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eflecting on the last few Proficio publications, I note our almost serial focus on retirement planning, appropriate investments and the strategies both pre- and post-retirement. I initially wondered if this pre-occupation was indeed healthy or if I needed to have a word with our Editor-in-Chief down in East London! South Africans are amongst the world's worst when planning and executing their retirement investments. This fact, together with some rather significant changes in the taxing of dividends (Dividends Withholding Tax, DWT) and the significant increase in Capital Gains Tax (CGT), adds fuel to the argument supporting Retirement Investments being both necessary and even more attractive than other investment options. As usual, we get the news piecemeal, meaning that SARS have not quite decided exactly how the rules will change, but change they will. There are a few anomalies which we are personally investigating and once we have achieved clarity, we will broadcast to our clients. These include large contributions to Provident Funds, the proceeds and original disallowed contributions being available at retirement, with a large portion thereof being free of tax, having grown tax efficiently whilst invested in such fund. This approach holds currently, where disallowed Provident Fund contributions are withdrawn at retirement, free of tax against the fund capital - in addition to any lump sum withdrawal taxed in accordance with the Tax Tables on Lump Sum Benefits from Retirement. SARS have indicated that they will, in leveling the playing fields between different pension products (Pension, Provident, RA and Preservation Funds), not impinge on existing rights that investors are entitled to. As is normally the case, and particularly given the surprise dished out in the levying of a 15% DWT as opposed to the 10% which the market had "safely" assumed, we will need to adopt a cautious approach to reading too much into their indicated intention. Nevertheless, it is clear that opportunities exist in straightforward retirement investments, where one assumes typical access to funds on retirement. The BIG DEAL is that these products enjoy a completely tax free return, and more recently, the institutions who historically had a strangle hold on retirement products have had this "piggy bank" raided, inasmuch as the Minister of Finance has announced the broadening of the playing field to include other registered vendors including the Unit

Trust Management companies and other appropriate and LICENSED entities. This is bound to lead to cost compression (savings) for investors as this exclusive "club" is opened up to a new breed of more client friendly, new generation product providers who will help us change the rules in this massive part of the savings industry. One of the key benefits in the investment industry is "scale". This works two ways: historically the "giants" of the industry dictated by pure size. Losing an individual client or even hundreds, made little or no difference. This loss would be replaced by a flow of funds from new pensioners, restricted by law and regulation to place funds to this same Pension Fund! Until recently it was almost impossible to even opt out of a fund, and the fund administrator had the right to apply unbelievable penalties and time delays before allowing funds to move. No more! The second point with regards scale was the development of a professional advisory market, notably with some larger players such as the NFB Group. Suddenly, the institutions where no longer able to divide and rule, as the advisory businesses acted as gatekeeper in both directions, channeling large investment flows to the institutions and dictating terms of business much more beneficial to the clients and advisors alike. The new game will be played on a new playing field and we look forward to being in the vanguard of this critically important and very significant piece of the savings puzzle which, if used cleverly, will allow for more cost efficient and materially more tax efficient compounding of savings. We have done some early calculations of the impact of these two complementary, positive changes and the outcomes are certainly material. We don't think that we will be able to change the game for everybody, but we look forward to bringing these developments to a head and continuing to finesse the proposition to our clients. There are some very important aspects of planning such as ensuring sufficient liquidity, diversification and others, which mitigate against one investing all of one's savings in retirement funds. The devil will be in the detail. What is absolutely clear, however, is the added advantage these investments offer. I would urge our readers to engage with us to more fully understand these developments and their application in your respective portfolios. Mike Estment, BA CFP® CEO, NFB Financial Services Group

IN THIS ISSUE From the CEO’s desk A look at NFB’s range of Model Portfolios Reality cheque

financial services group

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A look at NFB’s range of Model Portfolios In October of 2011, NFB in conjunction with NFB Asset Management, launched a range of model portfolio solutions for its clients. We thought that it would be opportune to spend some time discussing the origins, purpose, and mechanics of these models. By Andrew Duvenage, Director/Private Wealth Manager - NFB Gauteng. The background to the fund: investors' dilemma Selecting from South Africa's ever-expanding universe of unit trust funds and then blending these funds together in a way that is sensitive to investor's needs as well as current market conditions has become an increasingly difficult challenge. To contextualise this, there are currently around 750 unit trust funds available in South Africa, despite the fact that there are only around 350 shares on the JSE (of which around 100 are actually large enough and liquid enough to be used in unit trust type portfolios). This massive amount of choice that investors are faced with is problematic in that there are funds that have produced excellent results, while some have had less than satisfactory outcomes. Selecting and blending the top performing asset managers is a significant challenge. Furthermore, the challenge for investors is to ensure that the selection and blend of funds used is blended favourably, and proactively managed over time to produce optimal long term performance and results. Ensuring that these solutions remain administratively and cost efficient makes the challenge that much harder.

The response: Model Portfolio solutions In response to this, NFB together with NFB Asset Management, have created a range of risk-profiled investment solutions that blend together the country's leading portfolio managers and administration systems. NFB advisors aim to provide you with holistic personalized financial planning services, part of which is focused at evaluating your appetite for risk and determining your overall investment objective in an effort to determine the most appropriate Model Portfolio or combination of Model Portfolios for you. NFB Asset Management, within a rigorous Investment Philosophy, will be providing portfolio management expertise, most notably asset allocation, fund selection and portfolio construction to the Model Portfolios.

The elements of a model portfolio =

Asset Allocation is conducted within a robust framework that seeks to identify over- and under-valued asset classes and then to under- or over-weight these depending on market conditions and the benchmark of the Portfolio. = Fund Selection seeks to identify the country's best fund managers from the country's best fund management houses through quantitative and qualitative screening tools and then to do so on an ongoing basis. = Portfolio Construction blends asset allocation and fund selection for a given set of Portfolio objectives and requirements.

The Range Of Model Portfolios =

The Cautious Portfolio is a low risk solution with the objective of providing investors with conservative capital growth. The maximum equity exposure is 40%. = The Balanced Portfolio is a moderate risk solution with the objective of providing investors with moderate capital growth. The maximum equity exposure is 75%, with a long-term neutral allocation of 60%. = The Flexible Portfolio is a moderate to high risk solution with the objective of providing investors with long-term capital growth. The maximum equity exposure is 75%, with a long-term neutral allocation of 70%, and with a larger risk budget is a more aggressive implementation of our asset allocation process. = The Income Portfolio is a low risk solution with the objective of providing investors with a high potential level of risk-adjusted income. The maximum equity exposure is 20%.

The composition of the model portfolios The fund composition of the model portfolios is derived from a house view that NFB AM creates based on a comprehensive and on-going due diligence process. That is to say that NFB AM is continually striving to identify the best fund managers in South Africa through

the use of an ongoing quantitative and qualitative review process. Based on this process funds may be added and removed from the house view, and consequently the composition of the models may change over time. The aim of this process is to ensure that the fund allocation is dynamic and changes based on prevailing market conditions and fund manager characteristics. This ensures that these solutions stay relevant and up to date through proactive management. As an example, the current composition of the Balanced and Cautious Model Portfolios are Illustrated below: Cautious Model Portfolio Coronation Balanced Defensive Fund Nedgroup Stable Fund NFB Cautious Fund of Funds

Weighting 33% 34% 33%

Balanced Model Portfolio Investec Opportunity Fund Coronation Balanced Plus Fund NFB Balanced Fund of Funds

Weighting 34% 33% 34%

The aim of the Model Portfolios

The ultimate aim of any investment solution is to provide superior risk adjusted returns to clients in the long term. That is to say that the use of multiple fund managers is aimed at producing higher levels of return for the client, at lower levels of risk, than what is typically offered by competitive propositions in each risk category. While the models have only been in existence for 6 months, it is possible to back test the results of the portfolio construction process in order to see how well the process works. As illustrated by the graphs above (for both the Balanced and Cautious Model Portfolios), both solutions have provided superior growth to their sector averages over time. When looking at returns though, it is necessary to understand the risks that have been taken in order to generate the returns. In both instances, the risk reward profile for both the Cautious and Balanced Model Portfolio indicate that the solutions historically produced higher levels of return at lower levels of risk than those of respective sector averages.

Benefits Associated with the use of Model Portfolios =

Fee transparency = All underlying fees are accurately disclosed. = NFB AM charges no fees on NFB Funds within the models.






The benefits of scale = As the size of the model portfolios grow, NFB AM is able to negotiate lower fees with the underlying fund managers in order to reduce the fee to you, the client. Immediate and efficient underlying fund selection = Switches within the models are done across the entire model for all clients invested through the use of an investment mandate. This means that administration is greatly simplified with real time switches. Broad Underlying Fund Access = The models have access to almost all fund managers, funds and fee classes ensuring high quality, well-priced portfolio construction. Access to the countries best asset allocation managers (within the Cautious and Balanced Model Portfolios) = NFB Funds are there to ensure that NFB can actively reflect its asset allocation views through to client portfolios. Look through asset allocation = All models' asset allocation have the benefit of NFB AM's lookthrough portfolio management tools. = Where these tools identify views inconsistent with NFB's, changes can be made.

The cost of Model Portfolio solutions The use of an asset management solution does introduce an additional layer of cost in order to run the asset management and administration functions of the model portfolios. This cost is, however, mitigated by the fact that through the volume of assets managed within the portfolios, NFB Asset management is able to negotiate reduced fees from the fund managers within the portfolios. NFB AM will continually renegotiate fund manager fees with the view of reducing fees on the basis of cumulative volume within the solutions (which currently stand at approximately R200 million). Furthermore, should any NFB funds be used in the model portfolios (as is the case within the Cautious and Balanced Model Portfolio), NFB AM does not levy any fund management charges on these funds. As a working example, the fund fees of the Balanced Model compared to a blend of funds held directly (please note that this analyses looks purely at the underlying fund fees and excludes advisor fees and platform fees that may be applicable). The analysis assumes 1/3 allocation to each fund: Balanced Directly Model Portfolio held funds NFB Balanced FOF 0.72% 1.00% Coronation Balanced Plus Fund 0.97% 0.97% Investec Opportunity Fund 1.14% 2.28% Model Portfolio fees 0.40% 0% Total Fund fees 1.34% 1.41% Within the model portfolio, it is thus possible to provide a proactively managed solution that is derived from a comprehensive and continuous due diligence process at virtually the same cost as a static solution with no such proactive support.

Issues that need to be considered While there are certainly numerous benefits associated with the use of the model portfolios, investors need to discuss the impact of CGT on switches into the portfolio for discretionary portfolios. Talk to your NFB advisor to discuss the appropriate Model Portfolio solution for you.

Reality Cheque By Stephen Katzenellenbogen, Private Wealth Manager - NFB Gauteng.


ecently we have been thinking a fair bit around the current investment climate and the subsequent long-term economic reality we are faced with. Our view has been moulded both by what we have read and watched in the news, as well as our client interaction – the latter of these, we feel, is more pertinent as it represents the 'reality on the ground'.

Cheque001: An article I was reading earlier in the week stated that in 1900 the average life expectancy of a person was 53 years. Currently there is a 25% probability for someone over the age of 65 to live beyond 90; and remember this is only an average. For some this then means that the years spent in retirement will be far longer than our grandparents and their grandparents.

Cheque002: Whilst the social, economic and political uncertainty we are experiencing may be temporary there are consequences that will linger. The significance of this translates into a global economy that has de-leveraged and where long term inflation and interest rates will in all likelihood be lower than those of the past. The impact of this may be felt in varying degrees, but from an investment perspective, and simply put, future long-term returns are unlikely to be as high as those enjoyed historically.

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Cheque003: The combination of living longer with lower returns implies that a greater proportion of the population runs a risk of not having adequate funds to meet and support their retirement objectives. Whilst the amount required for retirement differs from person to person the emotional and social aspects around retirement are fairly constant. There are things, to be discussed shortly, that we can do to counteract these negative market forces. However, at times there is a disparity between what can be done and what should be done.

Pre-Retirement: The pre-retirees have an advantage as they have time on their side. As someone gainfully employed you can increase your savings, work for longer, or even better, both of these, to be able to make up for diminishing returns. The appropriate use of product and risk can also help maximize investment returns. If you have the time it is critically important to take on an adequate amount of risk to give yourself the best chance of getting the most out of your investment returns. A reminder: when we talk about risk it relates to the short to medium term volatility of returns and not the eradication of your capital.

Post-Retirement: Once wealth has been destructed it is especially difficult to recreate. When you have retired and your income is derived through various investment sources it is critical that your living income requirements are contained to the return of your assets. By doing this you will avoid running out of funds and hopefully be able to create a buffer to cater for income increases and unexpected capital requirements. Unfortunately, in certain circumstances, in order to achieve the above this may mean a spending sacrifice or finding something to supplement income. If you ever find yourself in a position of considering certain schemes that provide “guaranteed high returns� please remember that if it sounds too good to be true it is likely to be so. Your NFB financial advisor is always available for a chat as both a planner and sounding-board.

Cheque-out Although the detail of this article may be sobering, our intention is to stimulate your thinking and to provide opportunity, if necessary, to re-assess your financial well being. "If you would be wealthy, think of saving as well as getting." - Ben Franklin

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NFB Proficio Isuue 62  

A newsletter which features financial planning, products and services