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OW Mzansi! You guys are GREAT! Having said that, this is not a time where politicians and citizens alike should be gloating. It is a time for consolidation. Adjectives such as brilliant, unforgettable and life-changing are the flavour of the day as we exit a mind blowing month; the culmination of the joint efforts of Government, Soccer S.A. and a nation at large. From a rather doubtful beginning, to rather embarrassing infighting, to sinkholes in Rosebank, to transport infrastructure worries and impending labour action, the list goes on and on; we have not done badly at all. In fact I'd hazard to call it a resounding success. Now all that remains is for all of us, from government, business, the media and the population to pledge our commitment to what we are capable of achieving. I will be asking our Board of Directors to support me in advertising our shared pride and belief in this remarkable country and its people. We need to treat obstacles and challenges with the same sense of urgency, ownership and pride we have displayed not only to the globe, but much more importantly, to ourselves and each other. Our reputation as a miracle nation has been bolstered not by yet another peaceful election, but by a remarkable event, the biggest of its kind in the world. And we've done it with grace, uniquely African character, in a safe way and as one! Most remarkable to me was the lack of partisan politics or blame being apportioned. The delivery was all that hit the headlines, whilst no doubt there were some difficult discussions taking place behind the scenes. The global reach of the money well-spent on advertising our country and its yet-to-bediscovered attractions remains to be seen, but what a stage! On a few occasions, I was emotionally touched by the service, friendliness and ownership displayed by folk, employed to usher us on and off buses and the awesome Gautrain, to offer us a cool drink, or being given directions by a traffic officer whilst walking down the Fan walk in Cape Town. These guys are supposed to be rude, accept bribes and not care a damn. Not the one's on duty in the World Cup. They went out of their way to “Protect and Serve” and did us all proud. The SAPS also deserve a huge hug and thanks for doing the impossible i.e. keeping the peace in an environment where supporters can get a little testy at times.

The lasting impact of the Soccer World Cup will be with us forever. One hears of a migration of sporting codes, notably rugby, to these new world class facilities. It is up to South Africans to support these initiatives and make it work, not watch others and criticize from the sidelines. The attitude between service providers and customers was world class and plenty of people from the previously negative and skeptical media, locally and abroad, have changed their opinion from doubting Thomas to impressed disciple of Madiba magic. On this note, it was with a mix of adoration and worry that I joined the 85 000 spectators to give this old gentleman a rousing welcome to Soccer City last night. He looked rather frail, but that smile still carries the magic that still reflects the inner strength and magnanimity of this amazing human being. Changing tack to markets and the more mundane, but nevertheless important business: I remain concerned that these markets still carry an unusual level of volatility and risk. The globe is an unsettled place and, until this moderates, I would advocate caution. NFB has a series of Funds which we manage through the capable team in our Asset Management business. These funds, in their current form, have a track record which has them delivering outstanding results whilst (and probably because) they err on the cautious. The results we as a business are interested in, are three years and longer in duration as we regard measurement of shorter periods too vulnerable to “noise”. Please ask your advisor to discuss these as they certainly have a place on the smorgasbord of choices out there and, if blended well with other top performing funds with a specifically aggressive or alternatively cautious mandate, can and have delivered results we are proud of. AYOBA. They say the time is now, but I have a feeling it is just beginning! Mike Estment, CFP® CEO, NFB Financial Services Group

Mike Estment

IN THIS ISSUE From The Ceo’s Desk Income In A Low Interest Rate (Low Return) Environment Being Active Is Good For Your Retirement Health


financial services group

INCOME IN A LOW INTEREST RATE (LOW RETURN) ENVIRONMENT When considering various investors and their portfolio objectives they could loosely be categorized as growth investors, income investors or a blend thereof. In many instances a portfolio will have both growth investments and those that provide the investor with an income. This article will focus on the income investor and will explore current investment considerations and investment products. By Stephen Katzenellenbogen, Private Wealth Manager, NFB Gauteng


hilst equity markets have fallen off substantially from

rate prospects we do not expect rates to rise substantially any time

their 2008 highs (see graph below) investors who

soon; nor do we expect rates to rise, over any time, to the fifteen

have had market exposure, and have had this for a

and twenty percent levels seen historically.

number of years, have been rewarded with

generous long term returns. Furthermore, those investors (growth) who still have a long term investment horizon, and those who picked up some exposure during 2007, should not be too concerned about current volatility and short term prospects.

Before we get in to the detail of our discussion let us look at a quick example illustrating the effects of income on an investment in a negative return environment. If you had R100 and took income/withdrawals equal to 10% over a period where that investment return was -20% your total investment return for that Now consider those investors who are unable to watch from the

period would be -30%. Thus, in order for your, now R70, to get back

sidelines and who rely on interest income, or income of another

to your original R100 you will need a return of 43%.

form; they are faced with a slightly different proposition with interest

(As a side note and potential topic of discussion with your

rates currently at their lowest level in 30 years coupled with volatile

advisor: there is an inverse relationship between the amount of

equity markets still well off their historical highs. In terms of interest

income you are taking and your possible exposure to growth assets;

although dependent on your overall portfolio and risk appetite.) The above example, and discussion, highlights a number of

also assume that the investment return in year one is 9% net of costs. At the beginning of year 1 the client’s income will be equivalent to

topics of that will be discussed throughout this article:

R30 000 (3% x R1m) and then at the beginning of year 2 the income

- Return expectations – is the past a good predictor of future

will be R31 800 (R1m + (9%-3%) x 3%).


The older you get the more aggressively you can increase your

- How much (income) is too much?

income, as reducing your capital base become less of a potential

- A means to an end…

problem. All of the above takes careful analysis and forecasting as well as

Return expectations – is the past a good predictor of future returns? When attempting to quantify a probable investment return there

a thorough understanding of investment markets and vehicles – please contact your NFB financial advisor for assistance and thorough planning.

are two ways we can go about this: • Assessing historical returns

A means to an end…

• Predicting future returns based on the economic climate and

To have a regular income from an investment does not necessarily


mean that it must be a traditional retirement product.

In reality both the methods above are filled with pitfalls, but do

We will not be discussing all of these, but here are some

give us something to work with. In the context of this article we will

examples of products that can deliver or supplement income:

venture that a combination of both assessment tools can provide

• Living annuity

some insight.

• Compulsory annuity

Interest rates are likely to remain low for some time and unlikely

• Voluntary annuity

to flirt with low, double digit returns in time to come. When

• Shares – dividends

considering equity markets returns it will take global markets a

• Unit trusts

number of years to deleverage and work the historical structural

• Matured endowments

faults out of the system. This is not a doom and gloom scenario, but

• Structured products

rather perhaps a signal to start readjusting our return expectations

• Income funds

to something more muted and commensurate with inflation, interest

• Dividend income funds

rate and future market return expectations. Furthermore, we must not forget tax and expenses which will impact your investment

Shares and dividends


With cash in the bank currently returning around 6%, a dreary bond

A final remark on this topic is that your portfolio will require a portion of growth assets, commensurate to your risk profile, in order to provide a measure of inflation protection. Once comfortable with the likely investment returns the next

outlook and slowing property market, dividend paying shares provide an interesting alternative. If you are a marginal tax payer (40%) your current net return on cash, assuming 6% interest, is 3.6%. (as an aside: have you ever

step is to, in some cases, adjust downwards what we believe to be

stopped and considered that cash is the most expensive investment

sustainable levels or amounts of income.

you have – you earn 6% and the bank ultimately lends your money out to the guy next door at 10%, thus making a 4% margin?).

How much is too much?

Currently, there are a number of shares available displaying

When considering what level of income is ‘safe’ or reasonable to

attractive dividend yields – if you were to buy a stock that has a 3%

draw from your investment you will need to consider both inflation

dividend yield all you then need is a modest 1% capital

and the potential duration of the investment. When pondering

appreciation and you are ahead of cash.

these factors, for this and any other investment, rather err on the side of caution than have an unwanted surprise should you outlive

Dividend income funds

your assets.

These funds provide a very attractive after tax yield for high tax

Either directly or indirectly all of us are affected by inflation

payers (and corporates), in the form of a dividend. Although

every year through rising medical expenses and a rise in the general

conservative in nature these funds are not without risk, and more

cost of living. This in turn means that year on year we require a bit

specifically, tax risk. NFB is currently analyzing the dividend income

more to cover our expenses. Therefore, consideration must be given

fund universe and suggest that all current and potential investors

to the fact that you will need 5% - 10% more income each year to

speak to their advisors in order to fully understand the investment

carry on with the style of living to which you are accustomed. If you

opportunities and possible pitfalls.

are currently 60 years old and require R40 000 each month, in 30 years’ time this will translate into an income requirement of R230 000

Outcome…of income

per month with inflation at 6%. Put another way, R1m today will only

If not limited by space it would not be hard to write a few thousand

be worth R175 000 in that same 30 years’ time.

words on our topic. What is difficult is to temper investor

When possible, an income level of 1%-5% should allow the asset to grow beyond the drawings which will then naturally give you additional income every year. Let us, for illustrative purposes, use an investor who has R1m and draws income at 3% per annum. Let us

expectations as well as ignore short term market movements in favour of a properly aligned long term portfolio. We look forward to getting your thoughts and input on this challenging subject.



HEALTH Active management assumes action – now more vital than ever in the management of your living annuity. Written by Philip Bartlett, Private Wealth Manager, NFB East London


although making for interesting debate, is not really adding value to

1. Risk - what risk is one prepared to take in order to sustain income?

the management of one of your most important retirement assets.

2. Growth - how will one invest capital in order to sustain a growing

Active management, which assumes action, is essential, and if ever

income stream over the long term?

there is a time for the dynamics of the working relationship between

3. Income - what rate of income is sustainable without

advisor and client to take hold, it is in the management of a living

compromising the appropriate risk mandate (1) and ensuring the


longevity of income stream by growing capital (2)?

t would be naive to expect the recessionary consequence to

shoppers return. One surely needs to copy and paste this ethos into

have hop-scotched one's living annuity, and it would be

the Living Annuity strategy.

hazardous to carry on regardless. Unfortunately, the holding of thumbs and the ability to quote sound bites from Summit,

The hangover from the historic Bull Run is the delusional expectations of an easy income stream. Three years ago cash was giving you 11%, and an income rate of 10 % was sustained with no risk

There are really only three components an investor can manage:

In a world where risk is up and

if ever there is a time for the dynamics of the working relationship between advisor and client to take hold, it is in the management of a living annuity.

growth is down, cost cutting must surely be the first responsible step to take in a bid to protect the longevity of one's income stream. The reality of the matter, however, is that not everyone is in a position to manage

and a real return on capital left under the Christmas Tree. But one needs to put this into some sort of economic context and defer to the lie of the land at that time -

a bottom line, when ultimately, it is managing them. It is in this space that something has to give; either one

inflation at the beginning of 2008 was sitting at 10% and the Repo

compromises the growth element and focuses on capital

rate was 11%. If we were to mirror the context in today's terms, it

preservation and income generation, or one compromises the risk

equates to an income of 6% and a cash return of 6.5%. The obvious

element and risks capital erosion in the short term, trusting the

conclusion is that a 10 % income stream in today's world comes with

growth assets to adhere to the cyclical nature of the markets. Both

a whole new set of dynamics.

seem reasonable options - but neither is sustainable for a long

Like any going concern, cash flow is an active element of management. When demand falters and prices bottom out,

period and requires close monitoring together with your advisor. As mentioned above, one needs to actively assess the world

successful business owners focus on their bottom lines, cutting costs,

around us, and adapt accordingly. The good times will come again,

retrenching and tightening up on the entertainment allowance, all

but for the moment, “vasbyt� comes to mind.

in a bid to preserve working capital in readiness for when the

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NFB Proficio vol 51  

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