MoneyMarketing September 2020 by Media24 B2B

30 September 2020 | www.moneymarketing.co.za

@MMMagza

First for the professional personal financial adviser

WHAT’S INSIDE

YOUR SEPTEMBER ISSUE

UNPACKING MODEL PORTFOLIOS A careful and considered approach should be taken when deciding which model portfolios to use

Page 9

COVID-19: LIFE INSURANCE INDUSTRY ‘PREPARED FOR THE UNPREPARED’ MoneyMarketing's guide to investing offshore in volatile times

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Why the pandemic is changing how customers think about life insurance

Page 29

Is it too late to invest in tech stocks?

“

You can’t really talk about investing in technology without acknowledging what we’ve been through as a society over the last six months,” says Anchor Capital fund manager, Henry Biddlecombe, adding that COVID-19 has caused companies to adopt technology on a scale that would never have been the case before the pandemic ensued. He points out that year-to-date, the S&P 500 is flat, while the broader tech sector is up by more than 20%. “It’s what I’ve termed the ‘Zoom effect’ because I think this trend is nicely represented by Zoom’s share price that is up 300% relative to a flat market. This has left a lot of investors not quite grasping the valuations in that space, and feeling a little bit left behind, thinking that it’s too late to invest in technology.” But, as Biddlecombe explains, there is no such thing as the ‘Zoom effect’ but rather a continuation of a trend that has been in place for the last decade. To illustrate this, Henry Biddlecombe, he compares Fund Manager, the performance Anchor Capital of the tech-heavy

FIGURE 1: SECULAR OUTPERFORMANCE

Nasdaq to the S&P 500 over the last 10 years (Figure 1). “The Nasdaq has outperformed by around 200% – and that’s life changing for an investor.” However, he points out that tech stock valuations have been pushed into uncomfortable territory. “In the current dynamic, you’ve got shorter-term and longer-term driving forces acting against one another. In the short-term space, we’ve seen defensive rotation into tech stocks. People are buying technology companies because they’ve been less impacted by the pandemic and there have also been elements of FOMO (fear of missing out) – and that’s pushed valuations into full territory.” But one shouldn’t be distracted from the more important longer-term driving factors, he says, making the point that in the present dichotomy between shorterand longer-term factors, an active management strategy is favoured. “I think active managers like us are in a good position to identify those strong secular growth stories while remaining cognisant of the valuations.”

Biddlecombe lists three factors that he believes will continue to drive performance in the tech sector: Research and development Technology companies are spending more than any other sector on growth and innovation. In the last ten years, five of the largest US tech companies – Alphabet, Amazon, Microsoft, Facebook and Apple – have spent over $900bn or around one third of South Africa’s GDP every year on new initiatives and new ideas. These five companies also earn an average return on invested capital (ROIC) of 20.5. The high rate of reinvestment as well as the high return on investment together will make shares compound in value. “It makes sense that these companies are benefiting from the future because they’re spending the money to create that future,” Biddlecombe says. Network effects Tech companies demonstrate a superior economic dynamic through what are termed network effects. “As technology companies become bigger, so they become more efficient and they start to grow more quickly,” he says, using Amazon as an example. “When Amazon garners more sellers, so the platform becomes more attractive to buyers, and conversely, as Amazon gains more buyers, so the platform becomes more attractive to sellers. Over time, Amazon can extract more economic value from the platform.” Continued on page 3

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Invest in something bigger. *Environmental, Social, and Governance (ESG). Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor may not get back the amount originally invested. UK and outside the EEA: Until 31 December 2020, issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. From 1 January 2021, in the event the United Kingdom and the European Union do not enter into an arrangement which permits United Kingdom firms to offer and provide financial services into the European Economic Area, the issuer of this material is: (i) BlackRock Investment Management (UK) Limited for all outside of the European Economic Area; and (ii) BlackRock (Netherlands) B.V. for in the European Economic Area, BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1,1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311. For your protection telephone calls are usually recorded. Switzerland: This document is marketing material. Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. © 2020 BlackRock, Inc. All Rights reserved. 1251975.

NEWS & OPINION

30 September 2020

Continued from page 1

As an example, he uses the market values of Procter and Gamble and Amazon going back to 1996 (Figure 2).

And then, almost in a genius way, you are given the option to spend the money right at that point.” Facebook, with its subsidiary Instagram, is best positioned to benefit from this trend, he adds. The second theme is distance learning. “Not only has technology made it possible for students to attend a virtual college far more cost effectively than a physical college, it’s also allowed for the development of shorter-format, more focused courses that are headed towards specific job opportunities. We own Chegg, an online tertiary education services platform that currently has four million subscribers.” Chegg is disrupting the old US college system with cheaper online courses that take six months to complete. Payment is only due once its students are employed. The third trend is podcasting. “I think it’s a huge opportunity for advertisers. In the past, ads in print media, or on TV or social media, are generally displayed to someone who is very distracted so the hit rate is quite low, but when someone is listening to a podcast, they’re in a heightened state of mental engagement. Spotify is a business that we own and they’re leading the charge in the podcasting space,” he says. The fourth trend is the direct-to-consumer phenomenon. “A lot of businesses are using technology to build direct relationships with their customers. They don’t need intermediaries anymore.” Walt Disney Co is an example. The company’s forthcoming $200m blockbuster, Mulan, will be released directly to the public. “For obvious reasons, the film is not going to cinemas and it will be available to download for $30. In the past, Disney would only participate in around 60% of box office revenues, but now, with the direct release, they’re going to enjoy 100% of those revenues.” Biddlecombe says the Anchor BCI Global Technology Fund aims to meaningfully outperform global equity markets over time by taking relatively concentrated positions in high conviction ideas. Portfolio turnover will typically be quite low. “In other words, when we buy a stock, we plan to hold it for a long period of time. We’re very happy with the performance of the fund to date. Since the 6th of June last year, it has roughly returned 63% in rand or 40% in dollars.”

FIGURE 2: NON-LINEAR VALUE CREATION

Procter and Gamble pays out around 70% of its profits as a dividend and reinvests the remaining 30%, earning a return of about 10% a year on that reinvestment. Amazon, by contrast, reinvests every single cent of its free cashflow back into growth and new initiatives. “As the company becomes larger, so the rates of value creation for shareholders start to increase at an exponential rate. As one of the world’s largest companies with a market capitalisation of over $1.5tn, it has still managed to double in value over the last two years – and that is so typical of the tech sector.” This makes the point that investors have to have an allocation to the tech space for a long period, because typically the value creation is back-end loaded and only comes through in the later years. Innovation Biddlecombe looks at four themes – beginning with contextual commerce, which he describes as “a new way of selling things”. In the past, retailers serviced the need of people who had already decided to buy something they’d seen in ads and who were searching for the item in a shopping mall or on a website. Contextual commerce is different. “It’s a principle that creates a need where there wasn’t one before. And it hits you when your psychological and emotional propensity to spend money is at its highest,” he explains. “When you’re a hiking enthusiast on Instagram looking at images of hiking, and you’re planning your next hiking trip, and all of a sudden you see an advert for new hiking boots, your emotional and mental propensity to spend money at that point is much higher than it would be in a shopping centre.

Biddlecombe discussed the prospects for the broader tech sector during Anchor Capital’s webinar Bulls, bears and the world of tech, last month. For more information go to www.anchorcapital.co.za

EDITOR’S NOTE

ne can learn a lot about people from webinars and I’ve been doing just that. I had webinar invites for almost every day in August, and sometimes there were up to three webinars that took place within hours of each other. Make no mistake - I enjoy webinars: They allow me to stay in contact with industry bodies, the national treasury, investment houses, and insurance providers, in these times of coronavirus lockdown. I have, however, had some marvelously funny Zoom and Microsoft Teams experiences. During several webinars, the host was caught daydreaming, only to be awoken by a presenter asking: “Are you still there?” On other webinars, hosts were caught doing something completely unrelated to the discussion (perhaps shopping on Takealot.com), unaware that the presentation had finished. Probably my worst experience occurred when I joined a webinar in which a fairly high-ranking government official was giving a presentation. Firstly, he wasn’t on time – something that didn’t surprise me, although the person hosting the webinar became decidedly edgy. Secondly, when the presentation commenced, the sound wasn’t very good. That was because the official chose to make his presentation outside on a windy day. At first, through the whispering wind, we heard “… happy to be here (hiss)… addressing economic challenges … (hiss, hiss).” The wind then began to moan and only certain words were audible “… GDP … (whoosh)… funding …. (whoosh, whoosh).” If that wasn’t bad enough, the wind then began to whistle, and the man’s voice was entirely inaudible. One hoped that the webinar’s host would ask the presenter to go indoors to continue his presentation – but the host was silent, or perhaps he was on Facebook – and I spent an hour listening to the wind. Of course, I could have left the webinar – but as Alexander Pope put it: “Hope springs eternal in the human breast.” Subscribe Janice to our janice.roberts@newmedia.co.za NEWSLETTER @MMMagza bit.ly/2XzZiMV www.moneymarketing.co.za

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NEWS & OPINION

PROFILE

30 September 2020

FLYNN ROBSON HEAD: PORTFOLIO MANAGEMENT AND STOCKBROKING, SASFIN SECURITIES

How did you get involved in financial services – was it something you always wanted to do?

opportunities to present themselves. Avoid making investment decisions in a state of panic as rash decisions very rarely translate to solid investment returns.

Financials services was an industry I fell into. I studied for a BCom degree but I wasn’t 100% sure of what I was going to do, so I headed to London where I managed to obtain a job on a trading desk at HSBC and my journey in financial services began.

What was your first investment – and do you still have it?

I have always been fascinated with the impact great management teams have on a business. This led me to initially invest in small to mid-cap stocks as access to management was easier, and information was readily available – and in many ways more transparent, leading to a more informed decision. This belief in the power of great management teams to deliver value led to my initial investment being in a small cap stock.

What’s the best book on investing that you’ve ever read, and why would you recommend it to others?

As I’ve mentioned, I’m fascinated by the impact great leaders have on businesses, so I’ve read quite a few biographies or case studies. The one book that does stand out from my recent readings would be The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, written by William Thorndike. The book provides a different perspective on some great unsung leaders of great businesses.

What have been your best – and worst – financial moments?

The best must be every time I happen to find myself on the right side of a trade; the worst for me so far was definitely 2008. I was astounded at the speed and ferocity at which wealth was eroded, and this, being my first market crash, was a life lesson.

What do you tell investors who are worried about their investments due to SA’s current economic environment and COVID-19?

Investing rewards those with long-term thinking, and markets have shown in the past that they recover. If you are in a position to be able to ride out the environment we AVOID MAKING currently find ourselves in, then INVESTMENT DECISIONS IN A it’s best to sit on your hands STATE OF PANIC and wait for the

EARN YOUR CPD POINTS The FPI recognises the quality of the content of MoneyMarketing’s September 2020 issue and would like to reward its professional members with 1 verifiable CPD points/hours for reading the publication and gaining knowledge on relevant topics. For more information, visit our website at www.moneymarketing.co.za

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VERY BRIEFLY The Financial Services Conduct Authority (FSCA) has confirmed that Adv. Dube Tshidi has been appointed by Mr Tito Mboweni, the Minister of Finance, to perform the functions of the Commissioner. The designation became effective from 6 August Adv. Dube Tshidi 2020 for a three-month period, until 5 November 2020, or until a Commissioner is appointed and assumes office, whichever occurs sooner. “Adv. Tshidi’s appointment is in line with the terms of Regulation 3(1)(d) of Financial Sector Regulations, 2018 (as amended) made in terms of sections 61(4), 288 and 304 of the Financial Sector Regulation Act No. 9 of 2017 (FSR Act),” the FSCA said.

Citadel Investment Services has announced its acquisition of Point 3, an independent Pretoriabased financial services firm. “In recent years, Citadel has consistently shown interest in pursuing growth through acquisitions in the wealth management space,” the firm said in a statement. “The company has expressed an interest in pursuing quality transactions that add value, allowing Citadel to unlock synergies and leverage off the benefits of an already fully vertically integrated business.” Citadel added that it is well positioned to offer a wider range of local and offshore investment solutions to the Point 3 client base, as well as ancillary inhouse services such as forex solutions, share portfolios and the formation of offshore structures. “Critically, the synergy between the two organisations in terms of approach to financial planning, investment management, transparency and reasonable fees, points to a clear cultural fit. Both organisations share a deep commitment to ensuring personalised service and offering tailormade solutions.” The Point 3 team, including Mark Botes and Heinrich Swanepoel, has joined Citadel and will initially focus on ensuring a smooth transition for Point 3 clients as they are welcomed into the Citadel family. Grant Maxwell will be appointed as Global Head of Alternative Risk Transfer at Allianz Global Corporate & Specialty (AGCS), reporting directly to AGCS SE Board Member and Chief Underwriting Officer Corporate, Tony Buckle. Since February 2020, Maxwell has led the global Alternative Grant Maxwell Risk Transfer (ART) team on an interim basis. “AGCS’ ART line of business provides structured (re)insurance solutions, including fronting solutions tailored to companies’ specific needs,” the company said in a statement. Buckle added, “I look forward to working with Grant and his team to further evolve ART’s client offering and global model. AGCS focuses on serving large, multinational companies – and these are increasingly seeking innovative solutions to protect their earnings and cash-flow risks, or to cover unusual or complex risks, where traditional insurance products are inadequate. Therefore, ART solutions are an increasingly important differentiator for AGCS in the market.”

NEWS & OPINION

30 September 2020

The unintended consequences of living together Why unmarried couples must ensure they have a valid will.

into the definition of spouse ‘a person who is the permanent life partner’ – when it comes to the duty of maintenance or when a partner in such a relationship dies without a valid will, the t is not unusual for people to live together, have consequences may be devastating,” warns Pols. children, buy properties and run a business “When a person dies without a valid will, the together without formalising their relationship, Law of Intestate Succession will prescribe how the either through marriage or civil partnerships. person’s assets will be left to their next of kin. In the According to Elmien Pols of Private Client normal scheme of things, a spouse and children will Trust, the fiduciary division of Private Client inherit. However, in terms of domestic partnerships, Holdings, many people incorrectly believe that such children will stand to inherit should a parent die relationships automatically lead to the formation of without a valid will, but the surviving partner will common law spouses. not qualify to inherit at all.” “I have been asked many times Pols explains how she was about how long the legal timeframe approached a number of years ago THERE IS A NEED by the family of a man who was left is to qualify as a common law spouse – however, the reality is that destitute as a result of his life partner FOR A REMEDY this concept is not yet recognised in not having a valid will. TO ASSIST THE South African law.” “This gentleman had lived together PARTNERS OF A Pols advises that the financial with his life partner for many years security and protection offered and for reasons unknown, all assets, COMMON LAW by marriage or civil partnerships including their home, were in his RELATIONSHIP does not apply to unformalised partner’s name. On her passing, it ‘life partnerships’ and says that the mutual duty of was discovered that she had no will and in terms of support and division of assets as applied by marriage intestate succession, her closest relatives were her do not exist in South Africa, unless formally elderly sisters, who inherited everything from her contracted in some shape or form. and left her partner in dire straits. It is very clear that “Even though some protection is offered to this was not her intention and the outcome would domestic partnerships – for instance in the have been entirely different had she nominated him case of the Pension Funds Act, which includes as her sole beneficiary in terms of a valid will.”

However, in the case of same-sex life partners, the courts have found that they will inherit from each other, should one of them pass away without a valid will. “The reason for this is that in bygone years, same-sex marriages were not allowed, and it would have been impossible for homosexual couples to get married and, as a result, inherit in terms of Intestate Succession. This principal was not extended to heterosexual couples as they have always had the option of getting married and, by choosing not to marry, they choose not to have the security that comes with marriage.” Pols says that it has been widely discussed and recognised that there is a need for a remedy to assist the partners of a common law relationship and, for this purpose, the draft Domestic Partnership Bill was published in 2008. “If written into Law, the Bill will do much to bring equality and dignity to often economically vulnerable persons. Until such time, however, it is critically important for life partners to know their rights and to ensure they have an up-todate, valid will in place.”

Elmien Pols, Fiduciary Specialist, Private Client Trust

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NEWS & OPINION

30 September 2020

JAMES GEORGE Compliance Officer Manager, Compli-Serve

Every organisation must have an information officer

very organisation must have one: All public bodies, private bodies such as companies, CCs, partnerships and trusts. Everybody has to have an information officer (IO) by law. The Information Regulator has developed draft guidelines on the registration of IOs, which requires that a responsible party registers its IO with the regulator, and that this be done before taking up his or her respective duties, in terms of the Protection of Personal Information Act 4 of 2013 and the Promotion of Access to Information Act 2 of 2000 (POPIA and PAIA). As things stand, IOs must complete and submit the registration form to the Regulator on or before 31 March 2021.

THE INFORMATION OFFICER PLAYS A CRUCIAL ROLE IN HELPING A FIRM FULFIL ITS DATA PROTECTION OBLIGATIONS Keeping up with compliance According to law firm Michalsons, the role of an IO is not to be confused with the chief information officer (CIO). The two jobs perform very different roles. An IO performs much the same role as a data protection officer as under General Data Protection Regulation (GDPR). An IO of a responsible party (or body) must encourage and ensure compliance with PAIA in accordance with the body’s definition of compliance. They must create, maintain and update a PAIA manual for the body, and evaluate and approve requests for access to information. This must be done in terms of the grounds set out in PAIA, and within the time constraint or any extended period. The IO is a key person in any project or programme involving POPIA and data protection in general. These full responsibilities are clearly stipulated in section 55 of POPIA and in the POPIA Regulations.

What qualifies an IO? An IO must be a leader who possesses appropriate communication skills and understands the key principles of data protection. Effectively, the IO is the champion of data protection, but not the policeman. It remains the firm’s responsibility to comply with data protection legislation, but the IO plays a crucial role in helping a firm fulfil its data protection obligations. An IO needs to be reasonably tech savvy with an in-depth understanding of the business, and knowledge of how the organisation processes client activities. POPIA doesn’t specify the precise credentials that are expected, but it does say skills must be proportionate to the type of processing you carry out, taking into consideration the level of protection that personal data requires. Where the processing of personal data is particularly complex or risky, the knowledge and abilities of the IO should be correspondingly advanced enough to provide effective oversight. The IO must be adequately resourced, and report to the highest management level. In some cases, several organisations can appoint a single IO between them. It should be an internal appointment at middle or senior management level, and executive bodies must support the IO in getting data protection right. South Africa is about three decades behind some jurisdictions in data protection. Appreciation levels need to increase to bring us in line with many other markets.

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Children’s book about investing translated into four languages

ast year, in what was an innovative first for the financial services industry, Foord Asset Management published a beautiful children’s picture book about saving and investing. The book, entitled More Than Enough, which is distributed free to anyone who wants one, has now been translated into three additional languages and is available in isiXhosa, IsiZulu, Afrikaans and English. More Than Enough is a story about a young squirrel who sets out with her mother one autumn morning to collect acorns. There is no jargon. No reference to money. And not a hint of greed. Beautifully illustrated, this simple story is about acorns and why the squirrel family collects them – to eat, to enjoy, to share, to save and to grow for the years to come. The book is the first in a planned series that targets the very youngest generation of South Africans in an education initiative that reaches out with clear, yet creative messaging about investing. The series, authored by Foord’s communications manager Christina Castle, will explore concepts such as time, saving, income generation, compounding, diversification, risk, patience and investing for the long term. “These are the basic investment principles that we drive at Foord,” says Castle. “If you understand and embrace these principles from an early age, you can only be set on the path to successful investing.” “Foord is passionate about teaching children (and their parents) the importance of investing for the long term,” she adds. “What better way to do it than with a beautifully illustrated children’s book that can be read repeatedly? It is the perfect platform for parents and teachers to start the conversation about investing and, more importantly, to keep having that conversation. “Because we want to reach out to all South African children, it was essential that the book be translated. It is not common to find an educational children’s book such as this available in a multitude of South African languages, but it is imperative if we are to get the messaging out as widely as possible.” A passion project, Foord has been distributing More Than Enough to libraries and schools throughout the country and to anyone keen to build a culture of investing and saving in South Africa. Foord has also partnered with a South African non-profit organisation, Wordworks, to distribute 40 000 copies to Grades R and 1 learners in the Western Cape. For more information, or to request your free copy of Foord’s new children’s book More Than Enough, contact info@foord.co.za

NEWS & OPINION

30 September 2020

FRANCOIS DU TOIT, CFP® Founder and Director: PROpulsion

hen we got hit by the COVID-19 pandemic, and the entire country was shut down, I became anxious not knowing what to expect or what the impact would be – both on my clients and eventually on me. It drove me crazy. Then the idea came to do a live webinar. Every day. For as long as the lockdown would be in place. Twenty-one days turned into thirty-five. And we are still in the lockdown. What started as something to keep me and my mind busy, and something to give me purpose, quickly evolved into something much more. This experience taught me valuable lessons. Lesson 1: Just start I had no idea if anyone would even watch the show. The first episode led to the second. The second to the third. One person

Seven lessons from starting a live show

quickly became several people. I interviewed my first guest in episode five. The rest is now, so to speak, history. The show evolved. People started talking and sharing. Suddenly I had more and more guests on the show – phenomenal guests from South Africa and countries like the US, the UK, Australia and Canada. You don’t need all the answers or a detailed plan. Just start. Then keep going and learn along the way. Nothing will be perfect. But it will be great. Lesson 2: Intent and purpose trumps everything else We always look for opportunities – golden moments that offer exposure for our businesses, our products or ourselves. You can never hide your true intent in the long run. It always surfaces for the world to see. Being sincere and genuine right from day one, stating that I am doing the show

as much for me as for the audience I wanted to serve, has truly resonated with everyone. It was the start of an audience evolving into a community.

SUDDENLY I HAD MORE AND MORE GUESTS ON THE SHOW Lesson 3: Consistency is the currency Starting this show, doing it daily, having to show up every day and preparing for every episode have resulted in 93 hours of content, countless new relationships, a caring and supportive community and a show that was watched for 254 326 minutes to date. Consistency creates momentum. Momentum drives us forward. As momentum builds, it makes things easier. Lesson 4: Relationships are what it is all about When others resonate with what we do and why we do it, they jump in and they help, without one even asking. People are door-openers. They are connectors. They do it because they want to, and they do not expect anything in return. I realised through this that it is not always what we can do for others. We help because we want to. Someone’s help enables me to pay it forward to others. Lesson 5: Passion attracts Passion comes from deeply loving something and often being good at it. Enthusiasm is like a honey pot. We are attracted by excitement, energy and

like-minded communities. Passion inspires confidence. Lesson 6: It does not have to take that long When you are at the start of something, it feels like you will never get there. It seems like it will take forever to achieve anything. In the first 50 days, we created 50 hours of content. And it felt like it happened overnight. Doing a little every day translates into the exponential aggregation of progress. It accelerates. It delivers. Lesson 7: Giving and serving will save you Giving and serving without expecting anything in return is what it is all about. If you want to give, give. When you want to serve, serve. Do not expect or want recognition for it. You will build solid relationships. You will experience a level of satisfaction, gratitude and significance that no level of praise or recognition can bring you. Virtual Coffee with Francois VCF is a live show for financial professionals that airs Tuesdays at 8am and Fridays at 3pm on LinkedIn and YouTube. You can check it out at https:// www.francoisdutoit.co.za/vcf. These seven lessons are discussed in-depth in episode 51. PROpulsion focuses on delivering impactful learning content, training and technology solutions for financial professionals

FSCA announces resignation of Caroline da Silva

fter a combined seven years of service at the Financial Sector Conduct Authority (FSCA), having joined the Financial Services Board (FSB) in 2013, Caroline da Silva, Divisional Executive of Regulatory Policy, has resigned with effect from 31 October 2020. “At this stage Caroline has no plans on the next chapter of her career,” the FSCA said in a statement. The FSCA Commissioner, Advocate Dube Tshidi

added: “During her time at the FSCA, Caroline has been an invaluable member of our executive team and played an important role in the transition from the FSB to the FSCA. She was Deputy Registrar of FAIS and Insurance at the FSB, and later headed up both Conduct of Business Supervision and Regulatory Policy within the FSCA until all Executive appointments were made. “Some of her responsibilities in the Regulatory Policy

Division have included oversight of regulatory frameworks, Research, and Liaison, as well as the Authority’s consumer education mandate and Fintech. We thank Caroline for her unwavering commitment to the FSCA during her tenure.” The FSCA said that it was preparing to take the necessary steps to fill the position, “and we will advise once a suitable candidate has been identified”.

Caroline da Silva, Divisional Executive: Regulatory Policy, FSCA

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NEWS & OPINION

30 September 2020

DE WET DE VILLIERS Director, AJM Tax

he looming threat of prescribed assets remains a controversial topic, leaving many investors (and future pensioners) and taxpayers confused. Concerns that we are heading down the path of retirement savings being used to bail out mismanaged SOEs or to fund a state bank are scaring the living daylights out of many clients with whom I have recently debated the topic. Addressing negative perceptions is critical as fears like this will ultimately lead to greater outflows of capital, an erosion of the tax base and ongoing fiscal and economic instability. Draft Taxation Laws Amendment Bill It is important to connect the dots between, firstly, the new rules pronounced in the Draft Taxation Laws Amendment Bill (DTLAB) on July 31 (which, overly simplified, limits someone who is no longer a tax resident from withdrawing retirement funds for three years); secondly, the proposed changes to regulation 28 of the Pension Funds Act; and finally, the changes already

Limiting access to pension funds for non-residents needs rethinking

announced to exchange controls in the February 2020/21 Budget. Prior to these proposed amendments, individuals could access their pension preservation fund, provident preservation fund and retirement annuity fund upon emigrating for exchange control purposes through the South African Reserve Bank (SARB), or reaching the age of 55. Financial emigration However, as a result of the announcements in the Budget earlier in the year, the concept of ‘financial emigration’ or formal emigration as recognised by the SARB will be phased out to be replaced by a verification process. This removes some of the red tape associated with exchange control compliance. It has always been important to distinguish between tax residence – which follows the facts of a particular case and is often harder to prove – and SARB residency, which was always an election for exchange control purposes. What it now means is that should the DTLAB become law in the current format, you will only be able

to withdraw retirement benefits if you can prove you have been a nontax resident for tax purposes for a continuous three-year period. The big issue is that once you do cease South African tax residency – you would need to make (or should have made) a declaration to SARS in your tax return and this triggers a deemed capital gains event – the Income Tax Act treats this as a deemed disposal of your worldwide assets. Certain assets, notably immovable property in South Africa, is excluded from this so-called ‘exit charge’. As much as 40% of the gain is then included in income and taxed at your marginal rate.

Changes to regulation 28 Which brings us back to concerns that the changes to these rules are aimed at keeping more pension money onshore so that this money can be used to prop up failing state entities, or fund a state-owned bank. The ANC has made it clear in recent interviews that proposed changes to regulation 28 – which limits the extent to which retirement funds may invest in particular assets or in particular asset classes and may in the future require more investment in high-impact development areas of the economy – will not be in the form of a prescription (they plan to make this public by midSeptember). The drive seems to be to get more invested in viable infrastructure projects. So the proposed amendments seem like they will still give the funds the discretion as to Portfolio Modelling where they can invest, but with Presentation & Reports more scope to invest in non-equity,

The most up-to-date fund performance and fact sheet data in South Africa • Fund Research • • Comparison & Analysis •

For further information, please contact Tracey Wise on 011-728-5510 / 079-522-8953 or email: tracey@profile.co.za www.profile.co.za/analytics.htm

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private and infrastructure areas of the market. We need to wait and see as discussions with the industry are continuing and all the details must still be ironed out. But if regulation 28 changes do indeed play out as has been explained by the ANC recently, then why limit the ability of those emigrating or moving overseas from accessing their retirement money for three years after they cease to be tax resident? The intention behind this could be as simple as ensuring people do not struggle when they retire; the practical effects have probably not been thought through enough. In my experience, people emigrating often really need to access this money as it helps with emigration and set-up costs, and is often also ploughed into the new business venture offshore. This change may mean someone will think twice about setting up shop offshore. It also raises the prospect of RAs, for instance, losing popularity if it ties the money up. I therefore don’t believe the three-year test is the right one in the circumstances. What we are instead seeing is many people drawing down the amount of cash they can take tax-free from their retirement funds and then taking a tax hit for the rest to get their money offshore. This is an unfortunate reality and the conjecture, uncertainty and pessimism about changes to regulation 28 and possible prescribed assets down the line is not helping. While I do believe many people may be over-reacting, the practical effects of the DTLAB changes to those with a genuine intent to move, or to pursue a real business opportunity, are being unnecessarily limited. Individuals want to be in control of where, how and when they invest and ultimately just want to be able to sleep easier at night. The concern is that all the uncertainty (and speculation) will only lead to an accelerated outflow of capital and a weakening of the local tax base at the worst possible time for South Africa.

CONCERNS THAT WE ARE HEADING DOWN THE PATH OF RETIREMENT SAVINGS BEING USED TO BAIL OUT MISMANAGED SOEs OR TO FUND A STATE BANK ARE SCARING THE LIVING DAYLIGHTS OUT OF MANY CLIENTS

INVESTING

30 September 2020

DEBRA SLABBER, CFA® Business Development Manager, Morningstar Investment Management, South Africa

Unpacking model portfolios

inancial advisers face an array of challenges daily. Their responsibilities include a wide range of tasks, from providing excellent client service, staying abreast of each client’s affairs, running a practice, remaining compliant and keeping up with professional development. They also have to be aware of changes on an individual fund level and perform due diligence checks on every single manager and fund available. Consequently, more and more financial advisers are opting to make use of model portfolios when it comes to providing an investment solution for their clients. For this reason, model portfolios have grown substantially over the last couple of years. Model portfolios enable financial advisers to save a lot of time when it comes to making investment decisions, greatly reduces their administrative burden and frees up time to focus on what they do best − providing holistic financial advice to their clients. As with any partnership, a careful and considered approach should be taken when deciding which model portfolios to use, or which investment management firm to partner with and, equally important, what platform (LISP) to use. One size does not fit all The decision to partner with a firm to provide you with model portfolio solutions for your clients should not be taken lightly. It is imperative for financial advisers to understand that not all model portfolios and/or firms that provide model portfolios solutions are the same. While there are many benefits to reap from model portfolios there are key aspects that must be considered. Model portfolios, when compared to funds, have a great deal of complexity that is often not discussed. Let’s look at some of the key considerations you should keep in mind. 1) Which firm do you want to partner with? The most important question to answer is which firm you are going to partner with when you are considering model portfolios for your clients. Important aspects to investigate are the firm’s history, track record, investment capability, process, philosophy, independence and business longevity. 2) What fees are you paying? Keeping fees as low as possible is essential. We would advise looking at fees holistically. An investment management firm constructing model portfolios often has the scale to negotiate cheaper fees on your behalf, making the model portfolios’ Total Investment Cost (TIC) lower (including the additional investment management fee) than what you would have paid when not using model portfolios. 3) What additional benefits are you getting? Make sure you understand the added benefits that the investment management firm can offer you and what they cannot offer. Will they be able to provide additional reporting, commentary, factsheets, market information, research, etc.? What happens if they make changes to the model portfolio? Will you have

access to additional technical support or systems that can enhance your financial planning practice? 4) What is the firm’s operational capability and capacity? Operational support requires a great amount of responsibility, dedication and capability. When choosing model portfolios from a provider, ensure that you ask the right questions when it comes to their operational capacity and capability. Operational support typically includes (but is not limited to) the following: • Owning the complex process of restructuring and rebalancing. The operational team must ensure that an enormous amount of checks and balances are in place before and after every restructure/rebalance. From ensuring every instruction on every platform is executed at the same time, to monitoring manager flows and liquidity. • Reviewing platform reporting every month to ensure that new restructures have been implemented for all accounts and check for any large drifts. • Monitoring model portfolios to ensure they are compliant with the mandate. • Generate, review and distribute snapshots, factsheets and other client reporting. • Compile AUM (assets under management) data for model portfolios and advisers every month. • Assisting with monthly invoicing processes. • Assisting with the onboarding of advisers to the selected models on various platforms. • Complete TIC calculations for portfolios. • Attending to client queries and liaise with service providers. 5) Which platform do you want to use model portfolios on? Last, but not least, the financial adviser must decide which platform(s) he or she wants to utilise to list the model portfolios. Just as different investment management firms running model portfolios have different capabilities, platforms range widely in terms of functionality when it comes to model portfolios. Before deciding what platform to use

A CAREFUL AND CONSIDERED APPROACH SHOULD BE TAKEN WHEN DECIDING WHICH MODEL PORTFOLIOS TO USE model portfolios on, the adviser must ensure that a thorough due diligence check is done on the various platforms to assess their respective functionality and capability. Morningstar has put together a high-level due diligence questionnaire that advisers can use when deciding what platforms to partner with. When performing due diligence on a platform, here are some key questions to ask: • Can you accommodate model portfolios? • Are you willing to work with a DFM and load funds for them? • Do you have the functionality to accommodate a model portfolio and a fund in one contract? • Do you have the functionality to accommodate two model portfolios in one contract? • In which products can model portfolios be accommodated? • In a living annuity, do you have the functionality to withdraw income from one underlying fund within the model portfolio? • Do you have specific trading days in a month? • Do you have the ability to split fees? • Are you paid fees while transactions are in progress? • What is your online capability? • How does your team deal with operational issues and errors? In conclusion Model portfolios are a fantastic way to ensure that you take your financial advisory practice to the next level by outsourcing the investment capability and some of the operational complexities that come with running an advice practice. Make sure you choose the right investment managing partner to construct these model portfolios for you and ensure that you understand the functionality and capability of the platforms you are planning to use these model portfolios on.

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INVESTING

30 September 2020

DUGGAN MATTHEWS Chief Investment Officer, Marriott

Sticking to quality and focusing on what is known

as the future ever looked so uncertain? Probably not, at least not for a very long time. The fallout arising from the COVID-19 pandemic has, in just a few months, completely upended the way we live our lives, and furthermore, has disrupted many of the assumptions we use to predict what the future might look like. It is now very difficult to know what we will be doing next year, let alone in three to five years’ time. The resultant anxiety is not only understandable, but also tangible, as evidenced by rising mental health illnesses and stress-related issues around the globe – change is difficult for most people, even more so when it is imposed upon us and unfolds rapidly. Working from home, travelling less, not going to gym and home-cooked meals were all enjoyable for a while; however, 100-odd days into lockdown and it now feels as if we are all desperate to get back to ‘normal’. This new, rapidly evolving and unstable world understandably poses significant challenges for investment managers. Economic variables are now almost impossible to predict, along with company profits where even company management teams are not able to provide earnings forecasts for the remainder of the year. With the potential for mistakes now undoubtedly high, how do we best go about generating a predictable investment outcome – our primary promise to investors? The key, in our opinion, is to keep things simple, stick to quality, and focus on what we know. WHAT WE KNOW (WITH A REASONABLE DEGREE OF CERTAINTY)

• In addition, companies of this nature are currently offering very good value as the differential between their current dividend yields and the 10-year US Government Bond yield is the widest it has been in over 30 years, as illustrated below:

• In contrast though, even the highest quality South African companies have come under pressure to retain earnings in order to strengthen their balance sheets and ensure cash is readily available to weather the crisis. As a result, dividends have been cut. About interest rates • First-world bond yields are so low that the probability of an inflation-beating long-term outcome is close to zero. • Due to a 3% reduction in the South African repo rate since the beginning of the year, cash rates in SA are now the lowest they have been in 50 years. • SA government bonds are offering some of the highest real yields (i.e. the bond yield after deducting inflation) in the world.

About the virus • A vaccine will eventually be developed. About the economy • Global economic recovery is likely to be slow, as debts (both consumer and government) must be repaid, and consumer and business confidence restored. • The first world is set to recover faster than emerging economies, as they have more resources at their disposal to deal with the crisis. • South Africa was in a vulnerable position heading into this crisis. With unemployment now at 30%, consumer confidence at a 15-year low, and an unfavourable fiscal position (which limits the government’s ability to spend to stimulate growth), South Africa faces a particularly long road to recovery. • The basics of life will carry on. No matter how tough it gets, people will continue to eat, drink, brush their teeth, require healthcare etc. About companies • Quality companies, those that have the balance sheet strength and management experience required to navigate and survive this crisis, are likely to emerge stronger. They are also likely to take market share from smaller, more vulnerable businesses and in doing so, will become more dominant in their particular industries. About dividends • High-quality, multinational companies offering timeless products and brands have been able to increase their dividends during the COVID-19 crisis.

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South African Government Bonds – attractive real yields • Best value locally – South African Government Bonds are offering real yields in excess of 5%, which are amongst the highest in the world. • Increased exposure across several portfolios – in the Core and High Income Funds, for example, we increased exposure to 7-year government bonds (R186) by 36% at a weighted average yield of close to 10%, as shown in the graphic below.

Update on portfolio positioning Taking these factors into consideration, we have positioned our portfolios as follows: Equities – quality companies for resilient growth • No compromise on quality – we apply a stringent filter process when selecting companies for our portfolios to ensure we only own shares in companies that have strong balance sheets, firstclass management teams, market leading brands and resilient business models. These are qualities that are often under-appreciated when times are good but become increasingly valued in adverse market conditions. • Maximum developed market exposure where possible – first-world stock exchanges offer investors higher quality companies, with better growth prospects and attractive dividend yields. • Defensive local market exposure – we prefer South African companies that operate in resilient industries such as food, personal care and healthcare as their dividends are likely to bounce back strongest and soonest.

• Although South African government bonds are not without risk, especially given the strain the current crisis is placing on the government’s already stretched balance sheet, they remain one of the safest and most liquid investments available in the domestic market. • We remain concerned, however, about the trajectory of government debt-to-GDP and expect a continued deterioration in the years ahead despite Minister Tito Mboweni’s best efforts to rein in government spending. With this in mind, we have limited our buying to the front end of the yield curve, favouring bonds maturing in 6.5 years (R186). Property – unpredictable dividends • Minimal exposure – SA listed property is trading at substantial discounts to Net Asset Values (the book value of their property portfolios), however, dividend risk is high as many property companies will need to retain dividends to shore up their balance sheets (avoid breaching covenants). • Prefer distribution focused REITs internationally – the growth of e-commerce has been accelerated by the COVID-19 crisis to the benefit of warehouses catering for last mile delivery and at the expense of high-street shopping malls. Cash – reduced exposure • Reduced exposure – with the South African repo rate sitting at 3.5%, there is minimal real return potential from cash. Summary A combination of high-quality, first-world listed equities for growth (income and capital), and medium-term South African government bonds for yield (income) will enable our portfolios to continue delivering reliable income and decent long-term returns. The future may be more uncertain than ever but through keeping it simple, sticking to quality, and focusing on what is known, we are confident that we will continue to deliver on our promise to investors – a more predictable investment outcome.

International Investment Portfolio Invest in high quality companies for more predictable investment outcomes.

Contact our Client Relationship Team on 0800 336 555 or visit www.marriott.co.za

INVESTING

30 September 2020

MICHAEL TITLEY Business Development, Laurium Capital

Resilience is forged in Africa

hroughout the current COVID-19 and oil crises we have heard the overuse of Winston Churchill’s famous quote, “Never let a good crisis go to waste.” A crisis is all too often a relative term bandied about in everyday conversation. It may be the loss of one’s job, the breaking down of one’s vehicle or, to a lesser degree, the empty milk carton in the fridge first thing in the morning! The COVID-19 crisis is, however, much more of a leveller, stretching far and wide and impacting most of the global population indiscriminately. If we focus in on crises that affect investment markets, some investors will be more accustomed and more prepared to cope with volatility than others. As South Africans, volatility is feeling more and more familiar, but there are other territories that bear warning labels – the African continent is such a region and it remains under-researched, underutilised and

PAUL MARAIS Managing Director, NFB Asset Management

here is no question that taken purely from an income point of view, South African nominal government bonds appear to be an attractive investment, given that the yield curve is steep with cash rates significantly lower than long bond rates. The yield on a 10-year bond is approximately 9.5% and the same value for three-month debt is 3.53%, resulting in a difference, or spread, of 5.72%. A year ago, this spread was 2.37%. In other words, investors can now earn more than twice the spread for the same increase in time to maturity, making

if you know where to look, full of opportunity companies over the years have expanded their and potential. Many African markets still present operations across different high-growth markets frequent inefficiencies, with profitable investment in Africa. Laurium’s Pan-Africa expertise has opportunities, especially in times of heightened allowed it to be better positioned in identifying volatility. Not many South African investment South African companies that have successfully managers have resourced investment expertise expanded, as well as those who are prime short into the African continent. Laurium Capital has candidates due to general difficulties operating in been investing in African equity and fixed-income foreign markets. Laurium’s hedge fund DNA has also markets since its inception helped it generate alpha across in 2008. Its latest African our strategies, both long and NOT MANY SOUTH offering is the Laurium short, as it has capitalised on the AFRICAN INVESTMENT Africa USD Bond Prescient market inefficiencies that are still Fund, which has been abundant across the universe. MANAGERS HAVE garnering interest and One of the less considered RESOURCED INVESTMENT positive externalities of working producing solid results. As Laurium celebrates in African markets is the nous, EXPERTISE INTO THE its 12th anniversary this entrepreneurial zest and, above AFRICAN CONTINENT year, it owes some of its all, resilience a team develops. success to venturing north of the Limpopo river. A member of our team has coined the phrase, The investment team’s coverage has always been “Crises are not new to Africa, there is always a crisis implemented on a sectoral basis, covering companies somewhere in Africa” and, as an investor, one tries and markets in South Africa and the rest of Africa. to anticipate where these may next unfold. When Having ‘boots on the ground’ experience provides getting exposed to a volatile market, it is important the analysts with valuable perspective on companies to keep one’s head, stick to one’s investment case, that generate their earnings across the continent, as process and philosophy. This resilience, forged in well as how competitors function. This capability Africa, bore fruit for Laurium’s portfolios in Q2 has also helped Laurium with shorting in South 2020, generating considerable upside from the rally Africa. In a search for growth, many South African in markets.

SA government bonds: just how attractive are they?

for a significantly more attractive investment case. The change in spread can be attributed to both three-month rates going down after the South African Reserve Bank (SARB) cut interest rates dramatically to support COVID-19 relief efforts, and an increase in 10-year rates as the government’s fiscal position has become increasingly precarious. Bonds also offer an attractive return relative to inflation; 9.5% on a 10year bond versus inflation, which is currently under 3%. However, while the investment case

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for bonds appears to be strong given bond eliminates 1.5 years of yield. that the yield curve is as steep as it has Even though interest rates are likely ever been, in reality this is not a riskto go lower, making long-bond yields free investment. The biggest concern even more attractive, they are not around South African government likely to go significantly lower and bonds is the duration of the investment. are unlikely to stay at these levels The key point to bear in mind is throughout the life of the bond. In that the spread is only earned if the other words, their attractiveness investment is held to to cash will maturity. In the case degrade over THE BIGGEST of a 10-year bond, time. The same this is 10 years away. can be said for CONCERN AROUND A holding period inflation, which SOUTH AFRICAN any shorter than that is also currently GOVERNMENT BONDS at the bottom of exposes the investor to capital risk. IS THE DURATION OF the cycle. Those The modified investors who THE INVESTMENT duration for a 10-year don’t have a 10South African government bond is year investment horizon are undercurrently 6.5. A 1% increase in interest appreciating this risk. rates results in a 6.5% fall in capital Investors will also need to reconcile values. Between the end of May 2020 the investment case for bonds with and the first week of July 2020 – a what is often a very bearish view on six-week period subsequent to the South Africa. This emotional gap will lockdown-induced sell-off where yields need filling throughout the life of the rose 5% – the yield on the 10-year bond bond, as evidenced by the recent capital rose from 8.8% to 9.5%, wiping out half losses experienced in the bond market. of investors’ interest income for the Given South Africa’s implementation year. On a 10-year bond, an increase in track record, a lot can go wrong within interest rates of 2% during the life of the a 10-year investment horizon.

OFFSHORE SPECIAL SUPPLEMENT

THE HEADY HUNDRED PAGE 18

OFFSHORE INVESTING â€“ THE CASH CONUNDRUM PAGE 14

WHAT HAS DRIVEN STOCK MARKET RETURNS AND WHAT COULD DRIVE THEM IN THE FUTURE? INVESTING OFFSHORE OPENS A WORLD OF POSSIBILITIES

PAGE 16

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OPPORTUNITIES ABOUND ABROAD PAGE 16

OFFSHORE SPECIAL SUPPLEMENT

ALBERT COETZEE Co-Head of Sales, Ninety One Investment Platform

30 September 2020

OFFSHORE INVESTING – THE CASH CONUNDRUM

nvesting offshore can be intimidating, and holding cash in a foreign bank account is often perceived as an easy way to gain offshore exposure. However, it is likely that your money won’t grow due to very low interest rates, and on death, it can be complicated and costly to deal with this asset. Depending on where the bank account is held, offshore probate may apply on the death of the investor. This means that an overseas agent, like a South African executor, may have to be appointed to deal with the bank account, which could be a lengthy and expensive process. Overseas inheritance tax (situs) may also apply, which can be as high as 40%, depending on the country where the account is held. What is more, estate duty may be payable in South Africa as the worldwide assets of a SA resident are subject to this tax. There may be a double taxation agreement between the countries that could provide some relief, but it is still possible that the higher foreign inheritance tax will be applicable. The foreign bank account will be frozen while the estate is being finalised. This process can be lengthy, and the deceased’s family and dependents will not be able to access the cash until the estate is wound up.

A sinking fund policy, such as the Ninety One Global Life Portfolio, provides simplified, flexible access to offshore markets. Investors can choose from a wide range of unit trust funds, which include money market and income funds. Because the funds are held in a policy, they offer a host of benefits: • Investors don’t have to worry about personal tax reporting. Ninety One Assurance Limited takes care of all the tax administration by calculating and paying any tax due on behalf of investors. • No income tax is applicable, only capital gains tax (CGT) when switching funds or selling units. This is because the underlying investments are in roll-up funds, so interest income and dividends are not distributed – investment income is capitalised. What is more, CGT is taxed at a rate of only 12%, versus a maximum effective rate of 18% for investments not wrapped in a policy. So, there may be attractive tax benefits for investors being taxed at a higher marginal rate when investing in a unit trust fund via our offshore policy. • Investors can nominate a beneficiary who will receive the benefits on their death, thereby avoiding some of the offshore estate costs associated with foreign bank accounts and offshore unit trust funds that are not held in a policy.

Change makes us rethink

Ninety One SA (Pty) Ltd is an authorised financial services provider.

• There is no need to appoint a foreign agent to deal with this asset if there is a nominated beneficiary, and no offshore inheritance tax nor South African executor fees will be payable. However, estate duty may apply in SA. • On the death of the investor, the proceeds of the policy will be exempt from CGT, if the policy is transferred to the nominated beneficiary. • After transfer, the beneficiary will have immediate access to the investment and no investment term will apply. Foreign cash may be prudent for some investors as a short-term parking facility. Holding foreign cash rather than a diversified basket of assets can be risky, as investors are purely exposed to the exchange rate, which can be volatile. Longer-term investors who seek an alternative to foreign cash, could consider accessing a low equity multi-asset fund, such as the Ninety One Global Multi-Asset Income Fund, via our offshore policy. The Fund, which aims to produce attractive income with capital growth over the long term, invests in a mix of global fixed income assets and equities. Equity exposure is no more than 40% of the value of the Fund.

Investing for a world of change

Previously Investec Asset Management

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2020/08/11 11:58

OFFSHORE SPECIAL SUPPLEMENT

30 September 2020

INVESTING OFFSHORE OPENS A WORLD OF POSSIBILITIES

outh Africa accounts for less than 0.5 percent of the world’s gross domestic products, or GDP. Investors who therefore expand their horizons beyond local borders have access to the other 99.5 percent, which makes a strong case for diversification and investing in international markets. There are other benefits to offshore investments as well, including diversifying wealth across different markets and asset classes, particularly if investors are based in a region characterised by weaker economies, volatile currencies and socio-political risks. Many investors are weighing the pros and cons of investing offshore while the rand is weak, against diversifying their portfolios as soon as possible to protect them from further upheavals and for long-term growth and stability. Our goal is to help you navigate these decisions.

Global risks There are some risks associated with international markets. Tensions between the United States and China continue to rise, impacting global markets, and COVID-19’s influence is being felt around the world as economies contract. However, we believe that even in the current environment – which is characterised by immense uncertainty – diversification and the benefits of investing offshore protect and grow an investor’s wealth by ensuring they

ISLE OF MAN AND JERSEY HAVE A STRONG TRACK RECORD, REGULATORY ENVIRONMENT AND REPUTATION

are not over-invested in any one place, fund or asset. Markets, countries and industries are impacted differently at different times – even during a global pandemic – and ensuring that one’s wealth is spread out helps to maintain it, and grow it. Investment strategies to protect long-term wealth Here are three reasons why it’s sensible to consider offshore investment strategies. 1. Building wealth in international markets is a sensible choice. At the core of building offshore wealth is a diversification strategy that ensures that all one’s assets are not in the same place and that they, therefore, cannot be wiped out by a single event. 2. There are many stable economies to invest in. One of the benefits of offshore investing is that investors can focus on highly regulated and established markets. For example, Isle of Man and Jersey have a strong track record, regulatory environment and reputation. When there is global upheaval, such as during a pandemic, stable regions weather the storm and are more likely to recover. 3. Offshore investing opens access to global markets. Investing through Isle of Man or Jersey gives investors access

to the UK property market, as well as UK and European stock exchanges. Offshore investments Long-term wealth creation is important to our clients, which is why Standard Bank Wealth International has offices in Jersey and Isle of Man to assist our clients in their wealth diversification and international investment strategies. Our investment solutions include capital-protected products, investment funds and buy-to-let property investments, and our expertise encompasses asset classes, markets and investment opportunities across the globe. There’s no better place if you want to achieve your goals. These products and services are provided by Standard Bank Offshore Limited’s subsidiaries in Jersey and the Isle of Man. Standard Bank Jersey Limited is regulated by the Jersey Financial Services Commission. Standard Bank House, 47-49 La Motte Street, St Helier, Jersey, JE2 4SZ. Registered in Jersey No 12999. Standard Bank Isle of Man Limited is licensed by the Isle of Man Financial Services Authority. Standard Bank House, One Circular Road, Douglas, Isle of Man, IM1 1SB. Registered in the Isle of Man No.4713C. The Standard Bank of South Africa Limited (‘’Standard Bank’’), an authorised Financial Services Provider (FSP number 11287) and registered credit provider (NCRCP15). The Standard Bank of South Africa Limited (Reg. No. 1962/000738/06).

GLOBAL BANKING THAT GOES AS FAR AS YOU CAN THINK WIDE. Explore our range of international banking, investing and lending solutions, and let your wealth go as far as you do. Visit standardbank.com/international for more.

These products and services are provided by Standard Bank Offshore Limited’s subsidiaries in Jersey and the Isle of Man. Standard Bank Jersey Limited is regulated by the Jersey Financial Services Commission. Standard Bank House, 47-49 La Motte Street, St Helier, Jersey, JE2 4SZ. Registered in Jersey No 12999. Standard Bank Isle of Man Limited is licensed by the Isle of Man Financial Services Authority. Standard Bank House, One Circular Road, Douglas, Isle of Man, IM1 1SB. Registered in the Isle of Man No.4713C. The Standard Bank of South Africa Limited (‘’Standard Bank’’), an authorised Financial Services Provider (FSP number 11287) and registered credit provider (NCRCP15). The Standard Bank of South Africa Limited (Reg. No. 1962/000738/06).

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OFFSHORE SPECIAL SUPPLEMENT

30 September 2020

JAMES KLEMPSTER Director: Investment Management, Momentum Global Investment Management

OPPORTUNITIES ABOUND ABROAD

espite South Africa’s entrepreneurial spirit and ‘can do’ attitude, the economy is currently under severe strain, so it is understandable that many South Africans feel the need to take money offshore. Investing offshore, however, should not be an emotional or knee-jerk reaction to economic or political local developments. It should form part of a personal and suitable long-term financial plan for each investor to reap the benefits of the greater diversification, choice and depth that global markets offer. Global markets are not a panacea, however. There are risks inherent in all investments, whether that be in South Africa or further afield. Luckily for us, there is such a deep and rich opportunity set

SEAN MARKOWICZ Strategist: Research and Analytics, Schroders

available globally that, even today, there are good opportunities for judicious investors. The COVID-19 pandemic has dominated news flow in much of 2020 but even before the virus caused the market to sell off, there were questions over the longevity of the cycle, as well as other risk factors such as Brexit, trade wars and OPEC pronouncements weighing on markets. Adding the global lockdown on top of these factors was akin to putting petrol on a fire: it provided an accelerant to some of the performance differentials that we had already seen in markets, most notably the outperformance of the US equity market versus the rest of the world. Within equity markets, ‘value’ stocks underperformed ‘quality’ stocks, which held up better, and ‘growth’ stocks, which have been the stand-out performers post the financial crisis. From our perspective, while the tech-heavy growth index is beguiling, the cohort of stocks is now concentrated and overly reliant on the performance of a handful of names that account for a large proportion of the index. Furthermore, valuations here are high and the spread of valuations between growth names and value counters is greater than even during the dot-com bubble. We believe that it is sensible to retain a blend to different equity styles, but at the margin we are tilting our equity

WHAT HAS DRIVEN STOCK MARKET RETURNS AND WHAT COULD DRIVE THEM IN THE FUTURE

Increasing valuations have been the main driver of stock market returns since COVID-19, but when we look over the past five years, we find a different set of drivers.

ince the outbreak of COVID-19, markets have climbed a wall of worry, despite cuts to corporate earnings, forecasts and dividends. The chart below breaks down local currency returns into their key components up until 30 June 2020: • Income (dark blue bar) – dividends • Earnings (light blue bar) – how fast have companies grown their earnings? • Valuations (green bar) – how has the price/earnings multiple changed? Does the market now value companies more or less, for a given level of earnings? The sum of these components equals the annualised total return

allocation away from the US and away from growth stocks towards the cheaper parts of the market. Other pre-coronavirus themes have been catalysed, most notably low interest rates among government bonds. These sovereign debt instruments do not look likely to provide significant capital gains from these lowly yield levels, but they do arguably still play a role in portfolio construction as an insurance policy against event risks. We look to supplement our fixed income allocation through the credit markets. Corporate debt markets are broad and extremely complicated and the riskiness of the securities range from close to government levels of safety to close to equity-like risks, but this variety provides opportunities for active investors. Looking forward, clearly there remains plenty of uncertainty with the US presidential election in November, Brexit, and trade wars continuing to bubble in the background. However, 2021 promises to be a year of robust recovery in economies and corporate earnings, and risk assets will have continuing strong support from the lowest interest rates in history, substantial asset purchases by central banks, and exceptional levels of fiscal spending by governments. We therefore expect markets to be well supported through 2021 and would use setbacks in the months ahead as a buying opportunity.

of the stock market, which is shown with a red diamond. There are several features that stand out: • US equities have generated the highest earnings growth of all markets shown, which investors have rewarded with higher valuations. In this sense, the US had the best fundamental underpinning over the last five years. • Emerging market equities generated the second highest total return (in local currency terms), but almost half of this came from just rising valuations, while earnings growth has been next to nothing. The collapse in

commodity prices and global trade are partly to blame. • UK and European markets have been driven by a combination of modest earnings growth and dividends. Yet, the market has failed to reflect these fundamentals in valuations, which have collapsed. Brexit fears, US-China trade frictions and the pandemic have all contributed to this decline over the past five years. • Although the US is not immune to any of these headwinds, its lower sensitivity to global trade and concentration of tech companies has meant that it has not been materially affected. • Japanese markets achieved the lowest return. Earnings growth has been meagre while valuations have fallen against the backdrop of a sluggish economy. Rebalancing of return drivers may be on the horizon Looking ahead, previous one-time boosts to US earnings, such as corporate tax cuts, are unlikely to reoccur. In fact, we may even see this policy reversed if Joe Biden, the Democratic presidential nominee, gets elected to office in November. Without this underlying earnings tailwind, US equity valuations are vulnerable to a correction. Emerging markets also appear to be on shaky ground, as valuations have been doing most of the heavy lifting for returns. On the other hand,

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countries such as China, Taiwan and South Korea, which represent roughly 60% of the emerging markets index, have largely reopened their economies with minimal disruption, following several months of stringent lockdown measures. If this trend holds, a rebound in earnings could be on the cards. Dividends have provided a solid base for UK and European equity returns, which have been supported by earnings growth. However, the global recession has forced many companies to drastically cut dividends by at least 20% or more, while analysts have cut long-term earnings forecasts. Although this has removed a key layer of support for future returns, much of this is already reflected in current valuations, which have room to recover. As for Japan, analysts are sanguine about corporate profits over the coming years, as expectations of a swift economic recovery have surged. For example, over the past month, the forecast for long-term earnings growth has almost tripled from roughly 4% to 11% a year. If investors have conviction in this profit recovery, the potential for positive contributions from all factors remains possible. The views and opinions contained herein are those of the author. Schroders Investment Management Ltd registration number: 01893220 (Incorporated in England and Wales) is authorised and regulated in the UK by the Financial Conduct Authority and an authorised financial services provider in South Africa FSP No: 48998

Your client’s investment journey is personal. Investing and staying invested can sometimes feel like a rollercoaster of emotions for your clients, but partnering with us can make the outcome worthwhile.

Start of Ben’s investment

Ben starts his investment journey with a diversified investment.

A pandemic hits and markets fall. Ben checks the value of his investments daily and starts doubting whether the intended outcomes of his financial plan are still realistic. Ben doesn’t know what to do. He’s afraid that he lost the money he’s worked so hard for and invested so carefully. Ben speaks to his financial adviser who calms him down by showing him the benefit of staying invested over time. The markets start to recover at the same time. With our goal-based investing approach, you can help your clients stay invested, like Ben. End of Ben’s investment term

With our application of behavioural science and our approach to investment management, we help you to keep your clients’ emotions in check so that they can achieve their investment goals.

Speak to your Momentum consultant or visit momentum.co.za Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.

OFFSHORE SPECIAL SUPPLEMENT

JOHN CHRISTY Investment Counsellor, Orbis

THE HEADY HUNDRED As a contrarian investor, Allan Gray’s offshore partner, Orbis, prefers to invest in businesses that are overlooked or hated, rather than in ‘exciting’ businesses whose prices are racing ahead of fundamentals. John Christy from Orbis discusses.

as recently as this January, and both companies delivered similarly strong revenue per share growth through the end of 2019. Since then, the pandemic has been considerably more painful for XPO’s shares than Facebook’s, so you ‘only’ made about 400% overall. But both stocks trounced the S&P 500’s 200% return. The lesson here is that great investments come in many different shapes and sizes – and they may not always seem obvious. The evident winners in today’s environment have been the so-called FANGAM stocks: Facebook, Amazon, Netflix, Google (Alphabet), Apple and Microsoft. One can debate their valuations, but whatever your view of these giants, there is strong evidence of truly speculative froth elsewhere. Recent research by global asset management firm Verdad showed that there are 500 stocks in the US – the ‘Bubble 500’ – that are both more expensive than the FANGAM shares and have worse fundamentals. The vast majority of the Bubble 500 are found in areas such as software, fintech, biotech and healthcare equipment – the virtual happy-hour stocks of the present day. A few may turn out to be future giants, but it’s extremely unlikely that all 500 will work out anywhere near that well. Taking a global view, we ran a similar analysis on the FTSE World Index. We looked for stocks with the worst of both worlds: higher valuations than the FANGAM stocks, but with weaker margins and slower revenue growth. We found almost 100 such companies – call them the ‘Heady Hundred’. Unsurprisingly, software, biotech and healthcare equipment stocks are well represented, as is the US.

These companies are about 50% more expensive than the FANGAMs on a price-to-revenue basis and about 30% richer on price-to-earnings multiples, yet have delivered only half the revenue growth and with lower profitability. Astonishingly, this group of stocks carries a market value of more than $3tn. To put that in perspective, the Heady Hundred are worth nearly as much as the entire Japanese stock market. Of course, some of these may turn out to be great investments. Prices can often race well ahead of fundamentals for rapidly growing businesses. Amazon has never once looked attractive on traditional valuation metrics, but that hasn’t stopped its shareholders from earning spectacular returns over its 23 years as a public company. The problem is that prices also race well ahead of fundamentals for all the other ‘exciting’ businesses that go on to falter. For those who fail to live up to their Amazonian expectations, the punishment can be swift and severe. As contrarians, we much prefer the idea of investing in businesses that are boring, overlooked, or even hated. Not only are their fundamentals usually underappreciated, but there is far less room for disappointment since there is so much less enthusiasm reflected in the price. Besides XPO, other examples in the Orbis Funds include US health insurers, emerging market banks and conglomerates, Japanese drugstores, and even a manufacturer of farm equipment. These ‘boring’ businesses have delivered revenue growth in excess of 10% per annum – and some can even hold their own with the FANGAMs. Most importantly, you don’t need to pay a heady premium for it.

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magine you are at a cocktail party in May 2012. The conversation turns to the stock market, and your friend mentions that she bought Facebook at its initial public offering (IPO) that month. You tell everyone that you just invested in a trucking business. While your friend instantly becomes the life of the party, you spend the rest of the evening staring into your drink. Your friend made a good call – Facebook’s share price has risen almost sevenfold since the IPO. But your investment in XPO Logistics was also pretty exciting. Its share price performance was even with Facebook’s

30 September 2020

Why limit yourself to only 1%? Discover the full picture by investing offshore with Allan Gray and Orbis. Most investors tend to focus their attention on seeking opportunity locally, but with South Africa representing only around 1% of the global equity market, we understand the importance of seeing the full picture and unlocking investment opportunities beyond the local market. That’s why Orbis, our global asset management partner, has been investing further afield since 1989. Together we bring you considerably more choice through the Orbis Global Equity Fund and Orbis SICAV Global Balanced Fund.

Invest offshore with Allan Gray and Orbis by visiting www.allangray.co.za or call Allan Gray on 0860 000 654, or speak to your financial adviser.

Allan Gray Unit Trust Management (RF) Proprietary Limited (the ‘Management Company’) is registered as a management company under the Collective Investment Schemes Control Act 45 of 2002. Allan Gray Proprietary Limited (the ‘Investment Manager’), an authorised financial services provider, is the appointed investment manager of the Management Company and is a member of the Association for Savings & Investment South Africa (ASISA). Collective Investment Schemes in Securities (unit trusts or funds) are generally medium- to long-term investments. Except for the Allan Gray Money Market Fund, where the Investment Manager aims to maintain a constant unit price, the value of units may go down as well as up. Past performance is not necessarily a guide to future performance. The Management Company does not provide any guarantee regarding the capital or the performance of the unit trusts. The Orbis Global Equity Fund invests in shares listed on stock markets around the world. Funds may be closed to new investments at any time in order for them to be managed according to their mandates. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees, charges and maximum commissions is available on request from the Management Company.

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2020/04/24 11:39

Ashburton Fund Managers (Proprietary) Limited (Reg. No 2002/013187/07) is an authorised financial services provider (FSP number 40169) in terms of the FAIS Act, 2002. Ashburton Management Company RF (Pty) Ltd is an approved CIS manager in terms of the Collective Investment Schemes Control Act, 45 of 2002. The Global Leaders Equity Fund is a sub-fund of the Ashburton Investments SICAV; a Luxembourg-registered collective investment scheme approved by the Commission de Surveillance du Secteur Financier (CSSF) and which has been approved for distribution in South Africa in terms of section 65 of the Collective Investment Schemes Control Act, 2002. Issued by Ashburton (Jersey) Limited. Registered office IFC 1, The Esplanade, St Helier, Jersey JE4 8SJ. Regulated by the Jersey Financial Services Commission.

FULLY INVESTED IN BRINGING THE WORLD’S BEST, TO YOU In a volatile and uncertain world, where investment returns are unpredictable, wouldn’t you like the opportunity to access up to 25 of the world’s leading mega cap stocks? Wouldn’t it be even better if they came to you? The Ashburton Global Leaders Equity Fund is a concentrated portfolio of the world’s most prominent companies as measured by market cap, with the aim of delivering sustainable superior returns over the long term through geographic and sector diversification. The fund is available in US dollars as a direct offshore offering, or via the rand-based feeder fund without having to utilise your offshore allowance. From R500 per month or a lump sum of R5,000 via the rand feeder fund, you can put your money to work with the world’s best. Visit www.ashburtoninvestments.com to find out more.

FULLY INVESTED /

A part of the FirstRand Group

INVESTING ESG FEATURE

30 September 2020

FRAN TROSKIE Investment Research Analyst, RisCura

‘

These are unprecedented times’ currently seems to be a catchphrase. The COVID-19 pandemic has easily outstripped previous crises in its impact on the global economy, and on the livelihoods of millions of people worldwide. The South African economy, which was already struggling before the crisis, is certainly no exception. The International Monetary Fund (IMF) recently slashed its outlook for global growth, forecasting a contraction of 4.9% for 2020, while the Organisation for Economic Cooperation and Development (OECD) and the World Bank are more pessimistic, predicting 6% and 5.2%, respectively. The World Bank forecasts that South Africa’s growth rate will contract by an alarming 7.1% in 2020. Recent data shows that the country has already entered a recession: South Africa recorded its third consecutive quarter of negative economic growth, with GDP falling by 2% for the first quarter of 2020. These figures do not yet reflect the impact of the lockdown. It is expected that second-quarter figures will make for stark reading. And so, in these unprecedented times, can investors be expected to pay any attention to Environmental, Social and Governance (ESG) considerations? Arguably, they should be paying more attention, particularly to the ‘S’. South Africa’s unemployment rate hit a new high of 30.1% in the first three months of 2020, even before the COVID-19-related job losses were accounted for. The emergency budget made it clear that the government faces some tough decisions as the country teeters on a fiscal cliff. Gross national debt will reach an estimated R4tn by the end of this fiscal year, and government’s debt servicing cost will spiral upward to 5.4% of GDP. To put this into context, debt servicing is likely to amount to nearly 21% of government expenditure – the single largest component and far weightier than allocations to health, education and social assistance. Public-private partnerships are now more important than ever. There have been some developments in this regard, with many South African pension funds undertaking investments into infrastructure- and energy-related funds (the E in ESG). There has also been an increased focus on governance (the G in ESG)

Going above and beyond in ESG – the neglected ‘S’

when it comes to where and how institutional investors deploy their money. Social considerations (the S) have been taken into account, but for the most part the focus is on the lowhanging fruit, as it were, in targeting asset managers who have gone some way on the transformation scale. BBBEE credentials have taken centre stage here. And they are important, but they are not the only aspect of socio-economic change that investors can target. We believe there are areas that have not yet received the attention they merit, and which require a fillip from institutional investors. Some of these are job creation, education, gender empowerment and equity. In saying this, we can’t ignore that a handful of asset managers have created funds that are tailored to focus on exactly these aspects. We easily think here of Ashburton with their Jobs Fund, Old Mutual with their Schools Fund, Victus Global (which focuses on transforming agriculture in Africa, with a particular emphasis on gender equity) and the newlylaunched Maia Capital, which focuses on social infrastructure, clean technology and financial inclusion, all overlaid with a genderequity lens. But, beyond investing in targeted funds, which is also necessary, we feel that responsible investing requires these aspects to be included in a holistic assessment of all intended investments.

PENSION FUNDS CAN AFFORD TO HOLD SOUTH AFRICAN ASSET MANAGERS TO HIGH STANDARDS OF ACCOUNTABILITY Pension funds can afford to hold South African asset managers to high standards of accountability. We don’t advocate that every South African asset manager launches a targeted social-impact fund. It is a complex undertaking and requires a specific skill set. We do feel, however, that as part and parcel of a decision to allocate capital, trustees should pose a basic set of questions to their asset managers, and even to other service providers (consultants, auditors, administrators, custodians) who they deal with. A definitive set of

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questions has yet to be formulated, and there should be some flexibility so that pension funds can focus on a particular social target, with the aim of making a meaningful difference with dedicated resources and focused investment. Examples of questions, ranging from the most basic to some more complex, could be: • What is the percentage of female ownership/management/ investment staff/support staff in the business? • What is your intention regarding gender empowerment goals? And what is your strategy to achieve your intention? • How do you engage with investee companies to ensure that they are moving toward empowerment goals? • How are you engaging with investee companies to ensure skills transfer within companies? • How are you encouraging skills transfer within your own company? • What education initiatives do you support? • How are you engaging with the broader community to ensure skills transfer? • Does the company employ graduates and trainees? • Does the company support jobcreation initiatives, and how? • Do you measure any negative socio-economic impacts generated by investee companies, and potentially address them in engagements with management?

• Do you strive to educate investors and trustees in a broader sense? • How do you measure the social impact of your investments? Which impacts are measured? This is certainly not an exhaustive list, but it does illustrate that institutional investors can and must take broader socio-economic aspects of their investments into account. Paying lip service, or targeting only one area, should no longer be an option – particularly not in an economy that will struggle to shrug off the deep impact of COVID-19. It would be remiss if we did not consider the important topic of prescribed pension fund assets. It is a widely publicised topic and is surrounded by much debate. In the latest news, South Africa’s ruling party, the ANC, contemplates possible amendments to Regulation 28 of the Pension Fund Act to allow direct investment in infrastructure. While the ruling party has commented that the issue of prescribed assets is not on the table at this stage, the point to be made here is that investors need to be proactive about ESG impacts. In this way, the changes, and the intentions behind targeting social, infrastructure and related investments, not only make sense from an investment perspective (generating the required return while fitting into their risk profile), but also make sense from a personal ethical and moral standpoint.

INVESTING ESG FEATURE

30 September 2020

Sustainability is core to future of investing

SANVEER HARIPARSAD Portfolio Manager and Head of Fixed Income, Sentio Capital Management

Invest for good: Sentio’s unique approach to ESG investing ESG is here to stay At Sentio, we subscribe to the fact that ‘wealth creation’ has evolved beyond just financial returns and asks the question, “How are returns generated and what are the consequences for society and the environment?” Consequently, we believe that greater awareness and incorporation of ESG by investors will enable a more efficient allocation of capital and contribute towards a more sustainable and inclusive economy. The term ‘ESG’ is commonly associated with sustainable investing and has recently grown in popularity due to the increase in corporate fallouts like Steinhoff and Tongaat that, in turn, have led to several ESG frameworks being developed. Sentio’s customised ESG framework To provide a more holistic risk assessment, ESG risk measures need to be integrated with an understanding of the qualitative aspects of ESG, which we refer to as ‘Following the Timeline’. In the examples of Steinhoff and Tongaat, merely analysing annual reports would not have been sufficient to provide an early indication of the embedded risk. When assessing risk, we believe there are other qualitative factors that need to be considered that are not included in a traditional ESG framework, such as the restatement of financial statements, corporate culture and management integrity. In fact, the corporate failures mentioned earlier ticked all the traditional ESG boxes, which is concerning given what materialised. Taking the above into consideration, our customised framework calculates a quantitative score of each company’s ESG record based on both our qualitative risk measures and traditional ESG metrics.

decisions by quantifying and correctly pricing the embedded risk in all debt instruments. We do this by integrating the customised ESG framework with a rigorous quantitative analysis, using tools like ‘Altman-Z’ and ‘Distance-to-Default’ to arrive at a composite internal credit rating for each issuer. This is then compared to an external rating, which helps us better assess the value of any instrument.

THE TERM ‘ESG’ IS COMMONLY ASSOCIATED WITH SUSTAINABLE INVESTING AND HAS RECENTLY GROWN IN POPULARITY

Sasol is a great example of the effectiveness of Sentio’s process. In 2019, Sasol issued their first locally listed debt instrument with a AAA credit rating (the highest quality rating), but according to Sentio’s integrated fixed-income process, this rating was not justified, given the embedded governance risk. Firstly, these debt proceeds were going to be used for Sasol’s Lake Charles Chemical Project (LCCP) in the US, which meant that the additional currency risk was not factored into the credit rating and, secondly, the timeline of events suggested that the constant revision of estimated LCCP costs, the size of the project relative to the company, and the ineffective communication channels between management and executives were clear signs that governance risk was not correctly priced into the debt instrument. As such, Sentio preferred not to invest in the instrument until it fully reflected the underlying risks. Subsequently, the instrument was re-rated with a wider credit spread. Application of Sentio’s Sentio’s unique approach thus offers clients far fixed-income process more than a matrix of ‘good to haves’ and dives In addition, Sentio’s fixed-income approach integrates deep into the core of the organisation to determine our customised ESG, equity and credit processes, the key drivers and culture that determine the true Sentio_MM_ESG_Sep 2020.pdf 1 investment 2020/08/06 14:34 which allows us to make more informed interface between risk and value.

majority of asset owners globally actively integrate ESG factors into their investment process, according to a new survey published this year by the Morgan Stanley Institute for Sustainable Investing and Morgan Stanley Investment Management. The new survey polled 110 public and corporate pensions, endowments, foundations, sovereign wealth entities, insurance companies and other large asset owners worldwide, 92% of which had total assets over $1bn. The survey’s insights include: Asset owners increasingly embrace sustainable investing. • Adoption increased from 70% in 2017 to 80% in 2019 Asset owners seek better tools and data to measure sustainability. • Forty-five percent believe social and environmental returns matter as much as financial returns • Yet, 33% lack adequate tools to assess investments against their ESG goals and 29% cite the lack of quality data as a barrier to sustainable investing Environmental issues are the top choice for thematic and impact investors. • Priorities include climate change, water solutions, plastic waste and the circular economy ESG integration remains the most common approach to sustainable investing. • Nine in ten asset owners (92%) adopting or considering sustainable investing apply ESG integration in their portfolios • Across all approaches, investors find the highest quality sustainable investing strategies in public equities (78%) and fixed income (69%) Investment managers can play a key role in ESG reporting and education. Asset owners agreed third-party investment managers can help their organisations with: • Portfolio reporting on sustainability and ESG performance (86%) as well as education on sustainable investing approaches (81%).

INVEST FOR GOOD.

CMY

Sentio Capital Management (Pty) Ltd is an authorised FSP.

A majority black-owned asset manager.

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INVESTING ESG FEATURE

30 September 2020

New report reveals SA’s top priorities for impact investing, as well as main barriers

shburton Investments, the asset management arm of the FirstRand Group, has released the findings of its new report on the priorities of South African institutional investors, particularly pension funds, for impact investing. The research was carried out by financial research firm Intellidex, which surveyed 49 funds with combined assets under management (AUM) of R2.6tn, which is equivalent to 65% of the total R4.3tn AUM in the pension fund industry. It included most of the largest funds in the industry. Heather Jackson, Head of Impact Investing at Ashburton Investments, said that 98.5% of respondents expected sustainable investing to play a more important role in investing decisions in the next five years. “As impact investors, we look for opportunities to marry financial return with a measurable positive social and economic impact. Increasingly, South African institutional investors are recognising the importance of ways of making a contribution to grow our economy in a sustainable and more inclusive manner.” One of the aims of the report was to determine the impact of Guidance Notice 1 of 2019 issued by the Financial Sector Conduct Authority (FSCA), calling for greater disclosure on the “sustainability of investments and assets in the context of a retirement fund’s investment policy statement”. The research found that the FSCA guidance had a notable impact, with most funds reviewing their policies as a result of it. Interestingly, 53% of the funds (results weighted according to AUM) said they had already met or exceeded the guidance in the FSCA note. Key findings of the report • Terminology and definitions of different investing for impact approaches vary widely across the pension fund industry. The FSCA’s Guidance Notice 1 of 2019 appears only to connect sustainable investments with ESG integration. This narrow conception limits the potential for pension funds to support a much wider array of sustainable investments. Respondents to the survey called for greater clarity on classifications and measurement. Some argue that investing for impact should become compulsory.

• Socially responsible investments globally have been increasing across the major pension markets. South Africa and the rest of Africa show similar growth trends. There

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are notable regional differences in specific approaches. • Researchers and industry experts offer differing views on whether pension funds should pursue

impact-driven investments and concur that more research and regulatory alignment will be key to enable better approaches and measurement. • South Africa’s Regulation 28 of the Pension Funds Act is lauded globally as an exemplary piece of regulation giving clear guidance that ESG factors are considered, and responsible investment is linked to the fiduciary duty of pension fund trustees. • Pension fund regulators, globally, are bringing alignment to the industry while taking into account local conditions. In particular, regulations are seeking to address the main risks and challenges of investing for impact in their domestic contexts to create an enabling environment for institutional investors to increase their investments for impact. • Respondents in the survey attempt to balance sustainability, diversification and high riskadjusted returns. Larger funds place a greater priority on improving the sustainability of portfolios than smaller funds. • The primary issue for asset managers to engage pension fund clients on is diversity, which should be taken in the broad sense to include workforce diversity, board diversity and diversification in the value chain (especially in terms of suppliers such as black asset consultants). • Almost 80% of respondents say their funds get portfolio construction expertise from asset consultants or third-party advisers, while less than 10% make use of specialist ESG advisers. • Investors report that they actively engage investee companies through shareholder resolutions. Larger funds are more concerned than smaller funds with environmental and social practices of their investments, as well as remuneration policies. • Almost all respondents expect sustainable investing to become more important in the next five years. • Survey results indicate that greater transparency, as well as more evidence that investing for impact delivers better returns, would help investors to incorporate ESG issues into investment decision-making. • Pension funds consider the major challenges to increased

INVESTING ESG FEATURE

30 September 2020

sustainable investments to be difficulty in measurement and lack of transparency. Smaller funds emphasise that financial performance is their primary concern. • After BEE, thematic investing emerged as the primary strategy for investing for impact in South African pension funds. • Funds report that they have increased their focus on impact investment in the past five years. • While pension funds vary in implementing directives of the FSCA Guidance Notice 1 of 2019, only 4% expressed no interest in pursuing the recommendations. • 83% of pension funds do expect ESG issues to become mandatory in their investment decisions. • In terms of specific concerns for pension funds when applying ESG criteria to investments, water use was the top environmental concern, employment creation was the top social concern and bribery/corruption was the primary concern in governance. • The United Nations-supported Principles for Responsible Investment, launched in 2006, has the most influence on funds’ investment approach out of several global codes. • Pension funds place a low priority on publishing investment and sustainability policies on their websites, but 60% of respondents say they make them available in other forms. Recommendations The study found that there is already significant compliance with Regulation 28 and FSCA Guidance Notice 1 of 2019. This lays the foundation to expand and entrench SRI strategies further through enhanced regulations. Intellidex draws on insights from its review of the global state of SRI and the findings of its survey and makes the following recommendations: 1. A critical step to enabling SRI in South Africa is to have a single, universal set of definitions of terms and a taxonomy of the different strategies within the field. 2. Regulation 28 needs to be expanded to include all seven activities and strategies for investing for impact as defined by the Global Sustainable Investment Alliance outlined in the report. This will enable pension funds to participate in a much wider array of opportunities. 3. Larger funds tend to be more aligned to SRI in their portfolios.

Current regulatory framework for sustainable investment in SA

South Africa’s pension funds are mostly regulated by the Pension Funds Act (24 of 1956) though certain funds are exempt, particularly the Government Employees Pension Fund, which is by far the largest. The act is given force through regulations, and Regulation 28 specifies constraints on funds with, among other things, ceilings for maximum exposures to certain asset classes. The act and Regulation 28 are overseen by the Financial Sector Conduct Authority (FSCA), which has powers to investigate and discipline funds that violate the act or its regulations. Regulation 28 was last overhauled in 2011 under then finance minister Pravin Gordhan. This made a significant change in that, instead of simply specifying prudential limits, it introduced general investment principles. These created some positive responsibilities for investment managers to adhere to certain principles, rather than simply maintaining their portfolios within asset allocation limits. These principles range from promoting the education of trustees to performing appropriate due diligence on investments. Among those principles is Regulation 28(2)(c)(ix): “Before making an investment in and while invested in an asset, consider any factor which may materially affect the sustainable long-term performance of the asset including, but not limited to, those of environmental, social and governance character.” Since the establishment of this principle in 2011, the next major document from the FSCA was the Guidance Notice 1 of 2019 in June 2019: “Sustainability

They have access to more resources and can pay for the best advice. A possible solution is to bring about greater coordination and cooperation between smaller funds to enable them to advance their SRI strategies. 4. Regulations that guide the industry specifically on measurement and metrics and bring greater transparency to SRI initiatives

of investments and assets in the context of a retirement fund’s investment policy statement.” The Notice clarifies that the FSCA expects funds, in their investment objectives and philosophy, to comply with Regulation 28(2)(b) (that funds have an investment policy statement) and should be read with Regulation 28(2)(c)(ix). Three core expectations are outlined in the Guidance Notice. First, funds should stipulate how they intend to monitor and evaluate the ongoing sustainability of their assets and the extent to which ESG factors had been considered by the fund. Furthermore, funds are required to make explicit the advantage of owning any assets that limit the application of ESG factors or sustainability criteria. Second, funds must make copies of their investment policies (even in abridged format) available to members. Third, funds are expected to report their compliance with the Guidance Notice to enable the FSCA to monitor compliance with Regulation 28(2)(b) and Regulation 28(2) (c)(ix). The Notice recognises that the field is still developing and commits to ongoing refinements of the regulations, ensuring further alignment across different parts of the investment industry and the financial services sector generally. Its primary impact is likely to be to draw out from funds their thinking and approach to ESG, making this visible to members. Further regulatory momentum can then be initiated by members in demanding that their pension funds do more to deliver on ESG concerns. ‘Investing for Impact’ - Pension funds’ portfolio strategies 2020 – Intellidex, funded by Ashburton Investments

will give investors more comfort in making decisions. 5. In the same way that Regulation 28(2)(c)(ix) guides pension funds to consider ESG criteria, a further update of Regulation 28 that encourages pension funds to include impact investments as defined by the GSIA into their investment policy statements is needed.

6. Respondents included comments that Regulation 28 should do more than encourage consideration of ESG factors and become ‘instructive’. The same would hold true for impact investments in the future. Download the full report at https://bit.ly/31sQZGR

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INVESTING

30 September 2020

Retirement planning and COVID-19: New tools help South Africans navigate a smoother retirement

outh Africans close to or at retirement are extremely vulnerable to financial shocks or setbacks. However, they also seem to be amongst the least supported when it comes to financial advice or assistance. This is according to Quaniet Richards, Head of Institutional at Nedgroup Investments who undertook extensive engagement with people approaching retirement in South Africa last year. “The choices made in the few years before retirement are probably amongst the most important and impactful decisions a person will ever make. And yet, prospective retirees told us that they have significant concerns about making the right decision when it comes to investing their retirement savings. Furthermore, they don’t feel that they have the right support to help them,” he says. The biggest knowledge gap that needs to be addressed, according to Richards, is to help people close to retirement decide how to allocate their formal retirement savings. Traditionally, this is a choice between either a living annuity or a life annuity. “This is not an easy or simple decision and should be considered with one’s individual financial circumstances, risk factors and desired outcomes in mind. We have found that while most people are aware of the options at retirement, they lack a

detailed understanding of how their decision could affect them in the years to come. “We also found that many people did not feel comfortable with either option. This uncertainty is contributing to high levels of anxiety regarding their financial situation after retirement,” says Richards. To address this need, Nedgroup Investments recently launched its MyRetirement Solution – a solution that helps retirees to plan for retirement. It includes a digital tool to visualize outcomes, a retirement coach and an innovative new living annuity product. The MyRetirement Solution uses a world-class algorithm which provides prospective retirees with a clear and comprehensive retirement action plan for their formal retirement savings. “The algorithm is supported by a retirement coach that assists retirees in navigating the tool – not only on retirement but also annually as retirees’ circumstances change. The human touch is still extremely important to this group of people – now more than ever - and we didn’t want to lose that,” says Richards. Nedgroup Investments also identified the need for a retirement solution to address the most typical concerns and limitations of traditional annuities. MyRetirement Solution uses an algorithm to recommend one of three annuities - a living

annuity, a life annuity or the innovative new ‘Living Annuity Plus’. The Living Annuity Plus effectively offers retirees the best of both worlds, providing the security of an income that last longer while still allowing annuitants flexibility to select their income and enabling provision for an inheritance. Another key consideration when creating the MyRetirement Solution was the need to keep costs as low as possible in order to maximise the amount of members’ savings that are available to provide them with an income – so the effective annual cost (EAC) of the solution is very competitive. Richards says the fact that the tool is available online has made it increasingly popular with prospective retirees as a result of the Covid-19 lockdown. “There is much more appetite for online interaction now and tools like this will go a long way to helping retirees make better, more informed decisions,” he says.

Quaniet Richards, Head: Institutional, Nedgroup Investments

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UNIT TRUSTS | INTERNATIONAL | RETIREMENT FUNDS Nedgroup Collective Investments (RF) Proprietary Limited is the company that is authorised in terms of the Collective Investment Schemes Control Act to administer the Nedgroup Investments unit trust portfolios. Unit trusts are generally medium to long term investments. The value of your investment may go down as well as up. Past performance is not necessarily a guide to future performance. Nedgroup Investments does not guarantee the performance of your investment and even if forecasts about the expected future performance are included you will carry the investment and market risk, which includes the possibility of losing capital. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. Certain unit trust funds may be subject to currency fluctuations due to its international exposure. Nedgroup Investments has the right to close unit trust funds to new investors in order to manage it more efficiently. A schedule of fees and charges and details of our awards are available on request from Nedgroup Investments.

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2020/08/31 12:32

INVESTING

30 September 2020

European ETFs turn twenty Stephen Cohen, Head of EMEA iShares and Index Investments at BlackRock, shares his thoughts on the rise of ETFs from niche product to portfolio mainstay, answers the most popular questions he gets at the helm of Europe’s largest ETF provider, and looks toward the next two decades.

Who is winning portfolios, and manage risk. Buyers the active-versusand sellers were able to transact index debate? through the secondary market of This is a popular one, but it is ETFs at real-time prices, accessing time to move on. While pitting liquidity when they needed it one against the other makes for most. Looking back over the last dramatic headlines, 20 years, every time it falsely assumes we have experienced ETFs HAVE that investors marked volatility, the must choose. The number of new ETF PASSED YET word ‘passive’, has risen – and ANOTHER TEST users which is often used once they start, they IN THE LAST interchangeably with generally don’t stop. index investing, FEW MONTHS I believe the experience conjures a lethargy during this crisis will that does not reflect the many ways accelerate ETF adoption around investors use ETFs and index funds the world. to take control of their investment outcomes. ETFs are becoming an How much bigger integral tool to implement active can index funds decisions in portfolios by all and ETFs get? types of investors, including alpha If there is a limit, we are far from managers who are now among the it. As at 30 June 2020, there are fastest-growing users of ETFs. $6.2tn in ETFs globally, and over $1tn in European ETFs^, not There’s been a longto mention index funds. These running suspicion that numbers may go up and down ETFs would not weather in the current market volatility, bouts of market turbulence but the long-term trajectory is without cracks showing – unchanged. For context, ETFs still are the critics right? account for only a small share of ETFs have passed yet another test the markets: 10% of total equity in the last few months. Amid the assets, and below 2% for bonds. greatest market volatility we have seen since 2008, the products What do the next two performed exactly as they are decades hold in store designed to. In fixed income, in for asset management particular, as underlying bond and ETFs? markets got more volatile and We will continue to see ETFs harder to trade, investors turned to revolutionising more sectors ETFs to rebalance holdings, hedge and breaking new boundaries

over the next two decades. Asset management is going through a structural shift driven by regulation and technology. A new focus on the true sources of returns will shift the industry from traditional security selection toward a whole-portfolio, outcome-oriented approach where indexing and ETFs take centre stage. Developments in fixed income, factors and the seismic shift to sustainable investing will drive the next leg of ETF and index fund growth in the region. ^Source all data: BlackRock * The first UCITS ETFs were the iShares STOXX 50 and the iShares DJ EuroSTOXX 50 listed on the Deutsche Boerse stock exchange. Risk warnings: Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. Important information: This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons Issued by BlackRock Investment Management(UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 2020394. For your protection telephone calls are usually recorded. BlackRock

is a trading name of BlackRock Investment Management (UK) Limited. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Board, FSP No. 43288. Any research in this material has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. This material is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer. © 2020 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK and SO WHAT DO I DO WITH MY MONEY are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

Stephen Cohen, Head: EMEA iShares and Index Investments, BlackRock

2 7 th - 2 8 th O c t o b e r 2 0 2 0 .

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INVESTING

EMPLOYEE BENEFITS

KINGSLEY WILLIAMS Chief Investment Officer, Satrix Investments

Long-term trends will continue to drive adoption of fixed income ETFs

s investors are navigating duration is 7.21 years. uncharted waters in the wake of the coronavirus outbreak, The case for global bonds market valuations and changes in In a recent webinar, Kingsley Williams, medium-term macroeconomic Satrix CIO, reviewed the merits of assumptions will mean that what has global fixed income investing with worked in the past may not work going Brett Olson, Blackrock’s Head of Fixed forward. Now is the time to rethink Income iShares in EMEA. Olson fixed income portfolio construction, commented, “There are clear, long-term considering all investment styles and trends that will continue to drive the using indexing to build more resilient adoption of fixed income ETFs, such fixed income portfolios. as transparency, access and efficiency. Inflation has come under control in During recent market volatility, the the last decade and yields have fallen resiliency of fixed income ETFs sent a effectively to zero in many developed clear signal to bond markets, serving countries, making the case for investing to accelerate their adoption by many in global bonds less obvious. different client segments.” For South African investors, the Global bond ETF assets under most obvious advantage of bonds is management have surpassed the $1tn the hedge against rand depreciation in mark globally, driven largely by a few instruments that have long-term trends. An significantly lower in portfolio GLOBAL BOND ETF evolution volatility than global management over the ASSETS UNDER equities. The rand is last decade has led extremely vulnerable to a more outcomeMANAGEMENT to bad news around orientated approach, HAVE SURPASSED blending indexed the world and we THE $1tn MARK are living through a and alpha-seeking period in which there strategies to try to meet GLOBALLY appears to be no other specific investment kind of news. goals. Further, modernisation of the The high likelihood of negative bond market has increased efficiency global shocks also makes global bonds and also enabled an increase in a very defensive asset class in their own ETF innovation. These trends have right. Despite the large amounts of facilitated an uptick in ETF adoption in money being injected into economies active portfolio management. everywhere, the concomitant pick-up in spending isn’t evident. This could Diversify globally send many countries into a deflationary Allocating to global bond markets gives environment. In this scenario, bonds investors exposure to an asset class act as a safe haven asset. that is a natural complement to global equities, and can play a significant New Satrix ETF offers easy role in diversifying a portfolio. The access to global bonds size of the global fixed income market The Satrix Global Aggregate Bond is $105tn. Global Bond ETFs only ETF listed on the JSE on 19 August make up $1.4tn of this total. Growth 2020. It tracks the Bloomberg Barclays has been significant with expectations Global Aggregate Index and invests that this number will double in the directly into the iShares Core Aggregate next few years. Global Bond ETFs Global Bond UCITS ETF. This ETF allow investors to access this asset class holds investment grade treasury, tactically and strategically and at low government-related, corporate and cost. Global bonds provide exposure securitised debt. US debt is the largest to a much greater and more broadly geographical exposure, followed by diversified number of interest-bearing Japan, France and China. However, securities across a wider range of the exposure to the US is significantly markets and economic environments. lower relative to global equity indices. While interest rates in developed Currently the weighted average yield markets may be at all-time lows, risk to maturity is 0.78% and the effective certainly is not.

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30 September 2020

NASHALIN PORTRAG Head: FundsAtWork, Momentum Corporate

New hybrid umbrella fund model offers clients cost efficiencies and flexibility

ompanies’ search for greater cost efficiencies is evident across most sectors in the COVID-19 battered economy. But it’s a lot more than cost efficiencies driving the move to umbrella funds, says Nashalin Portrag, Head of FundsAtWork at Momentum Corporate. Portrag says, “As the current economic situation and regulatory change fuels the trend towards umbrella funds, it’s refreshing to see the emergence of new innovative models to meet the different needs of your clients that may be considering this move.” Economies of scale and operational efficiencies synonymous with umbrella funds reduce costs for employer and employee. Ultimately this makes it possible to channel more money to members’ savings. “As the regulatory pressure on governance standards rises, employers’ and trustees’ time commitment and risks increase. More businesses are recognising that the costs and time required to manage their standalone retirement fund takes the focus off their core business,” says Portrag. However, Portrag adds that there is a general school of thought that umbrella funds lack the flexibility that standalone retirement funds offer but this is not true of all umbrella funds. He explains that some umbrella funds consciously design flexibility into the benefits available to members. Once the employer has made certain initial choices at group level, which they believe are suitable for their employees, flexibility at member level allows employees to shape their retirement and insurance benefits according to their specific needs and situation. In addition, Momentum Corporate has pioneered a hybrid model that also offers high levels of flexibility when it comes to implementation. A good case study is the large contingent of University of Pretoria employees who joined the FundsAtWork Umbrella Funds in 2019. “We worked closely with the university to implement a flexible model that addressed the needs of all employees – young and old, current and future. Existing employees were given the option of staying on the existing standalone fund or moving to the umbrella fund. This process is an exciting and fresh approach to handle these conversions – where members are empowered to make the ultimate decision. “A comprehensive engagement programme of roadshows, workplace media and written communication made sure that all members had a clear understanding of the different options and were empowered to make an informed decision, in line with their specific needs,” says Portrag. Portrag adds that another inaccurate perception about umbrella funds is that employers lose control of the management of their employees’ retirement and insurance benefits in an umbrella fund. While umbrella funds are managed by a central board of trustees who looks after the interests of members from multiple employers, some umbrella funds make provision for each participating employer to appoint an advisory body. Advisory body members are elected by the employer and its employees and help to make sure the umbrella fund addresses the needs and interests of their specific employer and employees. Umbrella fund members may also have access to value-added benefits that are not necessarily available through a traditional standalone retirement fund, as well as state-of-the-art digital platforms that enable a more integrated service experience.

Nowadays, retirement fund members expect more. Value at retirement is just not enough. They want value throughout their working lifetime.

Do your clients’ retirement funds measure up?

The FundsAtWork Umbrella Funds are redefining the value that members receive from their retirement fund. Let’s talk about: • • • • •

Flexible retirement and insurance solutions. Digital solutions to help employees make informed choices. Regular engagement to help employees understand their benefits. Additional benefits that add regular value to employees’ lives. Unsurpassed fund governance by the FundsAtWork trustees.

• Unique rewards that enable your clients to invest more in their employees.

Shouldn’t you be partnering with the retirement fund that works harder and gives more? Contact your Momentum Corporate specialist. momentum.co.za

Momentum Corporate

Momentum Corporate is a part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider. Momentum Metropolitan Holdings Limited is a level 1 B-BBEE insurer.

EMPLOYEE BENEFITS

30 September 2020

DANIE VAN ZYL Head of the Smooth Bonus Centre of Excellence, Sanlam Corporate

The unique benefits of Sanlam’s smoothed bonus portfolios

A volatile investment can be compared to a wave with peaks and troughs, where the size of the wave represents volatility. A bigger wave carries more energy.

ou want to reduce or avoid volatility because it could be uncomfortable, or even dangerous, similar to rough waves on the ocean. Removing volatility by investing in cash is similar to removing energy; if you reduce risk or growth assets, longterm performance can suffer. Can we possibly smooth volatility in a clever way, without putting the long-run sustainability or growth potential of the portfolio at risk? The answer is yes! At Sanlam Corporate we have been expertly managing volatility for retirement fund members for over 50 years. During this time, thousands of retirement fund members have been able to face retirement without having to experience a negative return due to a market downturn – and there have been many of these market downturns along the way. Our range of smoothed bonus portfolios are designed to provide members with more stable, predictable returns than they can expect from an average balanced fund. It is for this reason that the Sanlam Umbrella Fund extensively utilises these portfolios in its default strategies, including:

exposed to negative returns just before retirement. At the same time, members understand that they simply cannot miss out on earning decent market-related returns by being too conservatively invested. Sanlam’s house view is to use a smoothed bonus portfolio as the ﬁnal stage in our lifestage strategies.

The crucial years leading up to a member’s retirement During this time, members have accumulated their biggest retirement nest egg and do not want to be

As part of a living annuity strategy for members post retirement These members are susceptible to negative returns early in retirement

As the default portfolio for retirement funds with a large blue-collar membership These members are vulnerable to economic downturns and potential layoffs and these funds are often characterised by significant member turnover. These members often have industry-specific skills and they find it difficult to translate these skills to employment opportunities in other industries, potentially leading to extended periods of unemployment. Such members often rely on their accumulated retirement savings during these times and do not want to see their fund value decreasing in times of economic upheaval. A portfolio that combines smoothing and protection on benefit payment events (where a member leaves a fund) is often popular with these members.

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when they start making regular withdrawals for retirement income. This sequence of return risk has the potential to significantly reduce the member’s likelihood of having a successful retirement outcome. At the same time, members cannot afford to be too conservatively invested as they still have a 20- to 30-year investment horizon ahead of them. A smoothed bonus portfolio, either on its own, or in combination with more aggressive portfolios, can significantly reduce the risks that these members face. The benefit of using Sanlam’s smoothed bonus portfolios can easily be seen when considering how one of our portfolios, the Stable Bonus Fund, protected member’s savings during the last two market downturns. Members retiring during March 2020 had the benefit of knowing that their fund value would not decrease due to the COVID-19 linked market downturn. Additionally, Sanlam was not forced by either of the above market crises into a position where we needed to close our existing portfolios / bonus series. The above was achieved without sacrificing significant long-term

returns. This can be seen from the graph below, which compares the returns of our Stable Bonus Portfolio with the AF Global LMW median (A survey representing an average South African balanced fund). The end result is that a member invested in the Stable Bonus Portfolio, as well as many others investing in any of our smoothed bonus portfolios, could face retirement with confidence, knowing their retirement savings survived the Great Lockdown and are not languishing in quarantine. Sanlam corporate smoothed bonus range for retirement funds Sanlam Corporate has a long history of providing smoothed bonus portfolios – the first to be launched were the Alpha Bonus Portfolios more than 50 years ago. These portfolios closed and clients transferred into the Stable Bonus Portfolio in 2010. We were the first in South Africa to launch a smoothed bonus portfolio which has exclusively black underlying asset managers, the Progressive Smooth Bonus Fund.

RISK

30 September 2020

COVID-19: Life insurance industry ‘prepared for the unprepared’

he life insurance industry is prepared for the unprepared in the wake of COVID-19, according to Liberty’s Chief Medical Officer, Dr Dominique Stott. “We are certain that there’s going to be uncertainty, and we’re doing our best to provide clients with the very best cover that we can,” she adds. Dr Stott was speaking at the launch of the COVID-19 Trends Report, Navigating the Flux, that was commissioned by Liberty*, and which suggests that the long-term health effects of the coronavirus could mean drastic changes ahead for many South Africans. Hospital overload The effects of the pandemic will be both direct and indirect from a health perspective. “We already know what the direct effects are on the population with the spread of the coronavirus, with the biggest threat to healthcare systems and insurers being hospital and ICU overload as victims seek urgent medical attention.” The severity of COVID-19 infections is correlated with age, demographic factors and pre-existing medical conditions; notably, obesity and diabetes, which are prevalent in South Africa. “Due to the number of people infected, we are receiving a lot of applications for insurance from people testing positive for COVID-19,” Dr Stott says. Liberty is, however, underwriting these people in the normal way. “We understand that people are feeling uncertain, and one of the things that gives them confidence is for them to know they’ve got some sort of long-term insurance in place, should something happen to them.” Mental illness One of the indirect health implications that is of concern relates to mental illness that has come about due to the extended periods of lockdown and isolation, as well as anxiety regarding finances, unemployment and fears around family members catching the virus. “We expect a mental illness tsunami,” Dr Stott says. “We’re providing for this in the insurance space by carefully underwriting applicants. We’re also providing claims benefits for people who are suffering from mental illness now, to make sure that people have got something to fall back on, and so that they can then recuperate and get back into the work environment as soon as possible.” The COVID-19 Trends Report finds that the lockdown has led to an increase in depression, anxiety and suicide

thoughts among South Africans. The South African Depression and Anxiety Group reports that call volumes have more than doubled since the beginning of lockdown, from 600 to 1200-1400 calls a day. Dr Stott is unsure about how the country’s public healthcare services are managing the coronavirus. “Even before the pandemic, we had a health service that was underfunded and under-resourced. You mix that with a population of which 13% are diabetic, and where nearly 70% are either overweight or obese, as well as the high proportion of people with hypertension and those with HIV – I’m not sure that our public health sector can manage. We’ll have to wait and see.” She believes that the lockdown has been of enormous benefit to the health services, both public and private, as it slowed down the infection rate. She is also of the opinion that the alcohol ban freed up many beds in hospitals for COVID-19 patients, as healthcare officials did not have the additional burden of coping with trauma-related problems associated with alcohol. Organ damage In the long term, there are unknowns around the lasting health complications for COVID-19 survivors. “The very long-term effects are almost unpredictable with regards to organ damage, the early onset of dementia, as well as lung fibrosis, and just how much is going to come around as claims,” Dr Stott says. The COVID-19 Trends Report contains information from a hospital in the UK where it has been observed that those with COVID-19 suffer from “moderate to severe acute kidney injury in about 20-30% of patients, and 30% of patients who are admitted to intensive care for COVID-19 infection are requiring dialysis – so the numbers

are much bigger than we envisaged based on the data coming out of China”. There are also accounts of a small but significant number of patients reporting persistent lung problems, diagnosed as fibrosis. The way that the virus impacts the lungs for some patients is a major concern since humans reach maximum lung capacity at around the age of 18 to 20, and from then on lung function declines and any loss due to damage or illness is not recoverable. Deferred surgeries and treatment Dr Stott is also concerned about the negative impact on patients with other critical and chronic conditions who will, out of fear or out of necessity, delay going to hospitals for treatment or procedures until the risk of contracting COVID-19 is reduced and/or until hospitals have the resources to attend to them. In South Africa, researchers estimate that COVID-19 precautionary measures will result in 146 000 cancelled surgeries, 12 000 for cancer. “We’ve also seen delays in HIV patients getting hold of ARVs, leading to treatment delays,” she adds. According to Aidsmap, 13% of respondents in a recent South African survey said they had lost access to regular medication that they needed since COVID-19 lockdown measures were announced. Studies illustrate that a three- to sixmonth interruption of HIV services across sub-Saharan Africa could lead to as many as 550 000 excess deaths from HIV, or a 2.2 times increase in the current annual death toll from the disease. The World Health Organisation believes that people will continue to die from COVID-19-related disruption for at least another five years, with an average annual excess in deaths of 40% over that period. The COVID-19 Trends Report

further states that, in Africa, activists are concerned that COVID-19 will set back women’s access to reproductive healthcare and contraceptives. They believe that if female sexual and reproductive health services are not considered in government’s COVID-19 response policy, there could be a rise in sexually transmitted infections and unintended pregnancies, including high-risk teen pregnancies, over the next few months. David Jewel, Group Executive for Retail Solutions at Liberty, believes that the COVID-19 pandemic has heightened awareness of the need for life insurance. He was speaking alongside Dr Stott at the launch of the COVID-19 Trends Report. “We’re certainly seeing an increase in demand for the kind of peace of mind and certainty that we, as a business, provide.” The uncertainty surrounding the coronavirus means that people are reassessing what is important to them. “As a business, we believe that this presents us with an opportunity to live out our purpose and fulfil the promises that we have made to our clients: paying claims as quickly as possible and being there for clients in the moments of their greatest human vulnerability.” Jewel says that in order to do this, Liberty has, as mentioned in its half-year results, established a pandemic reserve of R3bn (before tax). In addition, the insurer continues to manage its balance sheet prudently so that it can continue its role of providing certainty to clients through providing solutions that meet their needs as those needs evolve. “There’s no doubt that this pandemic is changing how our customers think about life insurance and the risks and consequences of not having their financial affairs in order,” he adds. *Liberty’s COVID-19 Trends Report, Navigating the Flux, was released via webinar last month.

Dr Dominique Stott, Chief Medical Officer, Liberty

David Jewel, Group Executive: Retail Solutions, Liberty

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RISK

30 September 2020

STEVE PIPER Chief Distribution Officer, FMI (a Division of Bidvest Life Ltd)

Keeping up with the times is vital for the future of our sector

he world is changing at a rapid rate. And along with it, perceptions about life insurance are changing. According to a recent Gallup poll, millennials (defined as individuals born between 1981 and 1996, currently aged 24 to 39 years old) are the least engaged when it comes to insurance, compared with preceding generations. This is reflected in the alarming insurance gap in this market segment of around 60%1.

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According to Gallup, this has serious long-term before proposing a lump sum life benefit that implications for the insurance industry if ignored this client base sees no need for. The COVID-19 because millennials will grow to outnumber any pandemic has demonstrated to many South other market segment in the years to come, as Africans just how financially catastrophic a they age. Rather than being disregarded, we need break in income can be and highlights the to investigate what drives this lack of engagement importance of making sure your income is and seek ways to overcome these barriers. And protected, as more and more people don’t have this starts with understanding who this individual sick leave benefits or other formal group benefits is and what makes them tick. to fall back on. This opens opportunities to fill Millennials are getting any gaps in a client’s policies, married, having children, if we adapt to the needs of this and buying homes later than modern customer. LIFE INSURANCE previous generations. They are Having a better NEEDS TO individualistic, self-reliant, wellunderstanding of these KEEP UP WITH educated and tech savvy. They markets and being able to want autonomy, flexibility and provide tailored solutions GENERATIONAL financial freedom. This mindset to meet their needs will go a SHIFTS IN THINKING long way in reaping success. is moulding a new employment landscape, which has only been By innovating in areas that accelerated by technological advancements, an address this generation’s unique needs, we can emerging gig economy and COVID-19. ensure the relevance and sustainability of our We cannot continue to market like we did sector. This has been a real focus area for us at yesterday. We need to remain relevant if this FMI, by enhancing our cover to provide income industry is to survive. The status quo will no protection for more diverse occupations such longer cut it. as freelancers, independent contractors, and individuals with multiple sources of income. So how do we do this? Life insurance needs to keep up with 1 According to a recent ASISA Gap Study, the 20- to 35-year-old generational shifts in thinking and not hold on market is dangerously underinsured, at around 60%. to the way of doing things in the past. When it comes to risk insurance, specifically, that starts Sources: Pew Research Centre, Property Casualty 360, Yes and agency insights, Gallup with looking to protect your clients’ income

EDITOR’S BOOKSHELF

30 September 2020

SECURE YOUR PENSION AFTER COVID-19 BY BRUCE CAMERON AND WOUTER FOURIE The people who face the biggest dangers from the COVID-19 pandemic are pensioners. The virus places their lives at greater risk, and their limited finances are under serious threat. They need to act now to ensure they keep themselves financially afloat. And the COVID-19 virus is not their only threat. They were already faced with the major fallout from state capture under Jacob Zuma’s presidency and the resulting downgrading of South Africa to junk status, and the plummeting of the value of the rand. This book clearly explains the challenges facing pensioners, and outlines what they can do to improve their situation. Written by award-winning author Bruce Cameron and leading financial planner Wouter Fourie, and based on research by the country’s largest pension fund administrator, Alexander Forbes, as well as life companies Just SA and Sanlam, this book is essential for anyone concerned about their financial future.

RECESSION, RECOVERY & REFORM SOUTH AFRICA AFTER COVID-19 EDITED BY RAYMOND PARSONS Like all countries, South Africa has been grappling with the deadly coronavirus (COVID-19) since it made its untimely appearance on the world stage earlier this year. Although it is tempting to put everything else on hold while acting to contain the virus and treat its victims, COVID-19 has highlighted and indeed reinforced the existing serious fault lines in South African society – from record levels of unemployment and a depleted fiscus to ever-deepening poverty and inequality. When the public health crisis eventually subsides, the old structural socioeconomic problems will of course still be there, but they will be felt more acutely in the aftermath of the coronavirus hurricane. What should South Africa be doing to prepare for the ‘new normal’ after COVID-19? That is the overarching question that a new book from Jacana Media, Recession, Recovery and Reform: South Africa after Covid-19, seeks to tackle. Edited by prominent economist Raymond Parsons, the book comprises a fascinating collection of essays by some of South Africa’s top intellectuals and thought leaders. While covering a wide range of topics – from labour market and land reform to economic empowerment, fiscal policy, productivity and the role of business in policymaking – the book’s core message is this: South Africa needs to reimagine a better future by using lessons from the past to craft and implement bold reforms that will pave the way for a more just and resilient society. Fundamental reform in many areas is long overdue. The so-called ‘lost decade’ under the Zuma administration provided ample evidence of the extent to which the country had drifted from its moorings and allowed its once strong economic values to be abandoned. These values need to be restored and a new trajectory envisaged, with buy-in from across the socio-economic and political spectra. But instead of elaborate (and largely unrealistic) plans, a ‘back to basics’ approach is the way to go. In short, the national agenda needs to be drastically and irrevocably reconfigured.

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Once South Africa begins to emerge from the deep recession that has inevitably come in the wake of the COVID-19 lockdown, there will be a unique opportunity to recalibrate the economy for inclusive growth by getting more people working, collaborating and contributing. The full list of essays and their authors are: Law and the economy through a social-justice lens (Thuli Madonsela) The media and the markets (Lukanyo Mnyanda) A jobs policy for greater inclusion (Antony Altbeker and Ann Bernstein) Making economic transformation work (Bonang Mohale) South Africa’s fiscal crisis: Is there a way back from the brink? (Lumkile Mondi) Why does South Africa have inflation targeting? (Dennis Dykes) Banking on the future: The banking sector in South Africa (Cas Coovadia) The emerging role of business: From outsider to strategic partner (Tanya Cohen) A free market for a more prosperous South Africa (Temba Nolutshungu) Productivity: The catalyst for competitiveness and sustainable growth (Mthunzi Mdwaba and Mothunye Mothiba) Evolution of South Africa’s land-reform process post-1994 (Tinashe Kapuya and Wandile Sihlobo) The township economy in post-apartheid South Africa (Fulu Netswera) The political economy of giving economic advice (Raymond Parsons) Recession, Recovery and Reform: South Africa after Covid-19 is a must-read for those who are concerned about South Africa’s well-being in these deeply uncertain times and who are willing to believe that a better future is still within our grasp if we make the right choices.

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