MONEY
IOL
JANUARY 2021
INVESTING IN 2021
CONTENTS FEATURES The 4 major asset classes
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Investors’ guide to 2021: what’s next for SA and the world?
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The ins and outs of unit trusts
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ETFs: what are they and should you invest in them?
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How to spot an investment scam
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REGULARS Rands and Sense with Sharon Moller
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Fact File: Top-performing unit trust funds to the end of 2020
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Money Basics with Martin Hesse: Understanding investment risk
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Money Quiz
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Planning Perspectives with Palesa Tlholoe
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Important contacts and links
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FROM THE EDITOR
All intelligent investing is value investing, acquiring more than you are paying for. You must value the business in order to value the stock. CHARLIE MUNGER American investor, businessman, former real estate attorney
CONTACT US PUBLISHER Vasantha Angamuthu vasantha@africannewsagency.com MONEY EDITOR Martin Hesse martin.hesse@inl.co.za DESIGN Mallory Munien mallory.munien@inl.co.za PRODUCTION Renata Ford renata.ford@inl.co.za BUSINESS DEVELOPMENT Keshni Odayan keshni@africannewsagency.com SALES Charl Reineke charl@africannewsagency.com Kyle Villet kyle.villet@africannewsagency.com ENQUIRIES info@anapublishing.com
ALTHOUGH the two words are often used interchangeably, saving and investing differ in their core concepts. Saving means putting money aside towards a financial goal – usually a short-term goal, such as saving up to buy a fridge or to put down a deposit on a property. Investing means committing money to something that you believe has the potential to provide you with a worthwhile reward over time. That something could be a human endeavour such as a business, in which your money is used productively to grow the business; or it could be a physical object that you buy, which is of value and which you believe will increase in value: a gold coin, a sought-after artwork, a plot of land. Risk is an inherent part of investing, because you are relying on a future outcome, which may or may not materialise. The business may go under in the face of an unforeseen catastrophe, such as a global pandemic; the price of gold may drop; the creator of the artwork you own may fall out of favour. You can save money in a bank account, in which the risks are minimal. The problem is, so are the returns. On short-term savings accounts, the interest rate offered by the bank is usually lower than the inflation rate. So your nest-egg actually loses value, and it certainly doesn’t benefit from the magic of compounding. At the other extreme is speculating, which is akin to gambling: betting on a high-risk investment will either make you a millionaire or make you broke within a short space of time. As with most things in life, knowledge and moderation provide the surest way forward. Know the risks you are taking on, by doing your homework on what you want to invest in. Then take on a moderate amount of risk with moderate amounts of money. Spread your bets, diversify. And don’t be impatient. A worthwhile investment, such as shares in a reputable, well-run company, may fluctuate in value over the short term, but will reward you handsomely over the long term. Investing favours the tortoise, not the hare.
Martin Hesse
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THE 4 MAJOR
ASSET CLASSES IF YOU are a serious investor – and that doesn’t mean speculating on the forex markets or on the price of crypto or gold, but investing in something that will grow and reward you with compound returns over the long term – you can choose among four broad classes of investments, known as asset classes. They have different characteristics, each with its
own advantages and disadvantages and each with a specific risk-reward profile: some are more risky than others in that you could lose money over the short term, but they reward you for taking on that risk by delivering better results in the long term. The asset classes are also not necessarily correlated with each
other, which means that while one class may be performing well, another may be performing poorly. Collective investments, such as unit trust funds and exchange traded funds, invest in a basket of assets. Some focus on a specific class, such as equities, while others, called “balanced funds”, diversify across asset classes.
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EQUITIES
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Equities are shares in companies. You can own shares in a private company (private equity) or in a public company listed on a stock exchange (listed equity). As a shareholder, you are a part-owner of the company and therefore share in its profits, which are paid as dividends. You also have a say in how the company is run – you can attend and vote at the company’s annual general meeting. Unlike private equity, listed shares are bought and sold on the stock exchange, so their prices take on a life of their own. The share price is usually, but not always, indicative of how well the company is doing. Equities can be high-risk over the short term, but can deliver high returns over the long term.
| All pictures freepik.com
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PROPERTY
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Property investments take two forms: 1. Physical property. This is property you buy to let (a property you buy to live in yourself cannot be considered an investment in the context of this article). Buy-to-let property comes with expenses, such as bond repayments, rates, insurance and maintenance, but it also provides an income in the form of rental. Over time, the value of the property itself will also rise. 2. Listed property. This is an investment in a company that specialises in buying and managing property, typically large commercial properties. These companies take on the work of maintaining the buildings and finding tenants. They pay their shareholders dividends from the profits they make on rentals. So it’s very similar to investing in equities. BONDS A bond is a type of debt, basically in the form of an IOU. Companies and governments issue these “IOUs” when they need cash. The bond is for a set capital amount (say, R1 million), which the bond issuer receives from the investor. The issuer then pays the investor a set interest rate on that amount for the period of the bond. When the bond matures (you get long-dated and short-dated bonds), the capital is repaid to the investor. Bonds are traded on a secondary market, much like shares, and their prices go up or down depending on how the interest rate of the bond compares with prevailing bank interest rates. Individual investors don’t normally invest directly in bonds, as the amounts required are large, so they invest in unit trust funds that focus on bonds. Investing in bonds is considered less risky than investing in property or equities, and while the returns are more stable, they don’t “shoot the lights out”, as equity investments sometimes do.
CASH This is the safest of the asset classes, but it also delivers the lowest returns. Investing in cash is simply putting your money in a bank savings account or in a money market fund. You will be paid interest on the balance in your account, but it may not beat the inflation rate, so you may effectively lose money if you are invested in this way for too long. The more flexibility you have to deposit and withdraw money, the lower the rate, and vice versa. So a five-year fixed deposit will pay a higher interest rate than a 32-day notice account.
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Investor’s guide to 2021: what’s next for SA and the world
Will 2021 see some sort of return to normal, or will the great disconnect of 2020 continue? MAARTEN ACKERMAN shares his views. AS WE enter 2021, the market’s recent bout of festive cheer will have left many investors feeling upbeat. However, do not allow yourself to be carried away by the market’s high spirits. While there are many reasons to feel positive about the year ahead, it is equally important to note what markets seem to have forgotten – namely the pandemic and its consequences are not yet behind us. Globally, there is a clear disconnect between market cheer and the economic situation on the ground, as many businesses and households remain under pressure while the global economic recovery slowly grinds forward. Unemployment levels have risen worldwide, placing pressure on consumer income which will, in turn, impact on businesses and corporate profitability. Additionally, many companies and consumers will come under intensified pressure following a second wave of lockdowns. That said, all is not doom and gloom. Efforts by governments to inject money into their economies continue to underpin markets, buoying sentiment and valuations. And Joe Biden’s presidential win has been seen as market positive, particularly in terms of global trade relations. Then, the speed with which Covid19 vaccines have been developed and are being rolled out represents a significant psychological victory over the virus. While the vaccines
are not an immediate cure for the global economy, their availability has boosted hope for a swifter-thanexpected return to normality. Where can investors turn? Despite the many headwinds still facing markets, it is important for investors to keep in mind that with the economic trough behind us, the Covid-19 reset means we are now entering the upswing of a new business cycle. Although the road to recovery may be long, this is a positive for global equity markets. Furthermore, Biden is expected to borrow heavily to extend support for the US’ social programmes, resulting in a softer dollar, which should in turn support equities. Central banks are likely to keep interest rates low in order to afford the debt generated by unprecedented fiscal stimulus. So, with cash and bonds providing neither investment protection nor safety, investors need to consider alternatives that offer some protection while still providing cash-beating returns.
UNDERSTANDING THE RISKS
Equity investments are not without their risks, especially as many companies will face a challenge to earnings in the coming months, placing pressure on dividends and share prices. Perhaps the biggest risk is that central banks will withdraw stimulus before companies are
able to generate reasonable profit numbers. Picking quality, fairly valued companies with a low risk of going bankrupt will therefore be particularly important in this tough economic environment. Additionally, investors need to look for companies that are well positioned for a post-pandemic world, and that are well positioned for a world in which the fourth industrial revolution is gathering momentum.
Perhaps the biggest risk is that central banks will withdraw stimulus before companies are able to generate reasonable profit numbers.
SA LAGGING ECONOMICALLY
South Africa is currently lagging behind its peer group economically, and once the equity rally has faded and markets look past global drivers, our looming fiscal cliff and debt issues are likely to be reflected in our asset classes. The majority of earnings produced by JSE-listed companies are generated outside of South Africa. However, headwinds in the global environment could filter through to the local exchange as well, while a deteriorating fiscal situation and structural economic issues could hamper the prospects of those companies which operate only in South Africa. Investors thus need to look for exposure to companies that offer some immunity against the local environment. Local bond yields were around 9% in March 2020 and, following the Moody’s downgrade to sub-
investment grade, they exploded to 13% to compensate investors for the higher risk of government default. Since then, however, yields have returned to 9%, seemingly indifferent to the fact that our fiscal situation has significantly deteriorated due to the pandemic, and that our budget deficit will be twice the size anticipated at the start of 2020. In light of this, it is highly unlikely that the local bond market will continue to trade at current levels indefinitely.
PROSPECTS FOR THE RAND
The current strength of the rand against the US dollar clearly reflects international factors such as the US election outcome, vaccine developments and an abundance of liquidity. The first bump in the road, however, will be the February Budget Speech, which is likely to remind investors of our poor local economic fundamentals. Eventually, as investors wake to South Africa’s economic
reality, the rand will come under some pressure again and is likely to weaken during the course of the year. However, the extent of this weakening will ultimately depend on the government's progress on fiscal reforms. This is an edited version of a report by Maarten Ackerman, chief Economist and advisory partner, Citadel.
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10 as the net asset value (NAV), is calculated by taking the overall value of the portfolio (which includes income that has not been reinvested or distributed), deducting expenses (taxes and investment costs), and dividing that amount by the total number of units in the fund. Example: R1 million (total value) – R50 000 (expenses) = R950 000 R950 000 ÷ 500 000 (number of units) = R1.90 (NAV) So if you invest R500, you will receive 263.16 units (R500 ÷ R1.90) If the NAV rises to R2, the value of your investment will be R2 x 263.16 = R526.32. If you sell at that price, you will have made a profit of R26.32 (or just over 5%). If the NAV drops to R1.80, the value of your investment will be R1.80 x 263.16 = R473.68. If you sell at that price, you will have made a loss of R26.32.
THE INS AND OUTS OF UNIT TRUSTS Unit trust funds have been around for half a century. MARTIN HESSE explains how this popular form of investment works. UNIT trust funds are a popular vehicle for investing, and it is likely that you have money in one or more of them, either directly, or indirectly, through a retirement fund or tax-free savings account. They are a type of collective investment, and are governed by the Collective Investment Schemes Control Act. In other countries, they are known as mutual funds. There are about 1 300 locally managed
funds to choose from. When you invest, your money is pooled in a trust with that of the other investors. A unit trust management company invests the money on behalf of the trust in assets such as shares, bonds and money-market investments, which form the portfolio of the fund. You, the investor, are protected, because the trust fund and the company that manages it are separate entities. If the management
company goes into liquidation, the assets in the trust fund are safe. All unit trust funds marketed to South African investors must be approved by the Financial Sector Conduct Authority (FSCA).
BUYING AND SELLING UNITS
The fund is divided into units of equal value, and it is these units that are bought and sold by investors. The price of each unit, known
The investments in the fund are valued at a set time each business day (typically, 3pm, Mondays to Fridays), and this determines the daily NAV. There is no gap between the buying price and the selling price: the price at which you buy a unit is the same as the price at which you sell it. There does not have to be a seller for you to buy a unit (or vice versa): you buy and sell units directly from the management company at the NAV. The NAV fluctuates according to the value of the underlying investments, which may be relatively volatile in the case of shares.
INCOME
There are two main sources of income: interest from interest-bearing investments, such as money-market instruments and bonds, and dividends from shares. Periodically (typically twice a year), income is distributed to investors. If you are investing for the long term, you should be reinvesting your distributions, which the fund manager does on your behalf by giving you
units to the value of the distribution. On the other hand, if you depend on your investment for an income, these distributions may be paid out to you.
TAXES
Three taxes apply to returns and gains in a collective investment scheme: 1. Dividend withholding tax of 20%, which is withheld by the manager on the dividend portion of your distributions. 2. Tax on interest, which is income tax you pay on the interest portion of your returns, subject to your annual exemption. You have to declare this interest on your tax return. 3. Capital gains tax on the capital gain when you sell units, subject to exclusions. This is also declarable on your tax return. These taxes don’t apply to unit trusts held in a tax-free savings account and to underlying unit trusts in a retirement fund.
COSTS
You can incur once-off initial fees as well as annual fees on unit trust investments. • Initial fees. These comprise an adviser’s fee of up to 3.45% (negotiable with your adviser) and an initial investment fee. Most unit trust management companies have scrapped the initial fee, and you do not pay an adviser’s fee if you invest directly. • Annual fees. The overall annual cost is expressed as the total expense ratio (TER). This includes management fees, bank and audit charges, value-added tax, and trustee fees, and it may also include a performance fee, paid to the manager if the fund outperforms a benchmark. The TER is between about 0.5% and 2.5%, depending largely on the complexity of the underlying investments. You may also incur an annual advice fee, but this is negotiable with your financial adviser and does not apply if you invest directly.
PROS AND CONS OF UNIT TRUSTS Advantages • Unit trust funds don’t require large up-front amounts; you can make a once-off lump-sum investment (of as little as R1 000 in some instances, although some investments require a minimum of R10 000), or you can invest a small amount (as little as R500) monthly. • They are extremely flexible: units are easy to buy and sell. You are not tied into a fixed investment term, and there are no penalties or fees on disinvesting. • They are well regulated. • They enable your money to be managed by an investment expert. Disadvantages • Choosing a unit trust can be overwhelming when faced with so much choice. • Not all unit trusts are created equal: fund managers’ ability to make good investment decisions varies. • Some funds’ annual management fees are relatively high. • There are no guarantees associated with these investments, such as a guaranteed return or a guarantee that you will not lose money.
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ETFS: what are they and should you invest in them?
THIS EASILY-ACCESSIBLE, LOW-COST INVESTMENT OPTION IS AN IDEAL VEHICLE FOR BEGINNING YOUR INVESTMENT JOURNEY
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LAST year highlighted the importance of having savings to be able to fall back on or dip into when times are tough. They are also an essential way to build wealth to secure the future you want for you and your family. There are many means to save, but you may consider investing on the Johannesburg Stock Exchange (JSE) through an exchange traded fund (ETF). ETFs offer a great opportunity to start saving and nurture an investment culture in your family. An ETF is a listed investment product that tracks the performance of a basket of shares, bonds or a single commodity, such as gold. These baskets are known as indices. An ETF can be bought or sold in the same way as an ordinary share and is ideal for any investor wishing to gain exposure to different sectors and asset classes, both locally and globally. ETFs offer convenience and flexibility, allowing you to make monthly contributions or a once-off lump sum, depending on your needs. Some ETF platforms do not even
have a limit on minimum investments. ETFs tracking local and global markets offer exposure to well-known companies and brands. You can invest in share baskets comprising international companies such as Facebook, Amazon, Apple, and Netflix; local companies from the resource, industrial or financial sectors; even bonds or commodities such as gold, platinum, and palladium. Like any investment guided by market forces, when these various assets do well, your ETF investment does well, while the inverse is also true. Adèle Hattingh, business development and exchange traded products manager at the JSE says: “The idea of investing is intimidating for most people, which is why ETFs are an effective way of starting your investment journey. ETFs offer you preselected investments in costeffective, transparent listed funds, saving you time and money.” The JSE offers a range of 78 ETFs, offering exposure to local and international assets, some of which are traditionally difficult to gain access to.
An added benefit of ETFs is that those that meet the criteria can be the underlying investment in a tax-free savings account. In these accounts your investment returns are free of dividend tax, income tax on interest and capital gains tax. All profits go to you, the investor. Last year, the JSE celebrated 20 years of ETFs listing on the exchange, showcasing their longevity, growth, and evolution. The ETF market has become an integral part of many investors’ portfolios with the objective of harnessing the potential of the stock market in an easy and costeffective way. This investment option continues to offer attractive and diverse opportunities for both existing and first-time investors. The JSE is committed to making the exchange and investing more accessible and thereby helping South Africans establish a culture of investing. It is easy and quick to buy or sell ETFs on the JSE through a stockbroker trading account, or through an online ETF platform offered by a financial services provider. Your chosen provider is equipped to help you with any extra information you may need before making this investment choice. A list of JSE stockbrokers and some FSPs is available on the JSE website. “An ETF provides your loved ones with a long-term investment and an opportunity to establish a foundation for wealth creation. Make a difference this year, with an investment that transcends the here and now,” says Hattingh. To learn more about ETFs and how to start your investment journey, click here to visit the JSE website. – Supplied by the JSE Editor’s note: Be aware that the performance of ETFs, like that of shares and unit trust funds that invest in shares, can be volatile over the short term. This type of investment is most suitable for saving over periods of five years or more.
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How to make and keep your money resolutions
Sharon Moller
AT THE end of 2019, 59% of South Africans set out to save money in 2020, according to a survey by international research platform YouGov. Despite their best intentions, many were unable to meet their financial goals, thanks to the impact of Covid-19. While 2021 offers us a new start, far more than a lack of discipline or even unforeseeable events, it is the way we go about setting our New Year goals that most often causes us to fall short. Most resolutions fail because they are based on a calendar date rather than on a real readiness to make a change. It might sound a bit esoteric or abstract, but the truth is that when your financial aspirations aren’t properly aligned with your life purpose, you’ll struggle to follow through with a plan, even with the best intentions. Goals that are based on external values, such as a desire to keep up with the Joneses or perhaps to manage your money in the way your parents or others think you should, will set you up for failure. On the other hand, when we get a grip on our intrinsic motivations – what really drives and energises us – we can develop a much more mature and useful understanding of what we want our money to do. When we make resolutions from this understanding then, whatever happens, we remain deeply committed to seeing them through. For real results, ask the big questions. This can be an intimidating and uncomfortable process, but it’s essential for robust financial health. And if you’re not sure where to start, a good financial planner can help you ask the right kinds of questions – and translate your answers into actionable steps. Such questions include: ● What is my life’s purpose? ● What does wealth look like to me? ● What beliefs are holding me back? ● In what ways do I sabotage myself? There is also value in taking a family approach to this – be it with a significant other and/or your children. It is important to align your thinking as a couple, especially when it comes to money resolutions and planning for your life. If there is no alignment, it becomes difficult to stay the course. The same goes for family and children. It’s important to have open and honest discussions about your dreams and how your money supports your goals for the future, get them to plan with you and decide on actions together. A key part of our success and long-lasting impact is to celebrate the small wins. We need to get to the essential, underlying reasons for saving, investing or getting out of debt. That way, we can work towards our money goals – and be prepared for whatever life throws at us. Sharon Moller is a financial planning coach at Old Mutual.
ILE FACT F
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Top-performing unit trust funds to the end of 2020
THE PERFORMANCE OF THE FUNDS LISTED BELOW IS THE AVERAGE RETURN PER YEAR, IN RANDS, AFTER COSTS. THE FUNDS LISTED HAVE A TRACK RECORD OF FIVE YEARS OR LONGER.
FUNDS Fairtree Equity Prescient Fund Ninety One Value Fund Satrix Dividend Plus Index Fund Kagiso Equity Alpha Fund
1 YEAR 19.8% -7.0% 3.4% 3.5%
3 YEARS 10.5% 5.5% 1.5% 6.8%
5 YEARS 11.7% 11.2% 10.3% 9.5%
Coronation Top 20 Fund
9.0%
3.5%
9.1%
FUNDS Gryphon Prudential Fund Kagiso Balanced Fund Aylett Balanced Prescient Fund Centaur BCI Balanced Fund
1 YEAR 21.1% 2.2% 5.0% 11.5%
3 YEARS 11.3% 6.0% 5.1% 5.3%
5 YEARS 9.9% 8.5% 7.9% 7.7%
Kagiso Islamic Balanced Fund
8.2%
6.3%
7.7%
FUNDS Anchor BC Global Equity Feeder Fund BlueAlpha BCI Global Equity Fund PSG Wealth Global Creator Feeder Fund STANLIB Global Equity Feeder Fund Autus Prime Global Equity Feeder Fund
1 YEAR 91.0%
3 YEARS 34.3%
5 YEARS 18.8%
24.6% 24.0%
18.1% 19.6%
11.9% 11.6%
24.9%
18.3%
11.1%
29.7%
20.1%
10.1%
Source: Morningstar
TOP FIVE SOUTH AFRICAN GENERAL EQUITY FUNDS
TOP FIVE SOUTH AFRICAN HIGH-EQUITY MULTI-ASSET FUNDS
TOP FIVE RANDDENOMINATED GLOBAL EQUITY FUNDS
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| Freepik.com
with MARTIN HESSE
Understanding investment risk THE probability of losing money in an investment differs according to the investment type, generally speaking. We all have some idea of these differences in investment risk. We know that bank deposits, for example, have a minimal degree of risk. On the other hand, shares in a company can be relatively risky. If you ranked the various types of investments (and “so-called” investments), they would form a spectrum, from very low risk on the left to very high risk on the right. On the extreme right would be scams parading as investments. A
genuine investment is when your money is used constructively to generate profits from legitimate business activity. In a scam there is no intention to use the money to generate growth. Usually, the touted rates of return are unrealistically high to lure the greedy. (See “how to spot an investment scam” on page 18.) To the left of scams, but still at the far right of the risk spectrum, are unregulated investments. These include property syndications, shares or debentures in private (unlisted) companies, venture capital schemes, and offshore investment funds in
jurisdictions with relatively lax financial controls. They are mostly legitimate, but sometimes only border-line so, and sometimes they’re downright dodgy. Furthermore, there are few regulatory controls in place to protect you. If one of these investments is offered to you, do as much research as you can on the business/scheme/ fund before committing your money, and then only money you can afford to lose. If you are looking for an investment for your life savings, stay well away, no matter how enticing the proposed returns or convincing
lower risk than those that specialise in specific sectors, such as financials, industrials and resources. Your financial adviser will tell you that, in order to make decent returns over the long term, you need to take on a certain degree of investment risk, and that this risk can be managed. Safe, low-risk investments, such as bank deposits, are appropriate vehicles in which to “park” your money for the short term, but to receive inflation-beating returns over the long term (more than five years), you must be at least partly invested in
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MONEY BASICS
the salesperson. Moving further left on the risk spectrum, we enter the more comfortable territory of regulated investments. These are legitimate savings vehicles and investments that are regulated by the Financial Sector Conduct Authority or the Reserve Bank. They can be subdivided into direct investments – where you invest directly in assets such as listed shares, government and corporate bonds, and bank deposits – and collective investments, such as unit trust funds, exchange traded funds and endowment policies, in which investors’ money is pooled in an investment portfolio. These may be less risky than unregulated investments and you are more protected by legislation, such as the Collective Investment Schemes Control Act. But don’t be under any illusions: there are still major risks attached to many of them. How can you lose money in a regulated investment? Here are some of the ways: Bank deposits are not entirely risk-free. Although the chances are low, the bank could go under, taking your savings with it. If you are invested in assets such as shares, bonds or property, the values of those assets are subject to short-term fluctuations and occasional market crashes. If you are invested in offshore investments, there is a risk that the rand will strengthen against the relevant foreign currency, losing you money in rand terms. If your returns, in whatever you are invested, do not match inflation, you will lose money in real (afterinflation) terms. Collective investment schemes (unit trust funds and exchange traded funds) are risk-graded according to what they invest in, ranging from low (cash and bonds) to high (equities and listed property). Broadly speaking, of the equity funds, the general equity funds (those that spread their portfolios over all sectors of the JSE) present
the higher-risk assets, such as equities and listed property. Over time, market ups and downs are smoothed out and you stand to benefit from the magic of compounding. Your adviser will also tell you that a good way to manage risk is through diversification. If your portfolio is diversified – invested across asset classes – you spread your risk, because the market cycles of the different asset classes tend to be “out of sync” with each other – in other words, when one is going down, another may be going up.
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HOW TO SPOT AN INVESTMENT SCAM
CHARLES Ponzi, a con artist of the 1920s, whose investment scam involved paying returns using deposits from new investors. | Wikipedia
While financial regulation gets ever tighter, unscrupulous operators continue to find new ways to con South Africans into parting with their hard-earned money, as happened recently with MTI. WYNAND GOUWS tells you what you should look out for
SOUTH African investors continue to fall prey to investment scams that promise unsustainably high returns, the most recent being Mirror Trading International, involving Bitcoin worth about R7 billion. It is estimated that more than 230 000 investors have fallen prey to South African scams over the years, losing more than R35 billion. Even though the schemes differ structurally, all of them have a common thread that goes back to the “origin” of Ponzi scheme from the 1920s. Charles Ponzi was an Italian swindler and con artist in the United States and Canada in the 1920s. He promised investors a 50% profit within 45 days or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the US. Ponzi was paying earlier investors using the investments of later investors. In the first month, 18 people invested in
his company with a total of $1 800. He paid them promptly the very next month, with the money obtained from a newer set of investors. Word spread and investments came in at an ever-increasing rate. Ponzi hired agents and paid them generous commissions for every dollar they brought in. As long as money kept flowing in, existing investors could be paid with the new money invested. This was the only way he could continue providing returns to existing investors, as he made no effort to generate legitimate profits. While this type of fraudulent investment scheme was not invented by Ponzi, it became so identified with him that it is now referred to as a Ponzi scheme. His scheme ran for over a year before it collapsed, costing his investors $20 million. Ponzi lived luxuriously: he bought a mansion in Massachusetts, maintained accounts in several banks and bought a
Locomobile, the finest car of the time. More than 100 years later we continue to see variations of the Ponzi scheme that continue to trick people out of their life savings. To date the recipe remains the same: the promise of high returns, high commission, initial investors are “paid” with new investor money and, at some point, the deck of cards comes tumbling down, as it is not backed by any proper investment or business model. Investment scams may be complex and structured to mislead investors, advisers, and regulators. If returns are higher than what is available in the regulated market, alarm bells should go off and this should, at a minimum, lead to further investigation to understand the risks involved. Wynand Gouws is a wealth manager at Gradidge Mahura Investments.
HOW TO IDENTIFY A SCAM Insight #1: If returns look too good to be true, it should raise a red flag. Without exception, every scheme offered investors better returns than what is available by investing in regulated financial products. These types of returns are especially attractive to the most vulnerable, retirees who cannot survive on their current income and are looking for some way to enhance their income. What is a realistic market-related return? As governments are the lenders of last resort, government bonds are a true reflection of a “risk-free” rate. Investors can find the rates of retail bonds on the RSA Retail Bonds website. Currently, the rate is 5.25% a year for a two-year investment. Any rates higher than this would imply some level of risk. Insight #2: If the return is better than that offered by government
bonds, you need to understand the risks. Investments that guarantee a return are often complex and require sophisticated investment modelling and hedging. Most retail investors are not able to assess the ability of an investment provider to deliver a guaranteed return. When a guarantee is provided, the institution offering it should have both the experience and capital to support or deliver on the guarantee. Question #1: Is the company licensed to offer the product? You can approach an accredited financial planner without a vested interest in the company under scrutiny to help in determining if the company is appropriately licensed. Alternatively, contact the Financial Services Conduct Authority (FSCA) to confirm if the company is appropriately licensed. Call the FSCA on 0800 203722 or visit www.resbank.co.za
Question #2: Does the company have a track record of delivery? It is important to consider the company’s long-term track record, ideally over the last five to 10 years. Sadly, some unscrupulous providers fabricate long-term returns. It is therefore important to ensure that reported returns are in accordance with a standard by an industry body. If the returns are not regulated by an industry body, you should ask for audited returns and ensure you are comfortable with the auditors. Question #3: Does the company have a balance sheet to back its promises? Any company providing a guaranteed return should have capital on its balance sheet to back its promises. Scrutinise the terms and conditions to ensure the company does stand behind the guarantee, and then ask for a copy of its financials.
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Money Quiz Test yourself on your financial knowledge
1. Some unit trust funds allow a minimum monthly investment as low as ….? a) R100 b) R200 c) R500 d) R1000 2. Which one of these is not one of the four main asset classes? a) Equity b) Property c) Bonds d) Cryptocurrency 3. Who said “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price”? a) John Maynard Keynes b) Albert Einstein c) Warren Buffett d) George Soros 4. Which of these is not in the so-called FAANG group of hightech stocks a) Airbnb b) Alphabet (Google) c) Facebook d) Netflix 5. If the inflation rate is 5% a year, and your investment earns 15% a year, what is your real rate of return? a) 5% a year b) 10% a year c) 15% a year d) 20% a year
ANSWERS: 1c, 2d, 3c, 4a, 5b, 6c, 7b, 8d, 9a, 10d.
6. What is the maximum percentage that a retirement fund can invest abroad, including in African countries other than South Africa? a) 25% b) 30% c) 40% d) 50% 7. Who is the governor of the SA Reserve Bank? a) Tito Mboweni b) Lesetja Kganyago c) Judge Bernard Ngoepe d) Adv Nonku Tshombe 8. At what age can you claim a tertiary rebate on your income tax? a) 60 b) 65 c) 70 d) 75 9. Which government body is responsible for investigating incidents of insider trading on the JSE? a) The Financial Sector Conduct Authority b) The Department of Trade and Industry c) The SA Reserve Bank d) The SA Revenue Service 10. What is the maximum annual amount you are allowed to invest offshore, subject to exchangecontrol approvals? a) R1 million b) R5 million c) R7.5 million d) R10 million
Investing in 2021: how to keep calm and carry on Beyond the gloom and doom are investments with a silver lining.
Palesa Tlholoe
21 PHEW! What a year 2020 has been. The world got tipped upside down and shaken around, and everything we thought we knew changed. One unprecedented event followed another as countries locked down, cities feared for their futures and entire industries were left stranded. The markets went for a roller-coaster ride and currencies fluctuated wildly as people tried to make sense of the new normal. With all of this in mind, it comes as no surprise that investors and analysts are uncertain about the economic outlook for 2021. This uncertainty is fuelled by, among other things, the second wave of Covid-19 that is rampaging through many countries including South Africa, our low growth rate and high debt-toGDP ratio, and our staggeringly high unemployment rate. So, are there any opportunities for investors going into the new year? Short answer, yes! Look beyond the doom and gloom and you’ll find that the investment cloud has a small silver lining… Positive growth areas: Despite the fact that many industries have been hit hard by the pandemic, certain sectors of the market are still growing. Take local equities, for example, which are suddenly much cheaper than they were in January. As investors search for stability, there has also been a move away from “growth” companies (like start-up tech businesses) to “value” companies, which typically offer more predictable returns. Property – another traditional safe haven – has likewise shown a positive upward tick since the panicked dip earlier in the year. Indeed, most hard assets (and asset-intense businesses) are expected to benefit as governments around the world roll-out stimulus packages to kickstart their ailing economies. Stay disciplined: There might be growth areas, but investing is as risky as it has ever been. If you want to have any chance of success, it’s crucial that you pay attention to managing and mitigating that risk. Our recommendation? Go back to basics and keep it simple. The goal-based investment planning approach is still the gold standard when it comes to investing in a disciplined manner. How does it work? The first step is to decide what you’re investing for. Maybe it’s a house, or your retirement, or your children’s education. Next, work out the “investment horizon” – when you’ll need the money for the thing you’re saving for. It could be in three years (a house) or 30 (your retirement). This is important because it determines how risky your investment should be. For example, you would typically take less risk for a short-term investment and more risk for a long-term investment, where time will flatten out all the market’s ups and downs. Palesa Tlholoe CFP is co-founder and wealth manager at Imvelo Wealth Solutions
Information
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Here are sources that can help you with financial education, give you more information on savings and investments, and afford you recourse if you have a consumer complaint or a complaint against a financial services provider
FINANCIAL EDUCATION Financial Sector Conduct Authority MyMoney Learning Series https://www.fscamymoney.co.za South African Savings Institute #WaysToSave https://waystosave.co.za/ OMBUDSMAN & REGULATORS Ombudsman for Banking Services ShareCall: 0860 800 900 or phone: 011 712 1800 Email: info@obssa.co.za www.obssa.co.za CONSUMER ISSUES National Consumer Commission Toll-free: 0860 003 600 or phone: 012 428 7000 Email: complaints@thencc.org.za www.thencc.gov.za CONSUMER GOODS AND SERVICES OMBUD ShareCall: 0860 000 272 Email: info@cgso.org.za www.cgso.org.za
FINANCIAL ADVICE Ombud for Financial Services Providers phone: 012 470 9080 or 012 762 5000 Email: info@faisombud.co.za www.faisombud.co.za INVESTMENTS Financial Sector Conduct Authority ShareCall 0800 110 443 or 0800 202 087 info@fsca.co.za www.fsca.co.za LIFE INSURANCE Ombudsman for Long-term Insurance ShareCall 0860 103 236 or phone: 021 657 5000 Email: info@ombud.co.za www.ombud.co.za MEDICAL SCHEMES Council for Medical Schemes MaxiCall: 0861 123 267 Email: complaints@medicalschemes.com or information@medicalschemes.com www.medicalschemes.com
CREDIT OMBUD MaxiCall: 0861 662 837 or phone: 011 781 6431 Email: ombud@creditombud.org.za www.creditombud.org.za
RETIREMENT FUNDS Pension Funds Adjudicator ShareCall: 0860 662 837 or phone: 012 346 1738 Email: enquiries@pfa.org.za www.pfa.org.za
NATIONAL CREDIT REGULATOR ShareCall: 0860 627 627 or phone: 011 554 2600 Email: complaints@ncr.org.za or (debt counselling) dccomplaints@ncr.org.za www.ncr.org.za
SHORT-TERM INSURANCE Ombudsman for Short-term Insurance ShareCall 0860 726 890 or phone: 011 726 8900 Email: info@osti.co.za www.osti.co.za
TAX Tax Ombud ShareCall: 0800 662 837 or phone: 012 431 9105 Email: complaints@taxombud.gov.za www.taxombud.gov.za PROFESSIONAL ORGANISATIONS Fiduciary Institute of Southern Africa (FISA) phone: 082 449 2569 Email: secretariat@fisa.net.za www.fisa.net.za Financial Planning Institute of South Africa (FPI) Phone: 011 470 6000 Email: info@fpi.co.za www.fpi.co.za South African Institute of Tax Professionals (SAIT) Phone: 012 941 0400 Email: info@thesait.org.za www.thesait.org.za FINANCIAL DATA ◆For ◆ the latest financial market indicators, go to https://www.iol.co.za/business-report/ market-indicators ◆For ◆ the latest quarterly unit trust performance, go to https://www.iol.co.za/ personal-finance/collective-investments ◆To ◆ look up performance of a particular unit trust fund go to https://www.iol.co.za/ personal-finance/fund-look-up
