Why South African citizens should consider diversifying into global assets through a wrapper
Hello everyone!
Welcome to our year-end bumper edition of our Connect newsletter for 2024. In this edition, we explore how saving for retirement can help you save on tax, share a few alternative gift ideas for your loved ones and discuss how health resolutions can reduce the risk of a stroke.
On the investment front, we speak with two of our wealth managers about the benefits of investment consolidation.
We also delve into the importance of wrappers and why past performance is not a guarantee of future returns. Finally, we wrap up with a market update.
We wish you a wonderful end to the year and look forward to connecting with you again in 2025.
Telephone: 0860 66 4444
Email: mymoneymatters@alexforbes.com
Head: Individual Consulting Strategy Rita Cool
Alternative investments gift guide
What do you buy for loved ones when you don’t need to shop on Black Friday sales? Here are a few gift suggestions that will delight anyone and could become an heirloom.
Hermès Birkin Bag
The Hermès Birkin bag is highly sought after by celebrities and luxury buyers.
The smallest Birkin bag, the Birkin 25, is currently sold for at least $11 400 (R207 000) for a Togo leather bag. The bigger Birkin 30 sells for at least $12 500 (R227 000).
The secondary market premium for these bags is about 2.4x the boutique price. The price for a pristine second-hand Togo leather Birkin 25 or Birkin 30 has remained around $28 000-$30 000 (R507 000-R543 000) on Sotheby’s marketplace.
Prices vary based on rarity and colour, reflecting the high demand and lengthy waiting list for purchasing a bag. One of the most expensive options currently is a second-hand Himalayan crocodile leather bag, priced at AED 1 650 000. This equates to an eye watering R8.14 million
Source: Vanessa Wat, Sotheby’s
Whiskey
Whether you’d want to enjoy these expensive options at a braai is debatable. Whiskey is traditionally made from fermented barley, corn, rye or wheat and is prized not only for the years it is aged but also for the container in which it is matured. Single malt varieties are among the most expensive, simply meaning the alcohol comes from one type of grain rather than a blend. Decanters also significantly influence the price.
The Yamazaki 55-year-old single malt, crafted in Japan by the House of Suntory, costs $949 000 (R17.2 million) and is not directly available to the public. Meanwhile, the Macallan Michael Dillon 1926 60-year-old was sold at auction in 2018 for $1.53 million (R27.75 million). The bottle is a one-of-a-kind, hand-painted creation by Irish artist Michael Dillon.
Isabella’s Islay Original Whiskey commands an astonishing $6.2 million (R112 million) price tag. The bottle alone, adorned with white gold, 300 rubies and over 5 000 diamonds, is worth $6 million before any liquid is added.
Source: www.cozymeal.com
Cars
Most cars lose value the moment they leave the sales floor, but a select few retain—or even increase— their worth, especially limited-edition models prized by collectors. These rare vehicles are sure to delight car collectors.
The Rolls-Royce La Rose Noire Droptail reportedly costs over $30 million (R541 million). With just two seats, it’s probably not the ideal family car.
The Bugatti La Voiture Noire (The Black Car) comes with a $13.4 million (R241 million) price tag. It features six exhaust tips and a massive light-up badge on the rear—perfect for spotting it in a crowded parking lot.
The Mercedes-Benz Maybach Exelero is a one-of-a-kind creation that debuted in 2004. At $10 million (R180 million) in today’s money, it’s practically a bargain compared to the Rolls-Royce.
Source: Motor1.com
However you choose to spend your hard-earned cash, consider speaking with an adviser to help set a budget for your dream purchase and create a savings plan. If you’re exploring alternative investments, ensure you’re investing in assets that are likely to appreciate, understand the risks involved and research the resale market.
As always, remember the old adage: “Buyer Beware.”
Control save your retirement. Ctrl S
Have you ever experienced that sick feeling after working on your PC for hours only to lose it all because you forgot to save (Ctrl +S) your work?
Take control of your retirement and remember to save so that your retirement goals are not lost.
You have until 28 February to make additional contributions towards a retirement fund, a retirement annuity (an RA) or a tax-free savings account (TFSA) to supercharge your savings and get the benefit in time for your next tax submission.
By making contributions to your retirement products, you can influence both your:
• after-tax income on an ongoing basis
• ultimate fund value, and therefore your future income after retirement
How can retirement savings help you to control and save?
You can make contributions of up to 27.5% of your total taxable income, up to a maximum of R350 000 per year, and get the tax back. On a contribution of R100 000, if your tax rate is 30% this means that you get R30 000 back in tax and it only reduces your take-home income with R70 000. Even an increase of 1% or 2% of your income can make a big difference to your income and available savings over time.
There is no tax on growth in retirement funds or a TFSA. This has a big effect on the long-term compounding of your investments compared to an after-tax investment where you have to pay tax on growth. If you combine the tax-free growth with the tax benefits on the contributions you get money that works for you, not only you working for your money.
Other benefits of saving in your retirement fund or RA are:
The proceeds of retirement funds and RAs are excluded from your estate when you die, which reduces estate duty.
If you make yearly contributions that are more than the 27.5% or R350 000 per year, you don’t lose the tax benefits on the excess contributions. If you are not able to claim the tax allowance before retirement you can get the benefit of the excess contributions back as a tax-free lump sum when you take cash at retirement or it can be offset against your retirement income to reduce income tax in retirement.
The table below shows the long-term benefits of different contribution rates as well as the impact to your after-tax income.
Source: Alexforbes
We encourage you to speak to your financial adviser to discuss if you have questions on the options or if you want to get tax benefits for this tax year.
How do I Crtl + S towards my discretionary investments?
Discretionary investments are investments that you can mostly access whenever you want, depending on the product, and are funded with after tax money.
It is a good idea to have both retirement and discretionary investments as they have different benefits. Retirement funds give you tax back and help you build your retirement income. A tax free savings account (TFSA) can create a source of taxfree income for your future and help fulfill your shortand medium-term goals, like building an emergency fund or saving for your children’s education.
The cornerstone of your discretionary investments should be a TFSA. You can invest up to R 36 000 every tax year, up to R500 000 over your whole life,
* Notes relating to the table above:
without paying tax on growth or withdrawals. It is never too soon to start a TFSA as you can start with as little as R100 with some providers.
You might not get that much tax benefit on the first year’s contribution but through the wonder of compound interest, without paying tax on that growth, you will soon start seeing the benefits.
Choose the TFSA portfolio to suit your needs, for example use a TFSA instead of keeping savings in a bank account. The interest you receive from your bank account can contribute to your tax liability whereas cash in a TFSA is not subject to income tax. You can also invest 100% of the TFSA in overseas portfolios if you want more diversification.
Start saving today to take Ctrl of your finances
1. The monthly take-home pay only takes into account the income tax payable on different contribution rates and ignores all other taxes and expenses.
2. The monthly contribution and salary are fixed for the 35-year period in the calculations.
3. A starting salary of R40 000 (before tax) is used.
4. No yearly increases are allowed for.
5. The fund values after 35 years are calculated using an estimated yearly growth of 10% per year.
Less tax. More savings - making the most of your tax benefits!
Our Alexforbes Member WatchTM show that the current retirement savings environment is characterised by low contributions, a culture of low preservation rates and a significant proportion of the working population not making provision for retirement.
Remember: SARS offers generous tax deductions when you make contributions to your retirement annuity (RA), pension or provident fund. You are able to make tax-deductible contributions of up to 27.5% of your taxable income (subject to a R350 000 limit per year). This simply means that you can save more for retirement and pay less tax!
It’s ALWAYS good time to top up your retirement savings and maximise your tax benefits – here are ways to do so:
voluntary contributions (AVC)
You can add extra contributions to your retirement fund whenever you want by making an additional voluntary contribution. (AVC). It does not have to be a regular contribution and can happen whenever you have extra money. There are generally no administration fees charged for putting extra money into your fund, so the full amount is invested for your retirement.
Contact your HR or payroll or financial adviser for more information
Increase your contribution rate
If your employer offers different contribution rates this is a great way to boost your ongoing retirement savings.
• Your contributions to your fund are deducted from your salary before tax.
If you contribute an additional 5%, your take-home pay will not decrease by the full 5%. Your taxable income would have reduced with 5% and your tax is then also less.
• When you contribute more to your retirement fund, more money is invested in your retirement savings and less goes to the tax man.
Please speak to your HR or Payroll department about increasing your contribution rates to the fund or contact your financial adviser.
You can top up your retirement savings with a private retirement annuity, which has a number of benefits including tax incentives, flexible contribution rates, and they are separate from employment-related savings. Most annuities have a minimum investment amount to get started. You may need to save up, or wait until you receive a bonus.
Alexforbes offers secure, tax-efficient Retirement Annuities that have access to a variety of investment portfolios.
You can invest a minimum of R100 each month, R5 000 as a lump sum or both. tax
Contact your financial adviser for more information.
It is a simple, flexible and affordable way to invest and save for a goal. You can save up to R36 000 per tax year and R500 000 over your lifetime tax-free.
That means you save more, because there’s no tax, no performance-based fee and no penalty for withdrawing. fees
Note: Any amount withdrawn from a tax-free savings account cannot be replaced and any contributions made above the R36 000 a year will be taxed at your applicable tax rate.
Contact your financial adviser for more information.
If you need help choosing or understanding your options, please contact your financial adviser.
All you need to know about a stroke
World Stroke Day is observed annually on 29 October. This year, the theme is #GreaterThan > Stroke, focusing on sports and physical activity as ways to lower the risk of stroke.
Some facts about stroke:
• A stroke is a medical condition that occurs in the brain.
• Stroke remains a leading cause of death worldwide.
• Over the years, more and more cases of stroke have been reported in Africa.
Uncontrolled high blood pressure (hypertension)
Risk factors for stroke
By improving any one of these factors, you can decrease the risk of having a stroke.
Inactive lifestyle or lack of exercising
Diet high in processed foods, saturated fats, salt and sugar
Obesity
Smoking
High cholesterol levels
Uncontrolled diabetes
Alcohol consumption that is high and frequent
Stress and depression
Stroke and exercise
Exercise plays a vital role in improving high blood pressure, diabetes, high cholesterol, obesity, stress and depression. When these risk factors are reduced, the risk of stroke is also lowered. Exercising moderately five times a week for at least 30 minutes, reduces the overall risk of stroke by 25%.
Physical activity is always a good idea
Start by making small changes such as:
Taking the stairs instead of the elevator
Walking instead of driving
Doing household chores such as cleaning or gardening
Home exercises
Park runs
Gym classes
Community sports
Lowering the risk of disease is a continuous effort. Whether you already have risk factors or have had a stroke before, every step counts. If you’re unsure where to begin, talk to a healthcare provider like your doctor, a biokineticist or a physiotherapist.
Let this year’s theme be a personal challenge to become more physically active, push a little harder and maintain the good habits we’ve already established.
It’s recommended to aim for 2.5 hours of moderate to vigorous exercise each week. You can break this up in a way that fits your lifestyle. Let’s
endeavour to be #GreaterThan > Stroke.
Past performance is not a guarantee of future returns
In this article, we’ll explore why relying solely on historical performance can be misleading and how a diversified portfolio can help generate better risk-adjusted returns over time.
We’ve all heard, “But last month, it was a star performer!” It’s natural to seek out winners, whether in sports, business or investing. And when it comes to investing, past performance can be irresistible. After all, who wouldn’t want to invest in last month’s star performer?
Performance ‘reversion’
Imagine a marathon where runners sprint at different paces. The leader changes frequently, and rarely does one runner maintain the lead for the entire race. Similarly, investment performance tends to return to average levels over time. Last year’s outperformer may become this year’s underperformer because markets correct, trends shift and winners become complacent.
However, here’s the catch: past performance is not a guarantee of future performance Just because an investment did well in the past does not guarantee future success. Markets are dynamic, influenced by economic conditions, geopolitical events and investor sentiment. What worked yesterday might not reward tomorrow.
‘Recency bias’
People have memories. Our brains prioritise recent events, so we often focus on the latest performance data when evaluating investments, which blinds us to the market’s randomness. An investment that outperformed last month tells you very little about its future performance prospects. Achieving good long-term returns hinge on behaviour that is directly opposed to automatic human memory and decisions.
Chasing the flavour of the month
Investors often chase the ‘flavour of the month’ – this could be the most popular stock, asset class or asset manager. However, by the time everyone is talking about it, the market has already factored in thousands of pieces of new information and adjusted prices – the opportunity would have already passed.
The power of diversification
Investors can benefit from understanding that they don’t need to predict which investments will deliver the best returns during the next month, next year or next five years. Why? Diversification protects us from the market’s variability and our inability to predict the future.
Diversification is like eating a balanced diet - a bit of protein, a mix of carbs and so on. In investment speak, it means spreading your savings and investments across different types of assets such as shares, property and cash, across different sectors, currencies and regions. The idea behind diversification is that when one asset underperforms, another outperforms thereby smoothing out the effects of the market’s variability and providing more reliable return outcomes over time.
Why does diversification matter? Genuine diversification can have long-term merit. The surest way to meaningfully outperform the market is not by chasing extraordinary gains, but by avoiding extraordinary losses. Portfolios that respond better to the motions of financial markets over time can help limit investors’ rand losses and crowd out emotions that get in the way of their long-term goals. This makes staying invested for longer easier with savings and investments more likely to compound into superior returns over time.
Just as diversification can be applied to asset classes, sectors, currencies and regions, so too can diversification be applied at the asset manager level. Asset managers make various decisions in different market environments. Asset managers select different stocks at different points in the economic cycle, but that’s just one of many choices. They also decide when to enter, how quickly to build a position, its size, and whether to adjust it over time. Finally, they determine when and how quickly to exit. Because asset managers have different views and investment philosophies (such as standards or beliefs), dictating how they manage money, it only stands to reason that a varying number of money management styles exist.
Types of diversification
Asset class diversification:
Think of asset classes like food groups—proteins, carbs, fats and so on. Just as you might adjust your intake of different food groups depending on your health goals, in investing, asset classes like stocks (equities), bonds, real estate and cash play different roles in a portfolio. Each serves a unique purpose, like how different food groups contribute to a balanced diet.
Each asset manager specialises in different asset classes. By allocating funds to multiple asset managers, investors gain exposure to a broader range of asset classes. For instance, one manager might focus on global, while another handles bonds or alternative investments.
Investment strategy diversification:
Consider investment strategy as a type of cuisine. The specific ingredients and cooking methods create a distinct meal—Italian, Caribbean, French and so on. When investing in equities, we refer to styles such as value, momentum, quality and growth. An asset manager’s philosophy sets out the fundamental approach that the asset manager applies to making investment decisions. The philosophy will give rise to an investment style and serves to aid an understanding of the portfolio actions taken and the investment results achieved – both in good and bad times.
Manager selection:
An asset manager is like a skilled chef. They use their expertise to select, prepare, and combine ingredients (asset classes) according to a particular style, creating a well-crafted portfolio. Just as chefs manage the preparation of food, asset managers manage investments.
Dynamic allocation:
Imagine a chef who can adjust the menu based on seasonal ingredients, guest preferences and the latest culinary trends. This flexibility allows them to create the best possible dining experience.
Similarly, asset managers can shift their investment allocations based on market conditions, economic trends, and changing investor preferences. This dynamic approach enables them to seize opportunities and manage risks effectively, just as a chef adapts to ensure a memorable meal. Flexibility allows them to capitalise on opportunities and manage risks effectively.
How can you diversify your investments?
How can you achieve diversification in your portfolio? One way to diversify your investment is to combine portfolios with different structures and with different managers to suit your risk and return requirements. Another way is to make use of a multi-manager.
What is a multi-manager?
A multi-manager is a professional who invests in and manages a selection of asset managers, across different markets, asset classes, investment philosophies and styles of money management. The ultimate goal is to reduce the potential downside risk asset managers have relative to one another, and thereby enhancing investment returns. Put simply, a multi-manager allows investors to
Conclusion
invest in a blend of the smartest and most talented asset manager strategies from one single portfolio solution. Because multi-manager portfolios combine multiple asset managers across different markets, asset classes and investment styles, they offer investors an added layer of risk management. You get the professional diversification already built into your portfolio choice.
While past performance can offer insights, it is not a reliable indicator of future returns. The investment landscape is ever-changing and what succeeded in the past may not necessarily do so in the future. Therefore, it is prudent for investors to resist the allure of chasing past winners and instead focus on building a diversified portfolio. Remember, the key to successful investing is not in predicting the short-term market winners, but in maintaining a balanced and diversified portfolio that can withstand market fluctuations and deliver sustainable growth over time.
Why South African citizens should consider diversifying into global assets through a wrapper
Ettienne Bezuidenhout – Wealth Manager at Alexforbes
In an increasingly interconnected world, South African investors have access to a broader range of investment opportunities than ever before. One of the key strategies for maximising these opportunities is investing in global assets through a wrapper.
An investment wrapper is a financial product or account that ‘wraps’ around investments to provide certain tax advantages or other benefits. It typically allows investors to hold a variety of assets like stocks, bonds and funds within a single structure, while benefitting from specific regulations or protections, such as an endowment.
This approach not only diversifies your investment portfolio but also provides several financial and regulatory advantages that can safeguard and enhance your wealth.
Diversification and risk mitigation
Access to high-growth markets and industries
Currency hedging
Tax efficiency and regulatory benefits of using a wrapper
Estate planning and wealth preservation
Protection against local political and economic instability
Diversification and risk mitigation
One of the primary reasons for investing in global assets is to achieve diversification. By spreading investments across different geographic regions, industries and asset classes, investors can reduce their exposure to risks specific to South Africa, such as currency fluctuations, political instability or economic downturns. The Johannesburg Stock Exchange (JSE), while one of the Top 20 stock exchanges in the world, accounts for only about 0.3%-0.4% of the roughly $109 trillion in global stock markets.
Global markets often move independently of each other. When one region’s economy is underperforming, another might be thriving. This diversification can help stabilise your overall portfolio performance, providing a buffer against market volatility.
Access to high-growth markets and industries
Investing globally gives South African citizens the opportunity to participate in high-growth markets and industries that may not be well-represented in the local economy. For example, the technology sector, particularly in the United States and Asia, offers investment opportunities that are not as prevalent in South Africa. By investing in global assets, you can take advantage of these growth sectors, potentially increasing your returns.
Currency hedging
Tax efficiency and regulatory benefits of using a wrapper
South Africa’s currency, the rand (ZAR), is known for its volatility, which can significantly impact the value of your investments. By holding assets in stronger or more stable currencies like the US dollar (USD), the euro (EUR) or the pound (GBP), investors can hedge against the depreciation of the rand. This strategy is particularly important for investors who plan to spend time or retire in countries with stronger currencies, ensuring that their investments retain value when converted.
One can also use the volatility of the ZAR to determine valuable entry and exit points into global markets. The ZAR tends to over time depreciate against the major currencies, so during times of ZAR strength it may be an opportune moment to increase one’s global exposure, and subsequently benefit from the global asset growth as well as the currency movement.
Investing in global assets through a wrapper can offer significant tax advantages. Wrappers can help defer taxes on investment gains, allowing your investments to grow without the immediate impact of taxes on dividends, interest or capital gains, especially when utilising roll-up funds. In some cases, wrappers can also provide a more favourable tax treatment when the funds are eventually repatriated to South Africa. For instance, when investing in global assets directly, capital gains is levied only on the actual capital gain of the asset, not on the exchange rate, as it would be if one invests in a ZAR-denominated global feeder fund.
Moreover, investing through a wrapper can simplify compliance with the South African Reserve Bank regulations on foreign investments. South Africans are subject to exchange control regulations, which limit the amount of money they can invest abroad. Wrappers often provide a legal and structured way to maximise these allowances while remaining compliant with local laws.
Estate planning and wealth preservation
A well-structured global investment portfolio can be a powerful tool for estate planning and wealth preservation. By holding global assets in a wrapper, you can protect your wealth from potential local economic crises and ensure that your assets are efficiently passed on to your heirs. Many wrappers offer estate planning benefits, such as bypassing local probate and situs processes, which can be very time-consuming and costly.
Cash in a foreign bank account could very well be subject to either or even both of these processes, which could severely delay and substantially increase the cost of winding up your estate. It may cause many grey hairs for your heirs, a situation that can easily be avoided through the prudent use of an appropriate wrapper.
Probate is the legal process through which a deceased person’s will is validated and their estate is administered. It involves proving the authenticity of the will, paying any debts or taxes owed by the estate and distributing the remaining assets according to the terms of the will or, if there’s no will, according to state law.
Situs tax refers to the principle that a tax is levied based on the location of the property or asset being taxed. In other words, it pertains to the tax obligations that arise from where an asset is physically situated or where a transaction takes place.
Protection against local political and economic instability
South Africa has faced political and economic challenges in recent years, from fluctuating economic policies to concerns about political stability. While the country has many strengths, these factors can introduce risks that affect local investments. By diversifying globally, you create a safety net that insulates your wealth from local uncertainties, providing peace of mind and financial security.
Conclusion
Investing in global assets through a wrapper is a prudent strategy for South African citizens looking to diversify their portfolios, protect their wealth and capitalise on global growth opportunities. By leveraging the benefits of diversification, currency hedging, tax efficiency and estate planning, you can enhance your financial security and achieve your long-term investment goals. As always, we encourage investors to consult with a financial adviser to tailor their investment strategy to their individual circumstances and ensure compliance with all relevant regulations.
Alexforbes
Wealth podcast: Consolidation of investments
Time spent with an Alexforbes financial adviser is invaluable.
Market updates
Macro highlights:
The uncertainty surrounding the United States (US) election has given way to policy uncertainty, thus complicating the outlook. Expectations of expansionary policies in the US under the incoming administration, combined with sticky above target inflation, are expected to prompt major central banks to adopt a cautious approach to the easing cycle.
Market highlights:
November was marked by stark contrasts in global equity performance, with developed and emerging markets moving along divergent paths. This disparity stemmed from a confluence of geopolitical developments and macroeconomic shifts that fuelled optimism in some regions while amplifying caution in others.
GDP growth slowed in the United Kingdom (UK) and Japan in the third quarter of 2024. Meanwhile, the US demonstrated exceptionalism by maintaining strong momentum in Composite Purchasing Managers’ Indices (PMI) in November, while PMIs in other major economies contracted.
Locally, S&P Global Ratings revised South Africa’s outlook to positive from stable and affirmed the country’s foreign and local currency long-and-short-term ratings at ‘BB-/B’ and ‘BB/B’, respectively. Inflation breached the lower bound of the inflation target at 2.8% in October, and the South African Reserve Bank (SARB) reduced the repo rate by a further 25bps to 7.75% in November.
The South West Africa People’s Organisation (SWAPO) won the election held on 27 November, making its candidate, Netumbo Nandi-Ndaitwah, Namibia’s first female president. Meanwhile, the Bank of Namibia reduced the policy rate by a third consecutive 25bps to 7%, leaving the interest rate differential with the SARB at 75bps.
Watch the commentary here
Disclaimer:
Please note that while care has been taken to ensure that the information provided in this article is correct, it represents an overview of the topic under discussion and as such does not constitute advice.
While Alexforbes has taken reasonable effort to ensure that the information contained herein is true and correct it will not be held liable in respect of any loss arising from any advice provided arising out of the contents of this circular.
We suggest that you contact your financial adviser before taking any decisions based on the information herein.
Global equities returned 3.8% in November, driven by developed market equities that rose by 4.6%, while emerging market equities declined by 3.6%. EM equities struggled amid widespread risk aversion driven by concerns of looming trade wars. Global bonds delivered a modest 0.6% gain in November as yields in developed marked nudged lower, recovering from volatility and uncertainty earlier in the month. EM bonds, like equities, declined as sentiment drove investors toward safer assets.
Locally, equities extended their decline in November, with the JSE All Share Index slipping by 0.9%. In contrast, nominal bonds returned 3.1% – outpacing gains in both listed property and equities. The bond market benefitted from declining inflation and interest rates.
Looking ahead, the policy agenda emanating from the US incoming administration is expected to have far-reaching implications for the global economy and financial markets. While the global economy has displayed remarkable resilience through 2024, trade restrictions and rising geo-political tensions threaten the outlook.
Alexander Forbes Financial Services (Pty) Ltd is an authorised financial services provider (FSP 1177 and registration number 1969/018487/07), an approved retirement fund administrator (24/472) and an accredited Council for Medical Schemes organisation (ORG468).
The following businesses are licensed financial services providers:
Alexander Forbes Financial Planning Consultants (Pty) Ltd (FSP 31753 and registration number 1995/012764/07)
Alexander Forbes Investments Limited (FSP711 and registration number 1997/000595/06)
