelerated Professional Disability Benefit. These products will now offer two options to cover disability-related conditions and the impact thereof: • The first is the (existing) Occupational Disability provider, that pays out 100% of the benefit should the life-insured become occupationally disabled. • The second is the (new) Functional Disability provider, that pays out a lump sum benefit if the life-insured suffers from any of the listed functional disability events. The payout amount will be based on the severity of the condition and may be 25%, 50%, 75% or 100% of the insured amount. Members can choose to be covered for either, or both functional disability and occupational disability. Functional disability focuses on conditions that will have an impact on the member’s ability to function, whereas occupational disability focuses on conditions that will render a member unable to do his/her occupation. Note that members will benefit from the overlap between medical events that may lead to both loss of function and the inability to work, through our provision of the SYNC discount, activated when members decide to buy both occupational and functional disability benefits.
conditions do not require permanent institutionalisation before the benefit may be claimed. • It uses a scoring model to determine the level at which a payment will be made. This allows for a successful claim where a condition results in multiple mild impairments (instead of a single significant one). • Functional disability allows for multiple claims which is especially important for progressive conditions like renal failure. • When members choose to be covered for both occupational disability and functional disability: • They will receive the SYNC discount, reducing the member’s total premium for the benefit. • Claims will first be assessed for occupational disability, and if the claim does not qualify for a benefit, it will then be assessed further under the functional disability definitions. Do members need this type of cover? According to our research, 82.5% of lump sum disability products sold to professionals across the insurance industry consist of both occupational disability and functional disability definitions. Clients clearly value the comprehensive protection they will enjoy by holding both types of benefits. Thus, new members will find value in taking out both, and existing members in adding functional disability to their existing lump sum disability cover. Looking at the broader picture for disability, functional or critical illness cover, each product offering solves for a component of the broader needs of a member, so this is also a great opportunity to make sure other benefits fulfil their respective purposes.
What makes the PPS functional disability offering different? • Functional disability uses medically defined definitions to ensure members are assessed objectively. • It is more lenient, realistic and comprehensive compared to other functional impairment benefits in the market. For example: • Organ transplants are covered when the member is on a waiting list, not only after the procedure is completed and unsuccessful Psychiatric
WWW.MONEYMARKETING.CO.ZA 23
You don’t choose a disability. But you can choose how you’re covered.
Help your clients make the decision. Our new Functional Disability provider ensures your client can fund their lifestyle changes should the unthinkable happen and their ability to function is impaired. Offer your clients access to cover tailored to the needs of graduate professionals. Visit pps.co.za to find out more. PPS is an authorised Financial Services Provider.
HEALTH
31 October 2019
LEE CALLAKOPPEN Principal Officer, Bonitas Medical Fund
B
Bonitas announces weighted increase below double digits
onitas Medical Fund’s increases for 2020 range from just 6.2% with an average increase on risk contributions of 9.4% and an average increase of 9.9%. For 2020, the Fund has introduced new benefits, changed the name of BonFit to BonFit Select, and kept increases as low as possible. Enhanced Wellness Extender One of the Fund’s key initiatives for 2020 is an enhanced Wellness Extender benefit to include, among others, blood tests and x-rays available on all options, except BonCap, without impacting on day-to-day benefits or savings. The Wellness Extender can be used across a range of services, from GP consultations to physiotherapy and blood tests. This will be paid from the Wellness Extender first so members can stretch their benefits further. More value for members In looking at our members’ needs, it became clear that they require additional out-of-hospital benefits for daily medical and day-to-day expenses such as acute medicine, blood tests and x-rays. On some plans day-to-day benefits have been increased, while on others the savings portion has been increased – the benefit increases range up to 15%. On other options, the dental benefit has been restructured and in some, GP visits have been increased.
Talking babies Bonitas covers the birth costs of around 9 000 babies every year and 20% of these involve some kind of complication. For this reason, the Fund firmly believes they need to offer pregnant women additional support and education. Next year, the maternity benefit will allow one of the post-natal consultations to be used for a consultation with a lactation specialist. Mothers will also be able to access vouchers for up to 70% off baby products and further discounts at Baby City from the voucher platform. We hear you The hearing aid cycle has been adjusted in line with international protocols, which show that the average lifespan of a hearing aid is approximately eight years. Hearing aids will now be available on a five-year cycle from the date of last claim on BonComprehensive, BonClassic, BonComplete, Standard and Standard Select. Run/Walk for Life and Eat for Life The top four conditions suffered by our highrisk members are hypertension, diabetes, high cholesterol and heart disease. These conditions can be significantly improved by exercising regularly and eating a healthier diet. To this end,
we have partnered with Run/Walk for Life, which is offering Bonitas members a 70% discount. Members can join Run/Walk for Life and Eat for Life for R135 a month. Improved value adds Attracting a younger target market is vital to sustainability, and this market demands additional benefits over and above healthcare. This is why we introduced our value-added product model for 2019. For the year ahead, this includes improved access to free discount vouchers, with over 300 retail discounts available to members every month on groceries, travel, fashion and more. MedGap has increased its limit to R165 000, introduced a trauma benefit for children under five, and a R2 000 pay-out on confirmation of pregnancy, while offering Bonitas members a 26% discount. Sanlam Indie offers members a wide range of life, funeral and disability cover products, and an exclusive benefit in the form of free investments up to 100% of monthly contributions, with Bonitas members receiving an additional 10%. In 2020, new Bonitas members will get R150 000 free life cover for three months. And finally, MiWay is offering a 5% discount on household and motor insurance, a free tracking device and emergency transport benefit to Bonitas members.
Medical schemes – where to from here? Industry contracts as medical schemes join forces to strengthen the sector
T
his has been a year of consolidation for the medical schemes industry, a number of schemes having answered the call from the Council for Medical Schemes (CMS) for healthcare funders to join forces where possible in order to strengthen the industry. “The South African private healthcare industry has undergone considerable change in recent years, one of the most notable being this trend towards consolidation. This development is aligned to the White Paper on National Health Insurance [NHI], and forms part of the industry readying itself for a new healthcare dispensation,” says Josua Joubert, Chief Executive and Principal Officer of CompCare Wellness Medical Scheme. “Among the key reasons for the consolidation of medical schemes is the benefit it holds for medical scheme members. The amalgamated scheme is able to achieve a broader national footprint, greater influence
and bargaining power within the of scale that are likely to have market place, as well as improved considerable benefit for members. cost efficiencies, all of which serve The amalgamation has also resulted to improve the sustainability of in a new scheme that is one of South the scheme and thereby protects Africa’s top medical schemes, with members,” he adds. reserves significantly above the “One proviso for such regulated 25%. amalgamations is that schemes Selfmed amalgamated into should complement each other well CompCare on 1 September 2019. to provide a According to Joubert, broader memberthe move was THE AMALGAMATED carefully strategically centric offering to better fulfil planned and SCHEME IS ABLE member needs. carefully considered, TO ACHIEVE A It is worth independent actuaries BROADER NATIONAL performing a thorough noting that the successful recent amalgamation analysis FOOTPRINT amalgamation of beforehand, which CompCare and Selfmed, placed the indicated that the new scheme would combined scheme in a very strong be able to keep annual contribution financial position with one of the increases to a minimum. This is highest reserve levels of open medical important, particularly in light of the schemes in the industry.” fact that the proposed amalgamation The amalgamated scheme’s of some schemes was recently turned combined balance sheet and down by the CMS. increased membership size are Joubert says that given its unlocking efficiencies and economies strengthened financial position, the
26 WWW.MONEYMARKETING.CO.ZA
new CompCare Medical Scheme can offer members significantly enhanced value for money, as well as a wide and highly attractive product offering to choose from. “With its outstanding track record of more than 40 years, CompCare is one of the most enduring medical schemes in the country. Our success over the years is attributed to the strong emphasis we have placed on meeting the needs of our members. “We listen to our members in order to give them exactly what they need and believe that affordability, choice and security are all absolutely nonnegotiable,” he adds.
Josua Joubert, Chief Executive and Principal Officer, CompCare Wellness Medical Scheme
HEALTH
31 October 2019
Momentum Health’s annual increase for 2020 below industry average
M
omentum Health medical scheme has announced a weighted average annual contribution increase of 8.2% for 2020. Sustained growth, with a favourable profile, in a stagnant market coupled with stable financials, allowed Momentum Health medical scheme to announce one of the lowest contribution increases for 2020 in the industry. “Over the last few years, the average age of beneficiaries covered on medical schemes in South Africa has increased, resulting in increased claims costs, which in turn impacts on the contributions charged, and annual contribution increases required to manage these components,” says Damian McHugh, Executive Head of Sales and Marketing at Momentum Health Solutions. “Part of the reason why Momentum Health medical scheme has been able to manage this risk so well in these tough economic times is through the flexibility of their product offering, catering to consumers’ needs and affordability. In addition to announcing one of the lowest contribution increases so far this year, Momentum Health medical scheme has once again retained stability in their product offering, with no reduction in benefits; in fact, in most cases the Scheme has increased benefit limits. The maternity benefit was also enhanced to provide for nurse-based support at home for new moms following the birth of their baby.” Momentum Health medical scheme has also
launched a new option, catering to the unique needs of the up and coming millennial market. “Although the industry increases this year may appear steep during a tough economic climate that continues to put a strain on consumers’ pockets, various factors need to be considered, such as rising medical inflation rates, ageing scheme profiles and regulatory requirements. Momentum Health medical scheme continues to have one of the lowest average contributions in the market, with one of the most stable benefit designs over the past 10 or more years,” says McHugh. “When you look at the underlying metrics of medical schemes – whether it is demographics or claims trends – there is a growing number of South African schemes for which these metrics are not looking good. While these may be quite subtle differences now, these trends are likely to deteriorate over time. “This is a common phenomenon and may force schemes to think of reducing benefits. At Momentum Health medical scheme, we do not compromise the ability for our clients to access the healthcare that they need. We provide them with flexible options that allow them to build the medical cover that suits their lifestyle requirements.” The best approach to medical cover begins with understanding what your needs are, and then designing the best possible solution around these needs, McHugh adds.
“It is critical that consumers understand the intricacies of their medical scheme and exactly what they are paying for, as often the distinction between benefits and contributions is unclear. Our product update provides even more flexible options than before, allowing consumers to build medical cover that suits their lifestyle requirements.” Health is an asset for every individual and as such, Momentum Health medical scheme has ensured that both benefits and price meet their members’ expectations by providing them with the ability to access the healthcare that they need. McHugh concludes, “Holding ‘the provision of more health to more South Africans, for less’ as our purpose, Momentum Health Solutions will be focused on innovation and problem solving for years to come. In so doing, striving to meet the holistic healthcare and financial needs of companies and individuals across the spectrum, uniquely positioning us to provide a safe, affordable and seamless life-journey to our clients.”
Damian McHugh, Executive Head: Sales and Marketing, Momentum Health Solutions
Discovery announces 2020 contribution increase
D
iscovery Health Medical Scheme recently announced the 2020 annual contribution increase and benefit changes. DHMS will be implementing a weighted average contribution increase of 9.5%. Based on a market survey of financial advisers representing over 250 000 lives, market expectations are for increases between 10% and 12% across the industry. Dr Nozipho Sangweni, Principal Officer of DHMS, explains, “The average increase for 2020 enables the Scheme to maintain and enhance benefits, while allowing for the increases in the demand for existing benefits, and the increases in the cost of those benefits. As a medical scheme, we remain focused on ensuring that all our members have access to the best quality care, while ensuring that contributions remain affordable for the long term.” Discovery Health Medical Scheme also announced further enhancement of benefits, including a redesigned Comprehensive Series plan – Classic Smart Comprehensive. Following the success of its digitally enabled,
network-based Smart Series, the Scheme has extended the design to its Comprehensive Series, to offer families attractive options for efficient, affordable comprehensive cover in 2020. For DHMS, increases in the cost of healthcare claims can be attributed mainly to more members needing to use healthcare services, and members making use of these services more frequently. Dr Jonathan Broomberg, CEO of Discovery Health, provided examples of these increases, citing higher chronic-related claims as a significant contributor in the demand for healthcare and demand-side inflation. “Claims data for DHMS indicate that the incidence of chronic conditions has increased by 48% over the past 10 years due to the impact of lifestyle diseases on the medical scheme population in general. Members with chronic conditions claim four times more than healthy members, and are more likely to require hospital admissions related to their condition, which adds to the cost of medical scheme claims,” said Broomberg. In his presentation to financial advisers, Dr Broomberg provided an
28 WWW.MONEYMARKETING.CO.ZA
analysis of the cost drivers behind medical inflation and medical scheme contributions. “Medical inflation is the year-on-year increase in the cost of healthcare claims and is a critical consideration for medical schemes. Increases in the annual cost and number of claims have a significant impact on a medical scheme’s ability to provide affordable cover for healthcare services on an ongoing and sustainable basis.” Discovery Health estimates total medical inflation for 2019 at between 10.5% and 12.5%, with the variance due to utilisation trends on the different health plan options. However, risk management by Discovery Health and the ongoing positive impact of Vitality on engaged members’ health, reduce medical inflation by 1.6%, resulting in plan-specific contribution increases between 8.9% and 10.9%. Broomberg said, “Contribution increases should be seen in light of the historic performance of the medical scheme and the ability to keep contributions and plan benefits stable and at a high quality. When comparing the annual contribution increases for the Discovery Health Medical
Scheme since 2008 with other open medical schemes, Discovery Health Medical Scheme’s annual contribution increases have been 1% or more lower on average each year. Maintaining this differential over time means members of DHMS are, on average, paying 16.9% less for the same or better benefits in 2019, than members of other open medical schemes.” Discovery announced significant enhancements to its Discovery Primary Care product range, which offers employers affordable access to private healthcare outside medical schemes for their employees. In 2020, employees will have new benefits allowing them to use pharmacy-based primary healthcare clinics, which will increase the access to healthcare, and create affordable price points for employers. Discovery also announced household employers will be able to buy Discovery Primary Care for their household employees. Less than 1% of household employees are covered by private health insurance, and Discovery Primary Care now creates the opportunity to expand this cover significantly.
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EDITOR’S BOOKSHELF
BOOKS ETCETERA
31 October 2019
studies and life. The book explores this fascinating subculture, shares the nine principles behind every successful ultralearning project, and offers insights into how you can organise and execute a plan to learn anything deeply and quickly, without teachers or budget-busting tuition costs.
AFTER DAWN, HOPE AFTER STATE CAPTURE BY MCEBISI JONAS In October 2015, the Gupta brothers offered Mcebisi Jonas the position of Minister of Finance in exchange for R600m. Then Deputy Minister of Finance, Jonas turned down the bribe and a period of deep introspection followed for him. What would be the future of South Africa, democracy and the economy, and how did we reach this point? In After Dawn, Mcebisi Jonas analyses the crisis at the heart of our current system, placing politics at the centre of policymaking and implementation at the expense of growth. In this important and authoritative book, Jonas first unpacks and analyses the current badlands of the South African economic and political landscape. In the second half, he proposes a series of workable and practical solutions for transitioning South Africa into a vibrant and job-creating country. Action points include putting jobs at the centre of economic policy; rapidly expanding new technological capacities and knowledge to transition to a twenty-first-century economy; expanding human capabilities at scale; developing new sets of trade-offs and measures to accelerate economic inclusion; nurturing a corruption-free, highperformance state built on meritocracy and innovation; and changing the nature of politics.
HOW TO BE A PRODUCTIVITY NINJA BY GRAHAM ALLCOTT World-leading productivity expert Graham Allcott’s business bible has now been given a complete update. If you waste too much time on your phone, scroll through Twitter or Instagram when you should be getting down to your real tasks, or if your attention is easily distracted, How to be a Productivity Ninja is the book for you. In the age of information overload, traditional time management techniques simply don’t cut it anymore. Using techniques including Ruthlessness, Mindfulness, Zen-like Calm and Stealth & Camouflage, this fully revised new edition offers a fun and accessible guide to working smarter, getting more done and learning to love what you do again.
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ULTRALEARNING: ACCELERATE YOUR CAREER, MASTER HARD SKILLS AND OUTSMART THE COMPETITION BY SCOTT H YOUNG
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This is a guide to future-proofing your career and maximising your competitive advantage by learning the skills necessary to stay relevant, reinvent yourself and adapt to whatever the workplace throws your way. Faced with tumultuous economic times and rapid technological change, staying ahead in your career depends on continual learning – a lifelong mastery of new ideas, subjects and skills. If you want to accomplish more and stand apart from everyone else, you need to become an ultralearner. Scott Young incorporates the latest research about the most effective learning methods and the stories of other ultralearners like himself – among them Ben Franklin, Judit Polgar and Richard Feynman, as well as a host of others, such as little-known modern polymaths like Nigel Richards, who won the World Championship of French Scrabble, without knowing French. Young documents the methods he and others have used and shows that, far from being an obscure skill limited to aggressive autodidacts, ultralearning is a powerful tool anyone can use to improve their career,
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