IOL Personal Finance -​ 2nd Quarter 202​1

FOUR FATAL ERRORS OF

ESTATE PLANNING

RISING COSTS OF EDUCATION

WHAT TYPE OF INVESTOR ARE YOU?

DO YOU NEED BITCOIN IN YOUR PORTFOLIO?

Global investing allows you to diversify your investments abroad and gives you access to a world of opportunities. Diversifying your investments offshore can help protect you against underperformance and Rand depreciation, while giving you access to opportunities that are not available locally, helping you maximise your returns.

regulatory changes.

COVER STORY

The four fatal errors of estate planning

Celebrities’ failures in planning for their deaths contain lessons for us all.

FEATURES

14 What type of investor are you? Personality type has a bearing on investment decisions.

18 Can you afford tertiary education for your children? Tuition and living costs may come to more than you think.

22 Raging Bull Awards: Ninety One takes the crown Winning unit trust companies and their funds.

25 It’s official: credit cards drive spending Brain activation study on plastic versus cash.

26 The future of shortterm insurance shopping

Flexible, personalised products are coming your way.

30 Does your portfolio need Bitcoin?

A US investment expert weighs in on crypto.

34 Crypto in Africa

Perceived benefits offset by security concerns.

REGULARS

36 What Covid-19 has taught us about wealth management

Four lessons for investors and advisers.

38 Three ways global investment markets have changed

Past winning strategies may no longer apply.

40 Tax returns: be careful what you claim for

What you gain in one area, you may lose in another.

41 How Portugal’s investment programme will change

Changes to the popular Golden Visa scheme.

44 Freelancing: 12 secrets to success

Marketing and productivity tips for self-employed creatives.

48 Understanding your offshore allowance

The limits on taking money out of the country.

8

2 Upfront Is your estate in order?

4 Book review Books on financial topics

6 Your letters

Readers’ queries answered by experts

49 Millennial view

When does the ‘adulting’ stop?

50 Ombud case file Insurance, advice and retirement fund disputes

52 Fund focus The Absa Bond Fund

54 On the contrary Rethinking risk

DATABANK

55 A list of the adjudicators and the ombuds who can assist you with your complaints, followed by the unit trust quarterly results, tax rates and annuity rates

IS YOUR ESTATE IN ORDER?

The Covid-19 pandemic has been part of our lives for well over a year now and, despite staunch efforts in many countries (South Africa is not among them) to vaccinate as many citizens as possible as quickly as possible, it seems there is still no end in sight, with horrific surges in Brazil and India, among other regions. As I write, the equity markets are frothing at mind-boggling valuations, which makes me very nervous. The markets could come to Earth suddenly with an extremely hard bump if it dawns on investors that, no, we’re not going to turn the corner very soon. In fact, if a far nastier variant of this disease evolves, which causes serious disease and death in younger people and proves resistant to the current round of vaccines, a scenario I believe is highly probable, we could be much worse off than we were when people first started dying on the streets of Wuhan.

So, without being unduly morbid, now may be a good time to update your will or, if you haven’t got one, to draw one up. It’s a more complicated process than many believe, especially if you have children. Before drawing up your will, you need to make some serious decisions: Who will be the executor of your estate? Who will look after your children if you and your spouse are not there to do so? Who will be the trustees if you decide on a testamentary trust for your kids?

And then the process must follow legal protocols: it must be signed by you and two witnesses, who must sign in your presence. And the witnesses can’t be beneficiaries of your estate.

Find out more in our cover story by Roz Wrottesley, on page 8.

As always, there’s a wealth (excuse the pun) of information in our quarterly edition – on investing, insurance, financial planning, emigration and tax, among other things. We also introduce a new “regular” feature: the Ombud Case File, which highlights interesting cases (of which there are many) to come from the offices of our insurance and financial advice ombuds as well as the Pension Funds Adjudicator.

Enjoy delving in!

VOLUME 87

2nd QUARTER 2021

An Independent Media (Pty) Ltd publication

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Personal Finance magazine (ISSN 1562-3750) is published by the proprietors, Independent Media (Pty) Ltd, Star Building, 47 Sauer Street, Johannesburg, 2001 All products appearing in Personal Finance are available and all prices are correct at time of print, subject to change.

MARTIN HESSE

Top performing fund in South Africa*

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To learn more visit our website www.truffle.co.za

Source: Morningstar as at 31 December 2020

*Full details and basis of this award are available from the manager.

Intelligence Isn’t Enough: A Black Professional’s Guide to Thriving in the Workplace

Author: Carice Anderson

Publisher: Jonathan Ball

Retail price: R220

It’s all well and good to have academic qualifications, but you’ll never fully succeed in the workplace if you don’t understand who you are, who you work with, and how you work, says Carice Anderson in her new book.

According to the Jonathan Ball website, Anderson has spent over 17 years focusing on human capital development strategies and working on change and performance management projects. She worked as a professional development manager at McKinsey & Company in Johannesburg where she developed a programme for young black professionals. She obtained her MBA from Harvard Business School. She is the founder of Thrive Leadership Advisory, a leadership consulting, coaching and facilitation firm and has worked for top companies like Google, Bain & Company, Allan Gray, Orbis Foundation and Publicis Media. She has lived in Johannesburg for more than 11 years.

Anderson says the key to making an impact is to be intentional and organised. This starts with organising information. Nowadays, many people are drowning in data, especially emails. One way to manage this is to avoid checking your inbox first thing in the morning, since this usually forces you to deal with other people’s

HOW TO SUCCEED IN YOUR NEW CAREER

priorities, which might not align with yours.

“Ask successful people at different levels of your organisation how they manage email,” Anderson suggests. “Many of my executive assistance friends follow the rule that you should only touch an email once: file it, action it, or put it in a folder with other items that you need to action later.”

Next, you need to organise your time, energy, and tasks. When it comes to work, it’s likely that 20% of your tasks will produce 80% of the results. Once you know what’s essential, you can figure out the most efficient way to get the work done. You can also plan energy cycles to schedule your work and breaks to fit what’s best for you.

“During the course of the year, you can monitor when you start feeling tired and need a holiday,” Anderson says. “Obviously, sometimes you might not have a choice, but if you do, be aware of your energy cycles, communicate them to your manager and teammates, and try to manage your schedule according to those cycles.”

Ultimately, pursuing your career is something that will span your entire life. You’ll take on jobs that involve all kinds of colleagues with various personalities and values. You could even live in different parts of the world as you pursue new roles. This will open you up to parts of yourself that you never knew.

“Get used to discomfort,” Anderson advises. “Embrace it. Make peace with it, because it’s the way of the world. But remember: the better you know yourself, the more equipped you will be to deal with an ever-changing world. Make the time to invest in you. It will be the best investment you will ever make.” –

Eugene Yiga

YOUR LETTERS

WHAT TO DO WITH A WINDFALL?

I recently received some inheritance money, and I am considering a deposit on a home or boosting my retirement savings. What should I do?

Name withheld

Jac de Wet, a financial adviser from PSG Wealth Somerset Mall Ring Road, responds: There are many answers and opinions to this question, with many different factors to consider – for example, your age, your current savings, your personal goals, and circumstances. What one can consider are the potential long-term returns in retirement funds versus the interest rate charged on the bond on the house. If the expected long-term returns of your retirement fund are more than the long-term average interest rate to be charged on the property, then consider investing. If the interest rate charged on the house is more than the retirement fund’s expected return, then rather pay off a bond, or put down a bigger deposit.

INSURING A SECOND-HAND CAR

I am buying a second-hand car. Does it need comprehensive insurance cover?

Name withheld

Bertus Visser, chief executive of distribution at PSG Insure, responds:

Your second-hand car needs insurance just like a new car would. Comprehensive cover extends to accidental loss or for damages to the vehicle. Opting for only third-party cover means you will only have cover if a third-party claim has costs for your account, but your vehicle will not be covered in the event of an accident. You might think a second-hand family car would be less of a crime target (compared with a new car), but you are at equal risk of getting into car accidents, which can be pricey without proper insurance to assist with vehicle repairs or replacement. Comprehensive insurance also means your car is covered if another legal driver drives it.

Some second-hand cars may not be as costly as

new cars, but keep in mind that they may require more frequent repairs or have different safety measures in place. Features may have been added after the vehicle was bought and these must be included in your policy (an example might be a sound system).

Any vehicle can be a target for theft, so putting safety measures in place is practical and may even reduce your premium. The retail value of your vehicle is also worth discussing with your adviser, as it does change overtime. The latest replacement value according to your insurer is easy to ask for and is the right amount of insurance needed for your vehicle.

SHOULD I PAY OFF MY DEBT?

I have a pension of R18 000 (net) a month, R1 million available in a lump sum, my home is paid off, but I have about R100 000 left to pay on my vehicle and credit card. Should I pay my debt in full or boost my savings, including an emergency fund?

Name withheld

Magdeleen Cornelissen, a financial adviser at PSG Wealth, Menlyn, responds:

The answer to your question is much debated. The interest rates charged on different types of debt is a crucial consideration. Credit card debt comes at a very high cost and, in my opinion, you should focus on paying it off as soon as possible. Although the debt on a car is typically not as high, I do think you should consider paying this off at a quicker pace than you normally would. Paying off your credit card will enable you to free up some cash flow, which can ideally be used towards paying off your car. Having an emergency fund is crucial, as this will give you the opportunity to shy away from using the credit card to pay for those unexpected expenses that arise from time to time.

Note: These letters are selected from “Your Questions Answered”, a monthly letters feature in Personal Finance in the Saturday newspapers, sponsored by PSG Wealth.

BMW Group South Africa believes in building a better today for a stronger tomorrow. That’s why we’ve been elevating our communities since 1973 through partnerships and initiatives. To date, we have proudly supported 144 schools to give children a steppingstone as every step in education is a giant leap for their future. We have provided The Rhino Orphanage with vital support vehicles, and every baby rhino saved helps to preserve these magnificent animals for future generations to enjoy. In our fight against COVID-19, we’ve upgraded several hospitals and clinics with more than 750 beds, a screening facility, PPE, support vehicles and an ambulance. This is our commitment towards our people, our environment and our country.

THE FOUR FATAL ERRORS OF ESTATE PLANNING

Disputes over deceased estates can make lurid stories, especially where wealthy celebrities are concerned. But they do expose errors that make even a modest estate much more likely to be a source of chaos instead of comfort to those left behind. Roz Wrottesley reports.

If you don’t have a will, you might feel guilty relief when you hear that at least 70 percent of working South Africans are in the same boat. And the figures are not much better in the developed world: while Americans were surging towards half a million Covid-19 deaths last year, a survey revealed that 68 percent of adults do not have a will. The United Kingdom figure is 54 percent, with an additional five percent having a will that is out of date.

According to the website Business Insider South Africa, the pandemic has prompted a dramatic increase in enquiries about wills. One company, Capital Legacy Solutions, reported 3 800 enquiries in the first quarter of 2020, compared with 500 in the first quarter of 2019. There is no firm evidence yet that the proportion of people with valid wills has increased significantly. Yet the consequences of paying little or no attention to estate planning are well documented. Celebrity stories abound, from the family feud triggered by the unintelligible notes left behind by singer Aretha Franklin, which appeared to disinherit her oldest son, to the continuing impasse over singer Prince’s estate. He died intestate in 2016 at age 57, when he was worth US$500 million (and counting), and five years on, the estate is nowhere near being wound up. All we know is that the biggest share will go to the tax authorities, which Prince could have prevented, and the heirs have been whittled down to six siblings and half-siblings, who are fighting over their portions. What Prince wanted is unknown.

In short, in the real world, you might

do everything else right – brilliantly build a successful business and assiduously acquire life insurance, savings and investments – but if you don’t consider what will become of your assets after your death, you are likely to leave a very different legacy from the one you imagined. As the law firm Norton Rose Fulbright puts it: “In South Africa, you don’t die without a will. You either die with one you signed, or one the State wrote for you – the Intestate Succession Act.”

Not only does intestate succession deny you the opportunity of maximising the value of your estate, but the one-size-fitsall provisions of the Act are very unlikely to fit the needs of a modern extended family. Even if a will exists, if it is poorly conceived or out of date, you could be setting the stage for unnecessary taxation, agonising delays in the distribution of benefits, and potentially devastating conflicts between beneficiaries and would-be beneficiaries.

Or you might just leave a loved one at the mercy of court-appointed executors and even the Constitutional Court. In Cape Town, Jane Bwanya is fighting to inherit the estate of her partner of seven years, Anthony Ruch, who died suddenly aged 57 leaving properties and investments worth millions of rand, but no valid will. The Sunday Times reported that Ruch had no immediate family, so various distant relatives overseas are destined to inherit the bulk of his estate, after the executors apportioned R3 million to Bwanya. Instead of taking that lying down, in February Bwanya took the case to the Constitutional Court, asking it to uphold a September 2020 decision of the Western

Cape High Court that a section of the Intestate Succession Act was unconstitutional because, where heterosexual couples were concerned, it recognised only “spouses” for the purposes of inheritance, not life partners. A Constitutional Court ruling in 2016 gave same-sex partners the right to inherit, but that right has never been extended to partners of the opposite sex.

You never know what will happen, as the Covid-19 pandemic has illustrated all too well. Whatever you do, make a will with the help of financial and legal advice, and review it periodically. Always review it when you approach a life-changing event, such as marriage, the birth of a child, divorce, serious illness or retirement.

Good-news stories about wills are few and far between, but the death of actor Luke Perry in 2019 is one. The Beverly Hills 90210 star was reportedly fit and healthy until he had a stroke at the early age of 52 and never recovered. But he had prepared for such a thing by leaving a will – perhaps because he had had a colon cancer scare four years earlier, which had made him a staunch advocate of cancer screening. Perry left everything to his children and protected his estate from unnecessary tax, according to Forbes magazine. The only thing he didn’t do was leave anything to his fiancée, which indicates that even he did not update the will as he might have wanted to do.

So when you do your estate planning, avoid these four fatal errors to ensure you have done everything you possibly can to make life easier for the people you care about.

Making assumptions

Gareth Collier, a financial planner at Crue Invest in Cape Town, says glib assumptions that turn out to be incorrect are the thread that runs through all the will-related problems he and his colleagues deal with … assumptions about life expectancy and relationships, as well as assumptions about the value of assets and the impact of taxation and fees.

“As planners, our role is to understand how you would like the future to unfold in the event of your death, and then play out the scenarios as realistically as possible,” says Gareth. But all too often it’s too late for that and Crue’s task is to work with the executors to minimise the damage and ease the stress and anxiety suffered by the people left behind. And he says it is not only the testators who make assumptions; sometimes it’s the people advising them.

One of his clients, who had lost her husband unexpectedly and was faced with losing her home and a large proportion of the wealth he had left behind, was so distressed that she shook visibly through every consultation for at least 18 months. “When you lose someone close to you suddenly and then find out that your financial security is at risk, it can be overwhelming. It can take years off people’s lives,” says Collier.

So don’t assume death won’t be sudden. Don’t assume heirs won’t predecease you. Don’t assume that

selling your small business will cover the bond on the house and secure it for your family. Don’t assume your dependents will have enough to live on while the estate is wound up. And don’t fondly rely on the goodwill of executors and heirs; make sure there are no grey areas to spark conflict.

And don’t assume your intentions are obvious, as the actor Robin Williams did. According to Vanity Fair magazine, his will left his $100m estate to his children from previous marriages, and made provision for his third wife to occupy their California mansion for the rest of her life. But he made no mention of the contents of the house, including his personal possessions, acting awards, clothes and valuable watches. That relatively small oversight drove a stake through the relationship between his children and his wife – they accusing her of being “greedy” and trying to enrich herself at their expense; she accusing them of invading her privacy in search of the items they wanted to remove, including the tuxedo Williams had worn at their wedding.

They eventually reached a settlement in court, but not before proving the point that uncertainty is unhealthy when it comes to wills and it is usually the result of the testator assuming people would understand and honour his/her intentions.

Procrastinating

You don’t want to spend money on legal or financial advice, you don’t know where to start, you’re too busy making the money you will eventually leave to your family, and you don’t want to make any tough decisions – at least not just yet. Later...

But Fate doesn’t wait, and if you don’t get around to making or updating a will, your estate could be tied up indefinitely or lack the proper protections for minor children or benefit the wrong people.

Whitney Houston’s will is a case in point: she had made it 20 years before her death and never updated it, so it didn’t reflect the family’s concerns that her only daughter, Bobbi Kristina Brown, was too immature and too unstable to inherit a fortune at 21. As her birthday approached, the family tried to delay the first payout, arguing that Houston had intended to amend her will, but to no avail. Houston’s will was clear and there was nothing to be done. (Bobbi Kristina died at age 22 after being found heavily drugged and unresponsive.)

Don’t wait. An imminent marriage or divorce, the death of one of your heirs, financial problems that change the outlook for your heirs, a serious illness: all these lifechanging events should trigger a review of terms of your will.

Failing to follow the money

There are no stupid questions when it comes to estate planning, says Collier. If there were, you would expect this to be one of them: “If I die before I retire, will the proceeds of my retirement annuity go to the beneficiaries I nominated?” The answer is “not necessarily”.

The beneficiary nominations are not binding on the trustees of retirement funds, including provident and preservation funds. In terms of the Pension Fund Act, the trustees’ priority is to benefit the dependants of the deceased – after making sure who they are, if it is not obvious. In other words, they will make their own enquiries and allocate funds to dependants before they allocate the balance to the named beneficiaries.

Financial planner Craig Torr, director of Crue Invest, relates the case of a man whose estate consisted of his house and car and substantial retirement savings in a single RA. When he died suddenly, his will was simple: he left his home (plus contents) and car to his partner, Ms X, who was well-off in her own right, and confirmed that he wanted his RA to be split three ways among the beneficiaries he had nominated. The trustees had other ideas: his mother and his

sister did not qualify as dependents by their standards, whereas Ms X did, so they left the whole amount of the RA to her. Even a petition by Ms X, arguing that she did not need the money and wanted her partner’s wishes to be honoured, did not persuade them to reconsider. In the end, she had to accept the money and share it with her partner’s mother and sister – which meant paying donations tax at the rate of 20% (the rate on donations up to R30m).

So make sure you understand what would happen to your assets if something happened to you; it might not be clear. For example, life insurance, where there is a nominated beneficiary, is not included in the estate, so it can be paid out before the estate is wound up, but not everyone realises it is subject to estate duty.

You might leave some thoughtful bequests to individuals and the residue (remainder) of your estate to your only child, but have you calculated what that residue will be? The first claims on the estate are bequests, estate duty, capital gains tax (CGT), executors’ fees and any other costs. If there is not enough cash in the estate to cover the costs, beneficiaries may have to contribute in order to prevent the sale of the assets they have inherited.

It is common to do what Robin Williams did and leave a residential property in trust to children subject to a usufruct in favour of a spouse or partner – the right to have all the benefits of the property in his or her lifetime. It’s great for securing the property for the children, but has one major drawback: the complicated tax implications can land the ultimate owner with a very high CGT bill if he or she wants to sell the property.

And so it goes on. Where would the money come from to pay off your home loan or your car loan? What about obligations related to a divorce? What would happen to you and your spouse’s shared bank accounts? If you have assets offshore, what happens to them? Should assets in another country, such as a property, be covered by a separate will? So many questions, and you need to ask them all. Write down all your assets and liabilities and go through them one by one.

The Port Elizabeth law firm Pagden’s has some very useful articles on its website (www.pagdens.co.za/news/page/5/) about the things that could go wrong with your will and the very significant savings that can be made through careful estate planning.

Leaving loved ones in the dark

The distress a widowed client of Collier’s experienced when her husband’s will exposed the precarious nature of the family’s finances is a typical example of what can happen when partners and children have been “protected” from all things financial and have never managed much more than a cheque account before they have to deal with death and its consequences. The widow was in her 50s and used to living very comfortably on the proceeds of a successful family business. She had never been included in any of the financial decisions of the business or the family, so the shock was severe when it turned out that her husband had taken loans, for which his company had signed surety, and that his will had failed to address these issues.

Fatal error #4

In short, says Collier, “it left the family desperately trying to hold on to the things they had worked so hard to build up. If there had been any estate planning, it had not been communicated to anyone and nothing had been documented”.

In another case handled by his colleague, financial planner Devon Card, a man’s premature death left his wife without retirement savings and dependent on her adult children. First, he relied on his mother dying first and leaving him a substantial legacy that would fund the couple’s retirement. In the event, his mother died after him, but she was already in frail care and did not amend her will, so there was nothing for his wife. Then, instead of leaving the family home to his wife, he left it in trust naming his wife and children as beneficiaries of the trust. This meant that

she couldn’t keep the house or sell it to buy a smaller one without a resolution of the trust signed off by all the beneficiaries –which resulted in conflict in the family.

“She was under the impression that she would inherit the house, but she didn’t actually know for certain, because her husband didn’t discuss it with her,” says Card. “Instead, nearly three years later, the funds from the sale of the house have still not landed in the trust account. When they do, a resolution will still have to be made and all the beneficiaries have to be happy. Along the way, it has caused a lot of personal strife between family members.

“If the couple had sat down and had a discussion with a financial adviser, he or she could have pointed out the potential problem areas and rectified them quite simply before either spouse passed away.”

WHAT TYPE OF INVESTOR ARE YOU?

Martin Hesse reports on a local research study that groups investors into five types according to their investment decisions.

You’re invested in the equity market and the market takes a sudden dive. What do you do? Switch out of your investment – which has taken a knock – into a lower-risk one, out of fear of losing more money? Do nothing and ride out the dip? Or plough more money into a market that is now offering good value?

What you do would depend on many factors, including the distance to your investment horizon, but predominant among them is your personality.

A widely accepted theory of personality lists five main traits: extraversion (to what extent you are outgoing and socially confident); agreeableness (how friendly, cooperative and altruistic you are); conscientiousness (how aware you are of your own behaviour and its effect on others); neuroticism (to what extent you are emotionally unstable, anxious and/or pessimistic); and openness to experience (your willingness to explore the world outside yourself).

So if long-term investment success depends to a large extent on psychology, shouldn’t it be an important consideration for investment professionals and financial planners?

Behavioural finance

The study of the psychology behind financial decision-making, known as behavioural finance, has come a long way in the last two decades, and it is increasingly being used in the financial services industry to improve outcomes for investors.

The pioneers in the field were Daniel Kahneman and Amos Tversky, who, in the 1970s and 80s, developed Prospect Theory, which maintains that people assess losses and gains asymmetrically. They found that we all have built-in cognitive biases when it comes to winning or losing money, based on how we perceive risk, and these biases are often counterproductive – in other words, they lead to sub-optimal investment outcomes.

Kahneman and Tversky found that we are particularly poor at assessing risk and can easily be fooled by the way a given situation is framed – which is why, for example, people are more afraid of dying in an air crash than in a car accident, even though the probability of the latter is far higher. When we lose money, we tend to assume a higher level of risk than would be prudent in attempting to recoup our losses – hence pensioners taking on highrisk investments at a time in their lives when they can least afford to do so.

In 1997, Elke Weber and Richard Milliman added to the growing body of research by finding that our propensity to assume risk is significantly affected by prior outcomes – wins and losses, successes and failures.

Consequently, we’ve learned that there are ways to counteract personality traits and instincts that act to our financial detriment. The key is to act counterintuitively. An airline pilot is taught to avoid intuitively pulling back on the

joystick in an emergency, which would cause the nose to lift and the aircraft to stall. Similarly, a long-term investor should be taught not to withdraw from an investment while it is falling.

Momentum study

Albert Einstein said there are three great forces that rule the world: stupidity, fear and greed. (Had the great man perhaps been in a less cynical frame of mind, he might have added a fourth, positive force – reason – and replaced “stupidity” with “ignorance”.)

Paul Nixon, head of technical marketing and behavioural finance at Momentum, and co-authors Professor Evan Gilbert and actuary Dirk Louw, recently published a paper on the results of their research into investor behaviour in South Africa. Its title, “Understanding the great forces that

rule the world: A study on South African investor behaviour”, refers to Einstein’s quote.

Nixon, Gilbert and Louw analysed the investment decisions of investors on the Momentum Wealth Linked Investor Services Platform. On such a platform, investors are able to switch underlying funds relatively easily. The researchers looked at 44 815 switches, involving almost R100 billion, by 23 390 clients holding funds on the platform between January 2006 to December 2017.

They identified the following elements in the investors’ switching data:

• The number of switches each investor made over the period.

• If the investor was in Fund A and switched to Fund B, how had B performed relative to A in the 12 months preceding the switch?

• Did the switch reflect a change in the

level of investment risk for the investor? While not all switches were made into a fund that had outperformed the one the investor was in, it was these switches that most interested the researchers. They found a clear inflection point in behaviour around the 12.5% return mark: if the returns were below 12.5%, and especially when returns were negative, the researchers postulated that the switching decision was driven by fear – and these formed the majority of switching decisions. If an investor was already receiving a return of 12.5% or above, and switched to a better performing fund, the researchers postulated that these decisions were driven by greed.

Finally, they looked at investors who, for reasons of their own, consistently switched into a worse-performing fund than the one they were in.

INVESTOR TYPES

Based on scores allocated to investors according to how often they switched, whether they did so out of “fear” or “greed”, and whether they switched into a lower- or higher-risk fund, the researchers were able to cluster investors into five groups. The descriptions below are direct quotes from the paper (the term “behaviour tax” refers to the negative impact an investor’s behaviour has on his or her investment outcome):

Cluster 1: The Avoiders

“These investors tend to have low risk appetite and rather avoid risk altogether. They therefore stick to a more conservative asset allocation and do not switch often. However, when they do switch, the decision to do so is likely a result of fear rather than greed. Keeping with avoiding risk and avoiding change, they are likely to remain in funds with similar (low) risk. They are relatively likely to chase past performance when current performance is below inflection. This behaviour seems to be more common in older investors and slightly more common with females compared to other archetypes.”

Cluster 2: The Contrarians

“As the name suggests, these investors are seemingly showing the opposite behaviour than that of the other archetypes. They have a seemingly high risk preference and a high tolerance of downside risk. Whether performance is high or low, these investors rarely chase past performance, in fact they are more likely to switch to funds with worse past performance. Keeping with the title of this archetype, this was the only cluster which realised a positive behaviour tax.”

Cluster 3: The Market Timers

“The main driver here is switch

frequency, since we expect that market timers will constantly move between funds in an attempt to beat the market and maximise returns. These investors show a mix between fear and greed driving switches. We see that such behaviour leads to high behaviour tax during periods of crisis and periods of fluctuating markets.”

Cluster 4: The Anxious Investors

“Investors in this group seem to have a low risk appetite, however, they do not avoid risk altogether. These investors are very sensitive to down-side risk and are likely to act out of fear when underperformance looms. Anxious investors are very likely to down-risk and chase past performance when current funds are performing below inflection. Such behaviour led to high behaviour tax, especially during periods of growth where they would be ‘missing out’ on performance.”

Cluster 5: The Assertive Investors

“These investors are more risk tolerant and clearly set on chasing past performance, hence high greed being associated with switches. When chasing past performance, it is mostly between funds with similar risk profiles. We expect these investors to be overconfident and to follow their own ways and not be influenced as much by advisers.”

Changes in behaviour

In a Momentum presentation on their paper, Nixon and Gilbert said the final step of the study was to analyse the change in the various clusters’ switching behaviour over time. “This was the most challenging yet valuable part of the analysis, as it provided a general view of the archetypes’ varying switching

activities during different economic events,” Nixon said.

“During the 2008 Global Financial Crisis (GFC), for example, switching behaviour was mostly linked to the Avoiders and Anxious Investor clusters. Then, during market recovery postGFC, there seemed to be a lot of active Market Timers, while during bullish market periods we observed an increase in Contrarian-type investors. The Assertive Investor cluster remained relatively constant during all economic cycles, reflecting their likely predisposition to overconfidence,” Gilbert said.

One behaviour trait, however, permeated across the board: investors are prone to making short-term decisions that are not aligned with their long-term investment goals.

The researchers note in the report: “Investing is, by its very nature, a longterm endeavour ...

"The grouping of investors based on their risk behaviour is useful for several reasons.

"First, it allows for the effective linking of their risk preferences or risk tolerance (both stable by nature) securely with their long-term investment goals. Secondly, a better understanding of the compromising nature of myopic risk behaviour (which places too much emphasis on the transient present and its related emotions) is key to understanding client and adviser behaviour, and, more importantly intervening accordingly at the right time to avoid the associated negative implications of these behaviours.

"Ultimately, the point is to help investors avoid the harmful outcomes of the third of the great forces that, according to Albert Einstein, rule the world, namely ‘stupidity’. These insights are key to achieving this outcome.”

Overriding auto-pilot Nixon says that there are steps we can take to override the auto-pilot in our brains when volatility strikes in the markets.

“Volatility can happen when a company scandal breaks, Elon Musk tweets something vague, or – on a bigger scale –when a global pandemic hits. During the panic that follows, it’s human nature to unknowingly give way to cognitive biases – or bad mental habits. In the investment world this usually causes people to switch

their investment funds – some change to safer, lower-risk investment funds while other people may take a gamble and switch to higher-risk investments with the allure of greater reward,” Nixon says. He says understanding which investor type you relate to will help you to be mindful of your behavioural tendencies, so that you can seek the right advice before making snap decisions that could cost you. In addition, following these tried and tested tips will benefit us all, no matter our personality type:

1. Get professional financial advice, set goals and develop a plan to achieve these.

2. Have a long-term mindset and don’t worry about timing. Get your wealth to work for you as soon as possible.

3. Diversify and spread your risk.

4. Have a cash windfall for a rainy day to ensure that you are not forced to sell long-term investments.

5. Review your plan often – especially when big-life changes happen – and make the necessary tweaks.

The obvious first step when saving for your children’s education is to find out how much money you will need.

“How long is a piece of string?” is the response from Kirsty Scully, senior financial planner at Core Wealth, and chairperson elect of the board of the Financial Planning Institute – but her methods are precise.

From university websites, she sources the average cost of a degree at present. As an example, University of Stellenbosch 2021 estimates for the first year of these undergraduate degree courses are: R44 940 for a BCom, R64 974 for a BSc engineering, R54 501 for a BA Law, and R48 037 for a BA in human resources management.

Then Scully works on an annual inflation rate of 10% to get to the expected future cost when the child reaches university. The rate is higher than the general (or headline) inflation rate because educational inflation exceeds it historically.

CAN YOU AFFORD TERTIARY EDUCATION FOR YOUR CHILDREN?

How, where, when to save for your children’s education – and what happens when it just isn’t possible to cover it.

By Anna Rich

“I like to ensure that the parents will have sufficient money for the full degree by the time the child is 18,” Scully says. However, this does not take other costs into account. “If the only place your child gets into is in another city, there’s the cost of accommodation and general living costs.” She recommends enlisting a financial planner to do the calculations.

The National Student Financial Aid Scheme (NSFAS) government bursary is

a useful starting point for benchmarking costs, but you might find this too conservative. Currently, besides tuition fees, the annual expenses covered are the university accommodation charges (for example, catered residence fees at UCT are R35 000); R7 500 for transport; R15 000 living allowance; R5 200 for books; and R2 900 for personal care. Using the UCT example, that’s R65 600, excluding academic fees.

What are your priorities?

For most of us, there is a trade-off between competing needs: we can’t afford everything. Once our basic expenses have been covered, the decision on whether to buy a better car or to save for our children’s tertiary education may be straightforward.

But it becomes trickier when we feel we have to choose between “worthy” ways of allocating our money. If, for example, our household income doesn’t stretch far enough to cover saving for retirement as well as our children’s tertiary education, which takes priority? If we pick education, perhaps we hope our children will take care of us in our old age. But for personal finance experts, there is no question.

“It’s a difficult pill to swallow, but funding your children’s education should not cost you your retirement savings,” says Gugu Sidaki, director and wealth manager at Wealth Creed. “Always work on the premise that you will be wholly responsible for your own retirement funding. If you have a spouse or a child who can assist you in retirement, it can only be a bonus.” She points out that there are options for funding your children’s education if you do not have the money from your income, whereas the options for funding your retirement outside of the money you save are almost non-existent.

“Parents must take their retirement planning into account first,” says Scully. “Work through your financial planning with a Certified Financial Planner to ensure that you have made adequate provision for your own retirement, and if there’s anything left, save for your children’s education.”

Henk Appelo, lead specialist for investments at Liberty has a similar perspective: “While saving for education is important, it’s vital to look after your own

finances, particularly your retirement fund.”

Advice needs to be personalised, because it needs to meet your needs, notes Scully. “It is important to see a financial planner to get personalised advice on planning for your children’s education.”

What are the best financial instruments to use?

There is a dizzying array of savings and investment vehicles, from unit trusts and tax-free investment accounts to education policies and endowments.

“It is very important that saving for education happens within the correct type of vehicle, based on age and stage of the children,” says Scully. “If you have very young children, and you are saving only for their tertiary education, you might have 10, 15 or even up to 18 years. If it’s long term like that, you can look at using a unit trust portfolio.”

Scully explains that the choice of unit trust portfolio takes your risk profile into consideration: how you accept risk, how you deal with risk, and the length of time you have for investing. (This determines the type of investments you allocate your money to: equity has a greater chance of achieving higher returns, though there’s also the possibility of losing money, but the converse applies to savings accounts and bonds.)

“For clients who are investing for more than 10 years, I use a flexible portfolio,” says Scully. “They tend to give higher growth, and they are also subject to more volatility – but that should not be a problem over a 10-year investment.” In this type of unit trust fund, the manager has the flexibility to adjust the portions in each asset class in response to market developments

“If the period is below two years, you need to go into savings mode, as opposed to investment mode. You have to choose a conservative portfolio – without volatility –such as a money market fund,” Scully says.

What about an educational policy, offered by life assurance companies?

These are often housed in endowment policies, explains Scully. Endowment policies are life insurance policies that are designed to pay out a lump sum after a specific term. “They can be beneficial for those with a marginal income tax rate of over 30%,” says Scully. But she reserves them for estate planning and taxation purposes. “I don’t recommend an endowment plan being used as an education policy.”

Scully says endowments are much more expensive than new-generation vehicles, like unit trusts. “With endowments, you are effectively paying for the packaging and have little idea of the extent of the fees.”

Costs associated with investing in unit trusts are more transparent: you know exactly what you are paying for, because you have to sign for these fees, she explains.

Endowments carry penalties for early withdrawal, whereas unit trusts are easily accessible. Though there might be some advantage in not being able to touch the money, Scully still advocates unit trusts for saving for education. “If it is important to you to be able to pay for your children’s education, view it as something you do not access. It is tough, but it comes down to self-discipline.”

She recommends keeping these savings in a fund dedicated to education. “Don’t mix education savings with other savings, as it is far too easy to ‘dip’ into it if you feel you need to redo your kitchen – and then there won’t be enough left for education.”

Pay as you go?

Relying on your salary to finance your children’s education becomes increasingly difficult, says Saleem Sonday, head of group savings at Allan Gray.

“The cost of education grows at a higher rate than the average salary (and inflation in general). Over time, this means that more and more of your salary has to be set aside for education. By the time your children are at university, education could take up the bulk of the combined salary of two parents.”

On the other hand, investing ahead for your children’s education relieves future pressure because the growth earned on an investment can significantly lower the impact of education costs, Sonday says.

Ideally, parents need to decide what is financially feasible from the get-go, says Liberty’s Appelo. “Will your child go to private school? And university?

A parent who puts away even small amounts each month from when their child is young will have a far less stressful time.” “Rather than worrying about the fact that you are not saving enough, get started,” Sonday says.

What about a student loan?

“If you do not invest long term, you may be forced to use credit to finance your children’s education,” says Sonday. “Although the power of compound interest works in your favour when you invest, it works against you when you borrow. This makes credit the most expensive option.”

For Sidaki, taking out a bank loan to fund your children’s education is an option if you cannot fund it on your earnings alone. She sees it as a better alternative than sacrificing your retirement savings. The rider is that you need favourable terms and affordable premiums.

“The only time I think it’s acceptable to take out a loan to fund your child’s tertiary education is if you are already saving sufficiently for retirement,” says Scully. That said, her feeling is that children should pay for their education themselves if their parents cannot afford to.

The last thing you want is to have gone deep into debt to afford an education for your children, and then they have to support you as soon as they graduate. Education is an important priority, as is making sure you are self-sufficient in each

stage of life, Appelo says.

To take out a student loan at a bank, all applications are subject to a credit and affordability assessment. But otherwise, the criteria vary from bank to bank. For example, to qualify for a student loan at FNB, the principal debtor (person who applies) needs to earn a minimum income of R6 000 per month, says Amika Maharaj, of FNB Loans. This could be the student (if they are employed part- or full-time), but more often it is a parent/guardian/ family member/sponsor who meets the qualifying requirements and applies for the loan. “Student loan interest rates are generally lower than other unsecured lending products, such as credit cards or personal loans,” says Maharaj. “The interest rates are based on the principal debtor’s credit profile and start from the prime interest rate, currently at 7%.”

Students who are employed part-time or full-time can apply for an Absa study loan in their own capacity. However, most undergraduates are unemployed, so the loan application is concluded with the parent/guardian/sponsor, who would be in a position to service the monthly repayments on the loan, says Cowyk Fox,

managing executive of everyday banking at Absa. This is in line with the National Credit Act. “We strive to ensure that our pricing on the study loan is as affordable as possible,” says Fox. “If students who take out our study loan with Absa are offered a lower interest rate elsewhere, we will beat it, and this could go as low as prime.”

No money does not mean no hope

If parents cannot pay for their children’s education, there are other opportunities, says Scully. “There are many sources of educational funding, such as bursaries.” A good starting point is the SA Bursaries website, which aims to provide a comprehensive list.

NSFAS bursaries are open to students who have been accepted into a public higher education institution, and whose household income is not more than R350 000 a year. In return, the student

has to pass the course, and agree to participate in the economy for as many years as their studies were funded for (or pay back the bursary).

Scully points out that studying while working is an option, and that companies are often prepared to help fund your studies.

Will tertiary education go online, becoming free or more affordable?

The internet enables free access to information to some extent, but this does not signal the end of educational institutions, says Dr Morne Mostert, director of the Institute for Futures Research at Stellenbosch University.

“Information has to be consumed in meaningful ways to turn into knowledge, and this is where some form of educational institution may be useful,” he explains. “Various forms of universities are likely to emerge. In one of the scenarios

for universities, the current face-to-face model becomes the status version, due to the direct access to high-quality teaching, research and infrastructure.” He envisages that this model will co-exist with open online courses that allow curated access to information to very large numbers of students.

Dr Mostert expects that the linear model of education and career will be severely disrupted, with an increasing number of job and career shifts. “This means that learning will grow as an essential part of life for any professional, at any age. And it will have to be financed in some way,” he adds. “But don’t expect governments to respond with agility; individuals and corporates will have to assume joint responsibility.”

For these reasons, Dr Mostert concludes that planning for the future educational needs of the entire family will become more, not less, important.

NAfrican Manager of the Year at this year’s Raging Bull Awards, which recognise superior investment performance by unit trust fund managers. In second place was last year’s winner, Cape Town boutique asset manager Mi-Plan, and third was the collective investment arm of the Peregrine Group, H4 Collective Investments, a newcomer to the Raging Bull winners’ podium.

The Offshore Manager of the Year award went to T Rowe Price, a US-based global investment firm, whose funds are marketed here in South Africa by Prescient.

The awards, hosted annually by Personal Finance, were sponsored this year by the JSE, Sanlam Investments, Stanlib, Truffle and Fundamental. The data suppliers were ProfileData and its subsidiary, PlexCrown Fund Ratings.

Instead of the traditional black-tie gala dinner, which has become an annual highlight for the investment industry, this year’s ceremony took the form of a video

RAGING BULL AWARDS: NINETY ONE TAKES THE CROWN

presentation, which was streamed at the beginning of February, and which can be viewed on the IOL News YouTube channel. Apart from the Manager of the Year awards, eight Raging Bull Awards and 29 Raging Bull Certificates went to individual funds in local and offshore categories.

LOCAL WINNER

Ninety One may have a relatively new name, but it is one of the most wellestablished asset management companies in South Africa, with a highly experienced investment team that has a presence in major centres across the globe.

The company changed its name at the beginning of last year, from Investec Asset Management to Ninety One, when it separated from Investec Bank. It has received many accolades at the Raging Bull Awards over the years, including two special awards at the 21st Raging Bull Awards in 2017, for the best-performing equity and multi-asset funds over 21 years: the Investec Equity Fund and the

Investec Managed Fund.

In an interview with Personal Finance, the firm’s managing director, Thabo Khojane, and deputy managing director, Sangeeth Sewnath, said the timing of the award, after rebranding as Ninety One, “couldn’t have been better”. They said that the accolade of Manager of the Year was less about industry recognition than about being an affirmation to its clients of its commitment to delivering good outcomes.

“Last year, given all the uncertainty, it didn’t really feel like there were any winners, and over the last one, two and even five years the investment environment has been really difficult. And so it has been reassuring for us that if you stretch this to the real long term – we are turning 30 this year – if you look at our 20- or 30-year track record, we were really encouraged that we have done really well over that period of time, and we think that’s what really counts,” Sewnath said, who added that many clients have been with them for all that time.

Martin Hesse reports on the winning unit trust management companies for performance to the end of 2020.

He said the company’s consistently superior performance over the long term and its differentiation from its competitors could be attributed to three things: the longevity and stability of the business; its unique employee-ownership culture, and its global reach.

“We’ve spent a lot of time making sure that we’ve built a globally integrated business. We have investment teams across New York, London, Hong Kong, Singapore, which we think is a big part of our long-term success. We’ve got clients in 120 different countries around the world.”

Khojane elaborated on the culture at Ninety One. “It’s all about giving people the freedom to create, whether it’s our portfolio managers or business leaders, it’s about encouraging them to take risks, to initiate things from scratch and to grow them organically.

“There is also this clarity of purpose, which is an almost obsessive focus on the client and making sure that we are accountable to the client.”

Khojane also emphasised the importance of being a global player. “We think this gives us a huge edge, not only in terms of investment decision-making but also our ability to attract talent.”

The last differentiator, Khojane said, was humility. “There are probably two ways in which humility is tested: when you are at the top (in terms of performance) and when you are at the bottom. When you are at the top, that is not the time to swing for the fences or second-guess what your client has appointed you to do. Similarly, when you are the bottom, that is not the time to capitulate and change your stripes.”

OFFSHORE WINNER

Pieter Hendricks, the head of Middle East and Africa, Global Investment Services at T Rowe Price, told Personal Finance the news that his firm had won the Raging Bull Award for Offshore Manager of the Year, had come as a happy surprise.

“We are very pleased to receive the Raging Bull award, especially since this is an endorsement for our company and it underlines our focus on long-term performance for the benefit of our clients. We believe that the sophisticated South African investor community has access to best-in-class global asset managers, and to win this award amongst a competitive peer group is a testament of the quality of the T Rowe Price global investment platform,” he said.

Lance Witten, the chief content officer at African News Agency, and Martin Hesse, the content editor of Personal Finance, at the recording of the first virtual Raging Bull Awards event. Picture: Henk Kruger/ANA

RAGING BULL CERTIFICATE AND AWARD WINNERS

for results to December 31, 2020

CERTIFICATES

Straight performance over three years

Best South African Equity Resources Fund

Ninety One Commodity Fund

Best South African Equity Mid- and Small-Cap Fund

Coronation Smaller Companies Fund

Best South African Multi-Asset Flexible Fund

Long Beach Flexible Prescient Fund

Best South African Multi-Asset

Low Equity Fund

Amplify SCI Wealth Protector Fund

Best South African Multi-Asset

Medium Equity Fund

Foord Conservative Fund

Best South African Multi-Asset

High Equity Fund

Long Beach Managed Prescient Fund

Best South African Multi-Asset Income Fund

Sasfin BCI Flexible Income Fund

Best South African Interest-Bearing

Short-Term Fund

Truffle SCI Income Plus Fund

Best South African Interest-Bearing

Variable-Term Fund

Absa Bond Fund

Best Global Multi-Asset Flexible Fund

MI-PLAN IP Global Macro Fund

Best Worldwide Multi-Asset Flexible Fund

Naviga BCI Worldwide Flexible Fund

Best Offshore Europe Equity General Fund

T Rowe Price European Equity Fund

Best Offshore United States

Equity General Fund

Franklin US Opportunities Fund

Best Offshore Far East Equity General Fund

Templeton China Fund

Best Offshore Global Fixed-interest

Bond Fund

Allan Gray Africa Ex-SA Bond Fund

Best Offshore Global Real Estate

General Fund

First World Hybrid Real Estate Plc

Risk-adjusted performance over five years

Best South African Multi-Asset

Low Equity Fund

Absa Inflation Beater Fund

Best South African Multi-Asset Medium

Equity Fund

Kagiso Protector Fund

Best South African Multi-Asset

High Equity Fund

Gryphon Prudential Fund

Best South African Multi-Asset Income Fund

Sharenet BCI Income Plus Fund

Best South African Interest-Bearing

Short-Term Fund

Prescient Yield QuantPlus Fund

Best South African Interest-Bearing

Variable-Term Fund

Absa Bond Fund

Best South African Real Estate Funds

Harvard House BCI Property Fund

Best Global Equity General Fund

Anchor BCI Global Equity Feeder Fund

Best Global Multi-Asset Low Equity Fund

STANLIB Global Balanced Cautious Feeder Fund

Best Global Multi-Asset High Equity Fund

Ninety One Global Strategic Managed Feeder Fund

Best Global Multi-Asset Flexible Fund

MI-PLAN IP Global Macro Fund

Best Global Real Estate Fund

Reitway BCI Global Property Feeder Fund

Best Worldwide Multi-Asset Flexible Fund

Select BCI Worldwide Flexible Fund

RAGING BULL AWARDS (trophies)

Straight performance over three years

Best South African Equity General Fund

Fairtree Equity Prescient Fund

Best South African Interest-Bearing Fund

Absa Bond Fund

Best Global Equity General Fund

IP Global Momentum Equity Fund

Best Offshore Global Equity Fund

Anchor Global Equity Fund

Risk-adjusted performance over five years

Best South African General Equity Fund

Fairtree Equity Prescient Fund

Best South African Multi-Asset Equity Fund

Absa Inflation Beater Fund

Best South African Multi-Asset Flexible Fund

Long Beach Flexible Prescient Fund

Best Offshore Global Asset Allocation Fund

PSG Wealth Global Flexible Fund of Funds

MANAGER OF THE YEAR AWARDS

South African Manager of the Year

Ninety One

South African Manager of the Year – 2nd Place

MI-PLAN

South African Manager of the Year – 3rd Place

H4 Collective Investments

Offshore Manager of the Year

T Rowe Price

IT’S OFFICIAL: CREDIT CARDS DRIVE SPENDING

Research has shown that people tend to spend more when using credit cards compared with cash. However, it has been unclear whether credit cards act to “release the brakes” on spending or “step on the gas.” A recent study by MIT Sloan School of Management Professor Drazen Prelec and University of Utah Professor Sachin Banker presents the first evidence of differences in brain activation when using credit cards versus cash. They found that credit card purchases serve to “step on the gas”, driving more spending.

“Prior studies have shown that credit cards have a different effect on consumers than cash and are often blamed for overspending and household debt. But it is unclear from standard research tools whether credit cards ‘release the brakes’ by removing the pain of payment or ‘step on the gas’ by creating a craving to spend,” says Prelec.

Banker notes: “Billions of financial transactions each year involve cash and credit cards, so any neural differences in the ‘buy’ processes that drive decisions are multiplied to a high degree. By identifying how credit cards shape neural processes involved in making purchase decisions,

we spotlight brain mechanisms that could be exploited by new payment methods as they evolve.”

In their study, which Banker worked on as a PhD student at MIT Sloan, the researchers used magnetic resonance imaging technology to look at the brain at the moment of purchase. Participants used their own personal credit card or cash to make real purchases of everyday products.

They found that credit cards serve to “step on the gas” by putting costs out-of-mind regardless of the price of the product. More specifically, the study revealed that credit cards drive greater purchasing by sensitising reward networks in the brain, involving the same dopaminergic reward center (the striatum) that is exploited by addictive drugs such as cocaine and amphetamines.

“The reward networks in the brain that are activated by all kinds of rewards are activated by a credit card purchase,” says Prelec. “The act of putting that plastic credit card in your hand is associated with enjoyable purchases.”

The researchers did not find evidence supporting the theory that credit cards “release the brakes” on spending by reducing the pain of paying. Further, cash

purchases did not activate the reward networks in the brain.

In addition, the findings suggest that not all credit cards trigger the same neural response. Prelec says: “The card you use for restaurants and vacations creates a different appetite for spending than the card you use to buy fuel for your car. We need to be aware of this, as technology is making it possible to pay with our phones, which can create different purchase cravings.”

Banker notes: “An important implication of this work is that it highlights how credit cards leverage neural reward mechanisms to facilitate greater spending. Hopefully, this research will help to encourage further work that takes new perspectives toward understanding how payment methods influence purchasing processes, particularly as people start to adopt new forms of payment.”

Prelec and Banker are co-authors of “Neural mechanisms of credit card spending,” which was published in Scientific Reports, a publication of Nature Research. Their co-authors include Derek Dunfield and Alex Huang of the MIT Sloan Neuroeconomics Laboratory.

A recent study in the United States confirms what many of us have known all along: credit cards don’t simply facilitate spending, they fuel it.

THE FUTURE OF SHORT-TERM INSURANCE SHOPPING

Digitisation has already transformed the insurance landscape, but this is only the beginning, reports Gareth Stokes.

The increased adoption of technology and our preference for e-commerce is changing the landscape of short-term insurance. We are moving from a world in which we toss some combination of buildings, household contents and motor insurance – plus all-risks cover for personal items like cameras, laptops and smartphones – into our shopping baskets and then wait for a loss event to occur, to a future in which we have full control over flexible and personalised insurance solutions.

Ernest North, co-founder of AI-driven insurance firm Naked, singles out artificial intelligence (AI), automation and consumer control as the predominant trends affecting your future personal lines insurance purchases. Personal lines is the term used by insurers to refer to insurance covers typically bought by individuals and households as opposed to businesses. “Traditional insurance

is built around manual processes that are driven by paper and call centres,” says North. “Digital insurance providers, unencumbered by legacy systems, are able to automate processes end-toend: from assessing risk to providing a quote to evaluating and paying a claim.” Cumbersome administrative processes can thus be completed instantaneously, at minimum cost and with the added benefit of zero human error.

AI allows your insurer to assess and price risk more accurately by “number crunching” a range of new and traditional data sources. And the application of this technology also assists insurers in identifying and preventing fraudulent claims, leaving more in the pot to share among honest consumers. Future insurance transactions will therefore take place at a price that is fairer to individuals based on their behaviour and insurance claims history.

Changing consumer behaviour

is central to the evolving insurance product environment. “The uptake of ride-hailing services like Bolt and Uber and the advent of driverless cars could forever change the motor insurance landscape,” says Sujeeth Bishoon, P&C chief underwriting officer at Constantia Insurance. Insurance company Santam, which holds over a quarter of the domestic short-term insurance market share, observes that insurers will have to respond to changing consumer needs. “Short-term insurance consumers are looking for integrated, channelagnostic purchasing experiences that are accessible anytime, anywhere,” says Andrew Coutts, head of intermediated business at Santam. He says 82% of consumers surveyed for Santam’s 2019 Risk Barometer Report wanted insurers to incorporate AI, devices, applications, self-servicing interactive websites and value-added services into their product solutions.

Technology and the locus of control

Technology is helping insurers to place more power in the hands of consumers than ever. The pending adoption of 5G will be like an adrenalin shot for connected devices whether on our bodies (smartphones and wearables); in our homes (through the internet of things); or on our vehicles (telematics devices). “Connectivity and the big data collected from connected devices make it possible for insurers to more accurately rate and predict risk as well as assisting in creating flexible and hyper-personalised products,” says Bishoon.

The locus of control is shifting towards the consumer; but not in the way you might expect. You will have greater control over how you structure your insurance portfolio; but less control over the personal data that informs insurance decisions.

“Digital self-service platforms put customers in control, allowing them to get an insurance quote without needing to speak to an agent,” says North. Those who choose to buy insurance digitally will be able make tweaks to excesses, insured values and length of cover to see the impact of these changes on their monthly premium. And they will be able to make on-the-fly changes to the items on cover and level of cover whenever needed. For example, a motor vehicle owner might pause accident cover on the days that they are not driving the vehicle. Insurers, meanwhile, will benefit from an entirely automated stream of data from an ecosystem of connected devices that allow them to monitor your assets, asset use and your behaviour.

Buying behaviour

We are in the early stages of a step-

change in how consumers buy their insurance too. The South African shortterm insurance market consists of 80plus insurers who distribute insurance solutions to commercial and private consumers through a mixture of direct or intermediated sales. Santam estimates that direct distribution through call centres makes up about 17% of the total short-term insurance market with 83% of insurance being sold via intermediaries or insurance brokers. They say that the digital component within the direct market segment has been growing strongly over the last five years, off a low base. But the picture changes if you strip out business insurance and only consider cover sold to individuals and households. “Direct sales via a call centre have eclipsed sales via the broker network in recent years,” says North. “Many direct insurers also use partners such as car dealers and

cellular shops as an extended salesforce and distribution network; consumers can buy insurance along with big-ticket appliance or electronics purchases or allow the car dealer to pass their details on to a car insurance company.”

North says there are two aspects that will prove helpful in predicting the future of personal lines insurance. The first is how quickly consumers will migrate to digital channels and away from call centres. The second is how quickly consumers will adopt the practice of unbundling or using digital platforms to choose a solution independent of existing sales channels.

Most traditional insurers believe that intermediaries will play a vital role in this future. “The 2019 Risk Barometer showed that consumers value the role of the intermediary in making their insurance decisions: 82% of commercial businesses and 71% of consumers said they rely on intermediaries for advice,” says Coutts. He notes that insurers and intermediaries will have to collaborate on solutions that combine the convenience of digital with the human touch of intermediary interaction. “Insurers are making significant investments to build their products, digital assets and analytics capabilities, while intermediaries have always had depth in customer data,” he says.

Constantia Insurance also believes firmly in the role played and value offered by intermediaries. “There is no

substitute for advice when it comes to complex insurance products,” says Alex Taljaard, head of marketing at Constantia Insurance, who expects the market to evolve in line with consumer demand to continue to allow for a mix of brokers, direct insurers and insurtech platforms.

“Although we are seeing an increased adoption of on-demand insurance cover sold digitally, many people are still opting for the value of an intermediary who can help facilitate their insurance needs in an increasingly complex risk environment,” says Coutts. But traditional insurers will not ignore a good thing for long. Santam has already invested and partnered with on-demand insurtech companies JaSure and Ctrl to offer innovative consumercentric services and solutions for existing and new client needs.

Product design

The typical insurance shopping basket will change over the next three to five years, driven by emerging risks and changing consumer lifestyles. “These categories may not change much in the short term; but over the medium term we expect new types of cover in line with changes in consumer buying behaviour,” says André Symes, chief growth officer at Genasys Technologies. He believes that most insurance will be sold on a comprehensive cover basis; but that you will have more flexibility around pricing based on asset utilisation and risk.

“In the next three to five years, people will have much the same requirement for home, contents and car cover as they do today,” says North. “However, the efficiency of digital platforms means that we can expect to see much wider use of single item cover such as buying cover for a cell phone, laptop or set of golf clubs without having to buy household contents insurance, because pricing will be more attractive.”

Insurers will have to adapt to current trends around motor vehicle use due

to the increased popularity of car hailing services combined with a more permanent structural shift to a work-fromhome culture. “It would not be surprising to see more one-car households in South Africa. Insurance providers may need to be flexible to accommodate this shift, especially in allowing an easy, digital platform to dynamically change the insurance on a vehicle,” North says. But Naked does not expect the domestic insurance market to suffer major shocks from the introduction of autonomous vehicles in the immediate future.

“We could soon see cover that automatically changes depending on your circumstances, adjusting for external factors such as your location or your current activities,” says Bishoon. He adds that future-fit personal lines insurance will also be based more around lifestyles and not just demographic proxies for risk. In this context it is quite likely that cyber cover will be added as a standard feature in the personal lines universe.

There is no doubt that many tried-andtested administrative practices will have to change. “Contract periods, payment periods and even payment methods may need to evolve as consumers demand more flexible cover and greater personalisation,” says Bishoon.

The acceleration of various technology trends has introduced new risk categories, such as the threat of cybercrime to both business and personal lines consumers. “We are likely to see more demand for pay-as-you-go insurance services, including new, innovative risk management products that provide niche cover for things such as cyber threats,” says Coutts. “It is imperative that personal insurance solutions continue to account for the changes in technology and the diversification of asset classes.” Circumstances that are unique to South Africa, such as load-shedding, urbanisation and unemployment challenges, will inspire insurers to think

out of the box.

Insurers and platform developers are able to build and deploy innovative insurance solutions that are far ahead of what consumers are ready for. It is already possible to complete insurance transactions beginning-to-end without any human intervention. The next time you buy a second hand motor vehicle you might leave the dealer floor with a copy of your digitally-signed insurance policy safely stored in the cloud. All of the necessary data on the car and purchaser will have pulled through automatically from various cloud data services… Insurance innovation will continue after your purchase thanks to your connected telematics device, which will track your driver behaviour. Your insurer will be able to cross-reference your telematics data with data from third-party providers, including the vehicle manufacturer, in real time, to assist in live responses to accident events as well as facilitate accident repairs. It is already possible for insurers’ systems to automatically despatch medical and towing assistance to the scene of an accident.

The next step is for automated instructions on the vehicle’s repair and immediate settlement of the associated costs. Symes notes that fraud concerns are easily addressed in the automated settlement space thanks to advanced AI algorithms that can flag accident claims for further investigation where necessary.

Digital platform providers are meeting the demand from both consumers, through business-to-consumer initiatives and insurers, through business-tobusiness solutions. “Our focus is on how we deliver more functionality to consumers via their devices, wherever they are in the world; we aim to deliver appropriate insurance solutions to more people at the right moment,” says Symes.

“Technology makes it possible to embed insurance, not only within the product itself, but also at the moment

of purchase”.

The future of insurance could see various stakeholders covering components of risk associated with an asset’s use, with multiple opportunities for the asset’s owner to add to that cover. Imagine a world where some of the liability risks attached to your new mountain bike are carried by parts manufacturers, while a basic assets policy is included in the price you pay at an online store.

Additional cover will be available at the most unexpected places – for example, when you buy an airline ticket to take part in a mountain bike race in Cape Town. Your interaction with an airline ticketing digital platform will unlock a chain of automated data exchanges. Questions will be bouncing around cyberspace to determine more about you and your likes in order to propose an irresistible list of add-ons to your plane ticket.

As-and-when usage

We are going to see a more modularised approach to short-term insurance products with more pay-as-you-use solutions. This change is being driven by millennial and subsequent generations: we buy our TV subscriptions based on what we want to watch this week; we turn Netflix on and off at will and want the same option for our asset cover. “The focus is shifting from clunky comprehensive insurance covers to specific, usage-based products that can be switched on and off with minimum cost and fuss,” says Symes.

Consumers want things to be simple, transparent and on-demand. Above all, they want to be able to manage their accounts themselves without having to speak to a call centre agent, though they want to reach human support when they really need it. “Digital platforms and experiences from social media and online banking through to ecommerce, ride hailing and home food deliveries

have reshaped consumers’ expectations of the brands they deal with, including insurance,” says North. “The insurance incumbents who are not able to offer this sort of seamless digital experience to their customers are creating a gap for digital companies that enable people to get a quote, buy a policy, manage their policies and even claim online without speaking to a human agent.”

Santam expects major innovations in the digital distribution and underwriting of personal lines insurance solutions. “The insurance industry cannot respond to growing risk in a complex world by offering the same products,” says Coutts. “A shift is required to loss prevention and management, to ecosystems of value and to the generation of new revenue streams across the full risk value chain.

Digitisation is a key enabler of these ecosystems”.

Gareth Stokes is a freelance financial writer who specialises in the insurance industry.

DOES YOUR PORTFOLIO NEED BITC IN?

US investment expert Amy Arnott reckons that maybe you do, but keep it to minimum.

Bitcoin investors have been on a wild ride lately. After dropping about 74% in 2018, the digital currency nearly doubled in price in 2019, and then nearly quadrupled during 2020. Trading volumes have also skyrocketed as individual investors have embraced cryptocurrencies through commissionfree trading platforms such as Robinhood.

Originally conceived as a digital, encrypted alternative to traditional currencies controlled by central banks, Bitcoin has also been attracting more interest from mainstream investors. For example, BlackRock recently added prospectus language giving three of its mutual funds the flexibility to invest in Bitcoin futures. In late 2020, insurance provider MassMutual purchased $100 million in Bitcoin for its investment portfolio. And in recent months, several high-profile institutional investors –including Miller Value Partners’ Bill Miller, BlackRock’s Rick Rieder, and Tudor Investment’s Paul Tudor Jones – have touted Bitcoin as long-term investment with significant upside potential, even after its previous surge. There are some arguments in favour of Bitcoin as an investment, but there are also reasons to be sceptical. Overall, it has enough negatives that I would hesitate to carve out more than a small fraction of a portfolio for Bitcoin.

The case for Bitcoin

Bitcoin has been hailed as a transformative technology that promises to revolutionise the entire landscape of money and payments. In fact, the enthusiasm surrounding Bitcoin is so intense that it borders on religious fervour. Bitcoin itself has even been compared with a religion, with its own set of doctrines, sacred texts, acolytes, and rituals.

Bitcoin proponents often argue that because only 21 million Bitcoins can ever be mined, a permanently limited supply should support its value. It’s often viewed as an alternative to gold, which also has a limited supply but has a more definable intrinsic worth because it’s used for

jewellery, industrial applications, and as a tangible store of value. Cryptocurrencies like Bitcoin could potentially benefit from increased demand for secure international transactions, low-cost banking, and anonymous micropayments or general-purpose payments. The network effect also comes into play with Bitcoin, as growth in usage should (theoretically) increase its value at an exponential rate.

Bitcoin’s limited supply also makes it a potential hedge against longterm inflationary pressures. With the Federal Reserve printing money at an unprecedented rate, the market is currently pricing in a five-year breakeven inflation rate of 2.18%, which would be higher than the unusually benign inflation we’ve seen in recent years.

Bitcoin has often (though not always) historically had a negative correlation with the US dollar, which started losing ground in March 2020 after a generally strong upward trend over the previous decade. Bitcoin’s future value partly depends on widespread acceptance and usage as an alternative currency. Unlike traditional currencies, it’s not controlled by central governments. In that sense, it’s the ultimate insurance policy against weakness in the US dollar or a collapse in mainstream financial systems.

The case against Bitcoin

But there are reasons to be sceptical. As a virtual asset that doesn’t generate cash flows, Bitcoin has no intrinsic value. Its value depends largely on what people are willing to pay. When Guggenheim’s Scott Minerd was quoted in December 2020 claiming Bitcoin could be worth

as much as $400 000, Bitcoin prices quickly escalated. But without a strong foundation to support an underlying value, asset prices can rapidly drop.

That’s exactly what happened in 2018, when the CMBI Bitcoin TR index dropped 74%. More recently, Bitcoin’s price shed nearly 30% from its peak on January 8 until briefly dropping below $30 000 on January 27. Even intra-day pricing tends toward the extreme, with prices often swinging by double-digit percentages within the same trading day. These sharp price moves mean Bitcoin owners must be prepared to HODL (hold on for dear life).

Bitcoin is often described as digital gold, but it hasn't held up particularly well during periods of market crisis. In the fourth quarter of 2018, for example, Bitcoin lost about 44% of its value, compared with about 14% for the broader market. When the novel coronavirus roiled the market from February 19 through March 23, 2020, Bitcoin lost about 38%, compared with 34.5% for Morningstar's US Market index. During weeks when the overall equity market posted negative total returns (over the period from August 2010 through the end of 2020), Bitcoin notched positive results only about half of the time.

As mentioned above, Bitcoin proponents often argue that limited supply should create a floor for Bitcoin’s value. But while the supply of Bitcoin itself is limited, there’s nothing preventing competing cryptocurrencies from emerging. There are already numerous Bitcoin alternatives available, including Ethereum, Litecoin, Cardano, Bitcoin Cash, and Lumens, to name a few.

Fees and transaction costs are another negative. Coinbase, one of the most popular platforms for buying Bitcoin, charges a spread of 0.5% plus a fixed or variable fee (whichever is greater) based on the investor’s location and method of payment. For US-based investors, Coinbase charges fees of at least 1.49% (for purchases made through a bank account or Coinbase wallet) or 3.99% (for purchases made through a debit card). Fees for small-dollar purchases can be considerably higher. However, Coinbase doesn’t charge additional fees for the hosting and storage required to keep Bitcoin assets protected from digital theft or other losses.

Accredited investors can also buy Bitcoin through Grayscale Bitcoin Trust, an exchange-traded fund structured as a grantor trust. The fund, which has been operating since 2014, charges a 2% annual fee, which also covers storage costs. It has limitations on redemptions, making it impractical for investors who may need to make withdrawals. The fund also typically sells at a premium to Bitcoin prices and doesn’t track the currency perfectly. Over the past five years, for example, the trust has posted an annualised market return of 115.3%, compared with 135.3% for the underlying index.

A competing firm recently started operating Osprey Bitcoin Trust, which is currently available as a private placement for accredited investors with a lower management fee of about 0.5%. However, investors are subject to a 12-month lockup period, compared with six months for the Grayscale offering.

Role in a portfolio

Bitcoin can play a role in diversifying a portfolio, but the impact of adding various weightings varies depending on the time period. To quantify this, I looked at the impact of adding different percentages of Bitcoin to an all-equity portfolio.

Over the trailing three-year period ended in 2020, Bitcoin’s meteoric rise could lead to a simple conclusion: The

more, the better. Bitcoin showed more than four times as much volatility (as measured by standard deviation) as equity market indexes over the period.

But because of its low correlation with the equity market, adding Bitcoin didn’t increase volatility all that much. Even a 10% Bitcoin weighting would have increased the portfolio’s standard deviation by a fairly moderate amount, as shown in the table below. From a portfolio perspective, higher return more than offset the added volatility; Sharpe ratios increased in tandem with higher weightings in Bitcoin.

The picture looks less favourable over

the trailing 10-year period, though. Bitcoin’s standard deviation was more than 15 times that of the equity market, making it among the most-volatile assets in Morningstar’s database of 35 000-plus market indexes. As a result, both risk and returns increased with larger Bitcoin weightings. Even a 1% weighting would have led to a sharp increase in standard deviation compared with an all-equity portfolio, as well as significantly worse drawdowns. Monthly rebalancing would have led to better risk-adjusted returns, but that approach might be impractical for many investors in light of Bitcoin’s transaction costs.

Given the divergence in results over different time periods, deciding on an appropriate Bitcoin weighting partly depends on whether you think the future will look more like the recent past, or more like the trailing 10-year period. Much of Bitcoin’s eye-popping 10-year record owes to an off-the-charts runup from 2011 through 2013, when the CMBI Bitcoin TR index posted annualised returns of more than 1 000% per year, including a gain of more than 5 300% in 2013 alone. These gains may not be repeatable, partly because trading volumes in Bitcoin have increased nearly 3 000-fold since 2014. On the positive side, volatility has significantly decreased, although Bitcoin’s standard deviation remains more than four times higher than that of the broader equity market.

It’s also worth noting that as Bitcoin moves to the mainstream, it’s becoming less valuable as a portfolio

DEFINITIONS

diversifier. Bitcoin has had fairly low correlations with most major asset classes over the past three years. Correlations have been trending up, though. In 2020, for example, Bitcoin had a correlation coefficient of 0.68 versus the S&P 500, compared with 0.32 for the trailing three-year period. However, its negative correlation with the US dollar has grown even more pronounced, making it a potentially valuable hedge against continued softness in the greenback

Conclusion

Overall, I'm sceptical about the case for Bitcoin as an investment asset. Its popularity with momentum investors and speculative buyers makes it prone to pricing bubbles that will eventually burst. It's also nearly impossible to pin down what its underlying value should be. As mainstream investors increasingly embrace Bitcoin, its value as a

diversification tool is diminishing; as a result, there’s no guarantee that adding Bitcoin will improve a portfolio’s risk-adjusted returns, especially to the same extent it did in the past. However, there are some compelling arguments in favour of Bitcoin as an alternative currency and as a commodity that can help support new technologies, such as smart contracts and more-efficient financial transactions with built-in encryption. For that reason, Bitcoin is probably best used in (very) small doses as a hedge against weakness in the dollar and major disruptions in the global financial system.

Amy C Arnott, a Certified Financial Planner, is a portfolio strategist at Morningstar in the United States. The article was originally distributed via Morningstar in the US. It is republished with kind permission from Morningstar South Africa.

Standard deviation: a statistical measure that shows to what extent data deviates from the mean, giving an indication of volatility.

Sharpe Ratio: a financial metric that measures investment performance adjusted for risk. It involves taking the excess return of the portfolio relative to the risk-free rate (the appropriate bond rate minus the inflation rate), and dividing it by the standard deviation.

CRYPTO IN AFRICA

Eugene Yiga reports on the take-up of cryptocurrencies in Africa, which is being hampered primarily by security concerns.

As cryptocurrency adoption begins to spread across Africa, so too do the regulations governing the trading platforms people use. And while some traders and investors have been scared off, others believe that cryptocurrencies could provide a stable store of value for people across the continent.

“If you look at some of the challenges affecting adoption across Africa, it’s still early days,” says Marius Reitz, general manager for Africa at Luno, a platform that lets people buy, sell, store and trade cryptocurrencies. “We exchanges often think that most people know about cryptocurrencies, but that’s not the case.”

One of the main challenges for people in Africa is a lack of safe access points. Because infrastructure is still a big issue, it seems that a large portion of the cryptocurrency space is dominated by scammers, who many people fall for out of desperation in these difficult times.

“We’re in a low-trust environment with little regulation,” Reitz says. “And because consumers and banks don’t trust an unregulated industry, it takes a long time from starting a discussion to having a legitimate business with strong compliance controls.”

The result is that banks have become the de facto regulators, which Reitz considers a big risk for cryptocurrency businesses. And while it might be easy to launch a fintech start-up that solves a problem in another part of the world,

doing so in Africa can be hard.

“Companies dealing in cryptocurrencies face a lot of hurdles,” he says. “And in emerging markets, relationships take a long time to establish. These are a couple of the challenges we’re facing across the continent.”

And yet there are examples of how cryptocurrency use is becoming more widespread across Africa, with some companies even paying employees in cryptocurrency when doing so ends up incurring less in fees than would otherwise be the case.

“No one has said that someone can’t be paid their salary in Bitcoin,” says Marvin Coleby, co-founder and chief executive of Raise, a platform that offers simple fundraising solutions for African founders, and co-trustee at the African Digital Asset Foundation. “But I think it’s difficult to know which of all the different platforms to use, because there’s always going to be the threat of [a cyber] attack.”

All this emphasises the need for more regulation. However, Coleby is concerned that regulators may go too far and ban cryptocurrency transactions altogether.

In February, the Central Bank of Nigeria issued a circular to banks that “facilitating payments for cryptocurrency exchanges is prohibited”, which sent a wave of panic through the Nigerian cryptocurrency sector. In April, Al Jazeera reported that the central bank had clarified its position, saying the circular “was not aimed at discouraging people

trading in cryptocurrencies, but served to enforce orders in place since 2017. “The 2017 directive did not prohibit crypto exchanges from using banking and payment channels. It simply required banks and financial institutions to ensure their crypto-exchange customers have effective anti-money laundering and ‘antiterrorism’ financing controls in place,” Al Jazeera reported.

Part of making cryptocurrencies more mainstream depends on consumer education and training into how they work. This depends on the kind of user – for example, there’s a growing class of technology-enabled individuals who work at start-ups and will probably be quick to understand the jargon of the crypto world.

Building trust

Trust is a scarce asset in today’s world. The growing number of scams (which Coleby says could “bankrupt people for generations”) is crippling confidence in the industry, while the need for instant gratification when it comes to investment returns makes scams more likely to happen in the first place.

“People expect cryptocurrency to instantly be better than the existing financial system,” Reitz says. “They want it to be safer, cheaper, and more secure. But the reality is that Rome wasn’t built in a day. The existing financial system was built over hundreds of years, so we’ve got to start right at the beginning.”

Reitz has seen a new class of people across Africa investing for the first time. These aren’t necessarily sophisticated individuals or institutions; they’re just first-timers who perhaps want better returns or a safer place to store the value of weakening currencies. Getting them set up and comfortable with the

platforms requires building the right kind of infrastructure that makes it easy to use.

“If you look at the data, only 20% of people in sub-Saharan Africa use mobile money services,” he says. “That’s still a low percentage. Companies are trying to run with crazy ideas and solve problems that you’ll only face 50 years down the line, when you just have to focus on the basics, especially across Africa.”

This once again emphasises the need for regulation. “I think in the crypto community we spend a lot of time vilifying regulation instead of intelligently building around it,” Coleby says. “We see it as this great threat, and it is. But we don’t have a choice. Regulation is inevitable, so we might as well just build and design around it. There are other things that we can do in the meantime to protect ourselves.”

Ultimately, it’s about understanding and accepting the responsibility that comes with being a part of the cryptocurrency world. “We’re building a new financial system,” Reitz says. “We’ve been sharing some of our learnings from other markets where the regulators have put controls in place. I’ve acknowledged that if we don’t regulate, the volume will move underground where there’s no way we’d be able to track it. So, even though it’s a long and slow process, it’s something we have to keep doing.”

WHAT COVID-19 HAS TAUGHT US ABOUT WEALTH MANAGEMENT

It’s been over a year since the pandemic-induced stock market meltdown and since South Africa entered hard lockdown, and it is time to look back and examine what this period has taught us as an industry.

The wealth management industry has had to face down a year unlike any we have ever seen before. From grappling with the trials of an unprecedented lockdown to pivoting rapidly to working from home, it was essential to adapt – and fast. But the key factor in both investing and wealth management is that you will always face the unexpected. Dealing with the unanticipated is, quite simply, what we do.

One of the most important characteristics for success in this industry is understanding and accepting the seasonality or the cyclical nature of markets. And this will never change. Investors will increasingly need to build seasonality into their mindsets. We should always expect such events or corrections but, significantly, we should expect that they will become even more commonplace. This is not humanity’s or the world market’s first rodeo and, just as sure as summer follows spring and winter follows autumn, so will this pass.

What we do need to consider, though, is that the frequency of natural disasters and unexpected events will rise, and that we need to design and hardcode portfolios to withstand shocks of this nature.

With this in mind, here are four lessons that Covid-19 has re-emphasised for investors and wealth managers:

1. Everyone has a plan … until they get punched in the mouth – Mike Tyson

The first lesson from our lockdown experience is that everyone must have a plan – both from an asset management and a financial management perspective. You need a plan that will accommodate the shocks that you are bound to experience along the way.

Often, people’s first gut reaction to anything new and different is to throw the rulebook away. But if that rulebook accommodates the ups and downs, if it has built them in, then there is no reason to discard it. It will be easier for you to ride out the storms and stick with that plan.

Andrew Möller says the pandemic has brought home some basic truths to advisers and investors, truths that are easy to brush aside when the going is good.

2. A good plan gets you into the race, but sticking with it propels you into the winner's circle – Lee Colan

One of the strongest behavioural finance traits is known as the “disposition effect” or “loss aversion” – in other words not wanting to lose. For investors, this typically manifests as a tendency to immediately sell those assets or shares that are down and to hold onto those that are up, keeping the winners and selling the losers.

However, while share prices may constantly fluctuate, the actual intrinsic value of the shares is very unlikely to change overnight. If they were viable, strong, functioning companies before the price drop, as long as the price movement has nothing to do with the underlying company, they will remain robust entities after the market downgrade. This is particularly true when the move comes from a systemic change and there is no reason why what was a good share yesterday is still not a good share today. In fact, at the lower price, it might be an even more attractive investment.

The point is simply that asset managers need to stick to the fundamental analysis as much as possible at all times, while clients need to stick to their financial plans, too.

3. Never mistake motionlessness for inactivity. Crocodiles get most of their meals that way – Hetty Lange (NCIS TV series)

In times such as these, investors are bombarded with statistics, data and real-time information on markets. Their natural inclination is then to take some action and make quick changes in their portfolios. The last thing investors think that they should be doing is sitting on their hands – but sometimes that’s exactly what such a situation requires. Not all information is necessarily actionable or needs to be acted on.

You may be familiar with the saying that the two most important days when investing are the day that you buy and the day that you sell. The former determines the potential return that you can generate from the investment: you will buy it on a particular yield, and the higher that yield, the better your possible return will be. The latter seals the return that you have generated from it, so you need to be sure that you have maximised its potential or that you have minimised your losses.

It may sound clichéd, and for some a very difficult thing to do, but at times like this, on balance, it’s best to stick to your plan and adopt a wait-and-see approach.

4. If you want to see the sunshine, you have to weather the storm – Frank Lane

There are many ways to weatherproof and protect a portfolio for uncertain and unexpected times. These may include using appropriate asset classes and diversification, but the one that I want to emphasise, and which is probably the easiest to achieve, is simply matching your liabilities to your liquidity.

You don’t ever want to be a forced seller who has to lock in any short-term losses. So by matching your liquidity to your liabilities, you can ensure that you are a planned seller in the market.

Let’s explore this in more detail. If you ensure that you have enough cash to cover your known and predictable expenses for the next roughly 24 months, then you will not need to sell assets should something untoward occur. When considering your expenses, take everything that you need for your day-to-day living into account, including housing, transport, food, entertainment, education, and even items such as a wedding, vehicle replacement or overseas holidays.

Then look at your spending requirements from 24 months to the end of year five or six – let’s call this the prudent category –and carry enough to match these liabilities in assets with low volatility, such as bonds, hedge funds and protected equity. Funds or money that you have in excess and are surplus to your living requirements from years five or six onwards should be placed in growth assets, such as local and global equities.

Following this simple formula of matching your assets with liabilities and ensuring that you are never a forced seller but rather a planned seller will go a long way to giving you peace of mind and the comfort that you are avoiding any unnecessary losses.

To sum up

• Have a plan with built-in shock absorbers.

• When things go pear-shaped, stick with the plan.

• Check if you need to adopt a wait-and-see approach.

• Match your liquidity to your liabilities.

We know that life will always throw us curve balls – we just don’t know when. As long as you are well prepared, you will be able to pull through financially.

Andrew Möller is the chief executive of financial services group Citadel.

THREE WAYS GLOBAL INVESTMENT MARKETS HAVE CHANGED

As the industrial age gives way to the information age, fundamental notions that served investors well in the 20th century may no longer apply.

“This time it is different” may hold...

The investment world looks very different today compared with what it looked like in the recent past and requires investors to challenge preconceived notions about markets and economies.

This is the view of Robin Parkbrook, fund manager and co-head of Asian equity alternative investments at Schroders.

Speaking at the annual Schroders Investment Symposium, which was hosted virtually for the first time over a number of weeks, Parbrook highlighted three ways in which the investment world has changed over time and how investors can best prepare and adapt to the shifts being seen.

1. Structural deflation likely to persist

“There are plenty of signs that inflationary pressure is rising,” he said. “The question is whether these inflationary pressures are structural or a temporary blip.”

For most of this year Parbrook sees inflationary pressures rising as global economies open up.

Longer-term though, there are “four Ds” that are structurally deflationary forces: demographics, disruption, disparity in income and debt.

“Two or three years out I don’t think inflation is going to be a structural phenomenon,” he said. “I think the four Ds will re-assert themselves, especially

disruption and debt.”

He tempered this by pointing out that if there was a major change in government policy (a move to modern monetary theory, and a concerted effort to inflate away debt) inflation could become a structural issue.

Modern monetary theory is referred to as “helicopter money”, because it involves governments creating money to directly fund public spending or tax cuts, rather than simply printing money to buy financial assets.

“This would be very significant and require capital controls. It may happen, but is unlikely in next two to three years,” he said.

2. “Bevi” bubbles will burst

There’s been a large increase in retail investor participation in stock markets across the world, including in Asia. Historically, this has been a good indicator

Retail money is flowing heavily into popular themes such as biotech, electric vehicle (EV) and internet (“Bevi”) stocks.

“I’m getting increasingly worried by the tone of the broker notes, especially on the EV side,” said Parbrook. “An EV is essentially a generic good with standard technology that’s relatively easy to use. There are hundreds of E start-ups, and hundreds of existing original engine manufacturing companies,” he said. “In fact EVs remind me of LCD TVs in the 1990s. We believe EVs are in a classic bubble and it will burst –rather badly. It’s not a great place for

3. Old-style value investing is dead

So if Parbrook is cautious on the growth areas of the market because it’s bubbly, should investors be looking at the more value-

“This is a key debate we’re having at the moment,” he said. “Relying predominantly on classic value measures like price-tobook and trailing price-to-earnings ratios

The key difference between today’s market and the market in which legendary value investors like Benjamin Graham developed the investment philosophy, is that intangible assets have become more important.

Intangible assets are things like research and development (R&D), brand building, building a sales network – things that can’t easily be quantified in the same way that the classic value measures can.

“Those companies that are investing heavily into intangibles will be the likely winners,” he said. “You can’t differentiate between stocks simply on traditional value measures like book value, because you’re not accounting for the value that lies in the company’s intangible assets.

R&D spending: old vs new

“This is the fun and the challenge for us as investors at the moment,” Parbrook said. “We have to work out which companies are investing well in intangibles and are really building businesses, because we can’t see these investments and potential growth just by looking at the reports and accounts.”

This led him on to the topic of new and old economy stocks. He pointed out the big difference in intangible R&D investing between the two based on the chart above.

“New-economy stocks are investing 5.5% of revenues in R&D while oldeconomy stocks are only investing 1%,” he said.

“So what you’re seeing is disruption: these new start-up companies are light on physical assets and investing heavily in intangibles, and they disrupt incumbents that are often too asset-heavy to adjust their business model,”

He went on to say that he doesn’t think value stocks are staging a come-back. “I think value stocks in many segments face such challenges that they’re much more like value traps,” he said.

He’s positive on the outlook for US, China, Taiwan and Korea stock markets because these are countries in which companies invest heavily in intangible assets.

Developing “what if” scenarios

Parbrook explained that there are several scenarios that he and his colleague and

co-manager King Fuei Lee believe could materialise in the long term.

“My colleague and I sat down at the beginning of the pandemic and put together a list of scenarios that could play out over the next decade,” he said.

“This has helped us position for the long-term in what we believe to be the right secular areas.

“These included the ideas that we’ve reached peak oil, and total oil consumption will be down by 30% by 2030; global trade volumes as a percentage of GDP could decline to 1970s levels; and leisure travel is likely to recover but business travel is not.”

He also believes ESG investing (investing grounded in environmental, social and governance principles) is here to stay.

“ESG is not going away – it’s another factor that you have to plug into the investment decision,” he said.

On the subject of China dominating Asian and emerging-market indices, Parbrook proposed that China will become a separate asset class on its own from both an equity and a bond perspective.

“We are moving from the 20th century industrial era into the 21st century information age and it’s a very different and challenging world. It is more important than ever to think longterm and consider ‘what if’ scenarios, as disruption is only going to accelerate, not slow, from here,” he said.

Source: FactSet, Macquarie Research, September 2020. New-economy stocks defined as those in commercial services, consumer services, hardware and semiconductors, healthcare, software and media. Old-economy stocks defined as those in automobile, capital goods, durable and apparel, energy, financial, fast moving consumer goods, materials, real estate, retailing, telecommunications, transport, utilities.

TAX RETURNS BE CAREFUL WHAT YOU CLAIM FOR

For many people, the financial year that ended 28 February 2021 involved considerable time working from home. As the filing season for personal income tax returns looms, it’s worth considering what can (and cannot) be claimed for as a legitimate tax deduction, writes Nicoline

Benzien.

Ordinarily, conversations about home office deductions apply to entrepreneurs and commission earners and not full-time salaried employees who typically claim expenses like their retirement annuities and medical aid contributions. The national lockdown has changed that. And while it’s tempting to claim for everything you think of as a business expense, the advice here is to be cautious

The SA Revenue Service (SARS) will likely monitor personal income tax returns very closely this year for exactly this reason. It’s imperative that you can justify your deductions when submitting your return.

WHAT COUNTS AS A HOME OFFICE EXPENSE?

According to the Income Tax Act 58 of 1962, taxpayers can deduct certain expenditure when working from home, to the extent that the expenses are not for private or domestic use. The expense claims must be incurred within the correct tax year and in the carrying on of any trade, including employment income, the expense should also not be of a capital nature. The Act contemplates this in terms of negative legislation (what you are not allowed to deduct) and positive legislation (what you can deduct).

If you worked from home between 1 March 2020 and 28 February 2021 for at least 180 days of the year, you can claim for business costs incurred, but only as a percentage of total expenditure. For example, you cannot claim a deduction on the total rental (or total bond interest) of your house when you only use one

room for work purposes. And even then, you must be able to show that you used that room mainly (more than 50% of the time) and exclusively for work purposes. In practice this is difficult to test, and it’s unlikely that SARS will conduct field audits to confirm usage, but they may ask you for a photograph of your home office setup. It’s also important to prove that your employer instructed you to work from home through, for example, a companywide email. The point is to be ready to provide substantiating evidence if you’re asked for it.

Other expenses that might be included as part of your home office deduction are: rates and taxes; electricity; the cost of repairs, including wear and tear for furniture used for business; and home and household content insurance. Just bear in mind that most expenses must be calculated on a pro rata basis.

WHAT YOU CANNOT CLAIM FOR

You cannot claim a tax deduction for anything that your employer provides to you free of charge, like a work laptop or mobile data dongle. You also cannot claim for anything that your employer reimburses you for.

A REMINDER FOR HOMEOWNERS

It’s important to note that when you claim a tax deduction for home office use this has an

impact on capital gains tax when you sell your home. Whatever portion of the house you’ve claimed for as a business deduction will be excluded from your R2 million capital gains tax exemption. For instance, if you claim that 20% of your home is used for business purposes, then only 80% will qualify under the capital gains exemption amount.

Even as many of us return to the office, we are likely to embrace a hybrid model where the workplace will be both office and home based. Knowing what to claim and how to justify it are essential tools for the future of work.

Nicoline Benzien is associate director of BDO Tax Services.

HOW PORTUGAL’S INVESTMENT PROGRAMME WILL CHANGE

The long-anticipated changes to the popular Golden Visa programme have been signed into law, and from 2022, foreign property investments will be channelled away from the country’s populated coastal cities towards inland areas and islands.

Andrew Rissik explains the changes and implications for South Africans moving to Portugal.

South Africans looking to take up the Portuguese Golden Visa opportunity as a property investment with a view to residency should note that, from next year, the greater Lisbon, Porto and most coastal areas will no longer be available for investment under the revised scheme. Instead, residential property investment will be directed to less densely populated interior regions, the Azores and Madeira.

The changes are scheduled to come into effect on 1 January 2022. After the deadline, the amendment will affect both the €350 000 and €500 000 property investment routes within these

areas. Notably, the €350 000 Private Equity Fund investment threshold will be raised to €500 000.

The new rules will help Portugal address two issues: the redistribution of investment received and the development of the property market in sparsely populated regions of the country.

The move is being seen as a positive one for the future of the Golden Visa programme. With the new rules being put in place, an attempt is being made to encourage investment outside current hotspots, like Lisbon, Porto, the Algarve region, and the Silver Coast. Investor capital will instead be

directed towards Portugal’s less densely populated interior and the island municipalities of Azores and Madeira. This will help the country gain a more balanced environmental and social dynamic. Investors will still have the opportunity to enjoy the Golden Visa’s long-term benefits, while experiencing Portugal’s glorious Mediterranean lifestyle in one of the safest places in all of Europe.

The Portuguese government is also planning to provide cash incentives to companies and individuals who relocate to the interior of Portugal, in an effort to counter depopulation of interior areas of the country.

A narrow cobbled street in Funchal, Madeira. Picture by freepik.

How the transitional period will affect investment.

Because of the pandemic and the importance that Golden Visas have had for real estate, the government opted to create a transitional period for the sector to adapt, instead of implementing the change at the beginning of 2021.

As such, all applications under the existing regime up to 31 December 2021 will still be accepted, and the changes will not affect residents who renew their residence permit cards or join family members in the programme.

Although the deadline is looming, there is a small window of opportunity for those who still want to secure property investment in sought-after areas, such as Lisbon and Porto.

Those considering applying for the visa could also invest in a fund such as the €350,000 Rebello Private Equity Fund and gain better exposure to the Porto real estate market.

The fund provides full Golden Visa eligibility for all dependant family members and is an attractive hands-off

investment option, with benefits that include preferred returns of 3% per year, and no tax deductions or other retentions.

Why is the Golden Visa so popular?

The Portuguese Golden Visa programme is a residency-by-investment scheme designed to encourage investment into the country from non-European Union citizens.

Traditionally, the programme’s real estate option has been a popular way to get residency in Portugal, especially for South Africans. This is because the country is regarded as a prime destination among property investors, with a flourishing real estate market and high rental yields. The route also allows investors to sell a property after a period and recover their investment.

Among the programme’s investment options, the purchase of a Private Equity Fund (PEF) share at €350 000 has also become an increasingly popular option over the last two years. Sable International has already assisted more

than 30 families in this regard.

Since launching in 2012, the Golden Visa programme has been one of the world’s most successful residency-byinvestment initiatives, largely due to the minimal residence requirements and the flexible path to citizenship. The main benefits of the programme include:

The right to enter and stay in Portugal with no additional travel visa.

The right to live and work in Portugal.

The freedom to travel across the Schengen area without an additional travel visa.

The right to benefit from family reunification and add family members to the Golden Visa programme.

The right to apply for permanent residence or for citizenship after five years.

As of November 2020, 8,782 Golden Visas had been approved through the property route. However, the majority of these were for the urban and coastal areas. Only 761 were in “urban regeneration” classified areas.

The coastal city of Porto has the second largest urban population in Portugal, after the capital Lisbon.

Picture supplied by Sable International.

Why choose Portugal?

Many people from across the world are settling in Portugal. The most sought-after lifestyle and business locations include Cascais, Lisbon, Oporto, and Algarve.

First, it’s secure: Portugal was recently ranked as the third-safest country in the world in which to live by the Global Peace Index. This will no doubt speak to many South Africans concerned about the high level of crime in their home country.

Visa-free travel in and around Europe is a prime reason for obtaining a Golden Visa. If you have ambitions of

Portugal has one of the most favourable tax regimes in the EU, whether you’re a resident or citizen. If you are not a tax resident in Portugal (spend less than 183 days a year in the country), you are exempt from tax on almost all foreign-sourced income. There’s also no tax on inheritance or gifts and no wealth tax.

least 20%.

working

within the EU, this is really beneficial. If you are a Portuguese citizen, you gain the right to live and work throughout the EU area.

Portugal is a prime destination for foreign retirees and, according to the Global Retirement Index 2020, it is on the top-10 list of best countries to retire to. This is largely due to the fiscal regime that is integrated into the non-habitual residency (NHR) status, with the level of taxation on pension income remaining relatively low at 10%.

The visa changes will not work retroactively

The Portuguese constitution prevents any judicial updates from working retroactively. Therefore, Golden Visa applicants who have started their application will not be affected.

Understandably, the change to the programme has triggered a rush of property buyers and PEF investors wanting to qualify for the residency scheme, with inquiries for residency via property investment and demand for PEFs up by at

As the new policy will come into effect in less than 10 months, experts anticipate a surge in the number of investors hoping to seize the last opportunity to invest in prime locales of the country or in the PEF at the lower minimum investment threshold. Prospective investors are urged to act quickly in order to get the best available deals and get into the programme before the deadline.

It is important to note that not all properties or PEFs qualify, and prospective investors need to be cautious of unscrupulous agents and developers who themselves don’t always understand the qualifying requirements.

Andrew Rissik is director of Sable International, which specialises in cross-border financial and immigration advice and solutions.

In the midst of the Covid-19-induced recession in which we find ourselves, many businesses are saying no to the “hire and fire” cycle and yes to freelancers instead.

“The freelance model works,” write Pete Savage, Steve Slaunwhite and Ed Gandia, the authors of The Wealthy Freelancer. “Companies like it because it allows them to get work done without the salary, training, and benefit expenses that come with hiring. And it provides the flexibility to source specific talent for any project quickly, on an as-needed basis.”

But how do you get the projects, clients, income, and lifestyle you want? Here are the book's 12 essential secrets to a great income and an enviable lifestyle.

1. Master the mental game

“When life is filled with roses and sunshine, it's easy to stay confident and upbeat. It's when the storms roll in –and they will roll in – that your mental toughness will be put to the test.”

Freelancers often deal with ups and downs. But don't let the obstacles stop you. Have clear but flexible goals to keep you focused. Remembering why you chose this path in the first place will keep you strong.

2. Simplify the process of getting clients

“Just because you have a lead doesn't mean the lead will become a client. To do

FREELANCING – 12 SECRETS TO SUCCESS

Eugene Yiga, himself a freelancer, shares insights from a book on optimising opportunities for those following this form of livelihood.

that, you must first convert the lead into an opportunity.”

To help freelancers land more clients with less effort, the book introduces a model called the Master Marketing Formula. First, you find high-quality prospects that would be a good fit for your freelance business. Then you generate leads by getting them to show an interest in your offer. Turn the leads into opportunities and the opportunities into clients by closing the sale.

3. Create your amazing buzz piece

“Next to an effective website, creating a buzz piece is the best investment you can make in your business.”

A “buzz piece” is a special report that provides your potential clients with useful information. For example, a graphic designer might create a guide called “How to choose the best logo for your company”. Doing so would position the individual as an expert in the field, which would make potential clients more interested in sending work his or her way.

4. Employ high-impact prospecting tactics

“For wealthy freelancers, prospecting is not necessarily about generating the most leads possible. It's about generating quality leads – leads that have a high chance of turning into clients.”

There are many ways to find clients:

tapping your network, getting more out of existing clients, investing in smart local networking, leveraging social media, and even employing direct mail. But the goal is to focus on the activities that are both efficient and effective. This is how you'll generate quality leads that have a high chance of becoming solid clients.

5. Cultivate repeat and referral business

“It does take some effort to get repeated and referral business, but it certainly is a much easier way to grow and sustain your business versus constantly fishing for new clients.”

Some clients are only ideal for once-off gigs. But the best are those you can work with over and over again. Find the clients who love what you do (and who you love doing it for) and then describe what else you can offer. It's also good to ask them if they know anyone else who could use your services too.

6. Nurture prospects perpetually

“When done right, lead nurturing dramatically reduces your marketing costs in the long run by increasing the overall quality of your leads.”

In some industries, timing is everything. So don't feel discouraged if the perfect client isn't ready to hire you today. Instead, stay in touch with them on a regular basis. You'll be the first person they think of if the other freelancers gave up after one try.

7. Price your services for success

“A fixed-project price takes the salary comparison out of the equation, making the client stop and consider if the project is worth the price instead of whether or not you are worth your hourly fee. And you can make a lot more money as a project pricer because you benefit financially by being faster and better.”

Accomplished freelancers and even people new to self-employment should be earning as much (or even more) than their employed counterparts. But this can only happen if you recognise that you deserve adequate compensation for your talents and skills.

8. Bring focus to your freelance business

“You can launch your freelance business, find clients, perform work, and earn money without having a sharp focus on a particular market. But sooner or later, this lack of focus will trip you up.”

It's easy to lose your effectiveness if you try to be all things to all people all the time. If you spend a lot of time explaining your offering and even more time trying to market it, stop and get clear on what you do, for whom you do it, and what makes you different from everyone else.

9. Boost your productivity –without perspiration

“You don't have to keep your nose to the grindstone until it bleeds to be productive.”

Freelancers wear many hats. But you don't have to wear them all. For example, you could decrease your workload by outsourcing non-core administration work to a virtual assistant. Then work on what you do best and what most deserves your time.

10. Construct your own work-life reality

“Freelancers do not have to build a life around a corporate work schedule imposed by others. Instead, you can create a work-life reality that fits your own unique circumstances.”

Once you accept that everyone has only 24 hours in a day, you can make the most of your time. But even though you might have to pull an all-nighter to meet a deadline or follow inspiration from your muse, don't forget to schedule downtime for the things you love.

11. Create alternative streams of income

“Active income limits you. There are only so many hours in the week. However, you can

increase your income potential significantly, without adding much more to your workload, by cultivating passive, or at least near-passive, income streams.”

To generate passive income, the book suggests you sign up for affiliate programs (not too many) for the products and services you recommend to your clients. You could also teach others what you know by creating e-books and other information products to sell online.

12. Live and work in the “Wealthy Triangle”

“Wealthy freelancers don't just make a living; they design a fulfilling and meaningful life.”

Do you want to be the overpaid executive who never has time for his or her family? Or do you want to be the stereotypical starving artist who loafs around all day? In the “Wealthy Triangle”, you can enjoy the best of both worlds: a high income and the flexibility that comes with the freelance life. As the book explains in the introduction:

“Being wealthy isn't just about the dollars you earn; it's about the life you build and the kind of person you become in the process.”

It's all up to you.

The Wealthy Freelancer, by Pete Savage, Steve Slaunwhite and Ed Gandia, published by Alpha, an imprint of Penguin, is available from Loot (www. loot.co.za).

Innovation, the final destination for exceptional creativity. ASUS’ passion for purpose driven innovation has developed over a three-decade journey in the search of incredible. The core of its design thinking process, enabling their customers to achieve the incredible, has led to the PC manufacturer being listed as the world’s best laptop brand in 2020 on the prestigious annual Laptopmag.com ranking. In December of 2020 ASUS for the first time in South Africa was the number one selling consumer laptop on GFK and that trend continues to run.

Dual Screen

This steady rise to the top of the PC world has been driven by innovation that targets user efficiency, productivity, and proficiency. One major example of this type of innovation is the dual screen revolution pioneered by ASUS. The first major leap forward began with the ScreenPad in 2019, a secondary display built into the trackpad allowing a simplified level of productivity that no other laptop had achieved. This concept was further developed into a

full-length dual screen that sits above the keyboard and below the normal display. This edge to edge screen provides fully functional multitask boosting productivity on the go to levels before impossible.

Purpose Driven

The ASUS brand has grown in prominence within the professional creator market and this relationship has driven much of the lauded innovation. The launch of the new ZenBook Duo and ZenBook Pro Duo have purpose guided software compatibility with Adobe creative suit products to utilize the secondary display, providing a native user experience on the dual screen for Adobe users. Being able to maximize workflow efficiency for creatives within a familiar ecosystem from any location is not a happy accident, rather a clear indication of purpose driven innovation led by the user experience.

Innovating for Tomorrow

The innovation path for ASUS and in particular ZenBook is guided by the user experience and how the brand can make

their search for incredible as effortless and fun as possible. Lighter, faster and more flexible form factors will be a priority. On opening the iconic ZenBook lid tomorrow’s laptops will offer a faster and more efficient way to get critical day to day tasks done at the desk or on the move.

UNDERSTANDING YOUR OFFSHORE ALLOWANCE

With an economy in the doldrums, South Africans are increasingly looking to make use of business and investment opportunities offshore. However, it’s important to note that as a South African resident, you are subject to certain exchange control regulations. And while these regulations have eased over the past few years, it’s crucial to understand the regulations at play in order to avoid landing in hot water with the South African Reserve Bank (SARB).

First, it’s important to understand what is meant by “South African resident”. This refers to a resident for exchange control purposes, and differs from SARS’s definition of a tax resident in that it refers to any person (or a natural person or legal entity) that has taken up permanent residence, or is registered in South Africa.

Next, it’s important to note that all funds paid from or to South Africa need to be reported through the balance of payments reporting system by an authorised dealer or foreign exchange provider. However, you don’t have to approach a bank directly for these payments; you can also make use of a treasury outsource company, which may assist in obtaining beneficial exchange rates for more cost-effective transactions.

For individuals, there are essentially two main dispensations or two types of offshore allowances at your disposal. These are a single discretionary allowance, and a foreign investment allowance.

SINGLE DISCRETIONARY ALLOWANCE

Every South African resident over the age of 18 years is entitled to a single discretionary allowance (SDA) of up to R1 million per calendar year. This allowance can be used for any legitimate purpose at your own discretion, including gifts to friends or family living abroad, making online purchases of goods denominated or sold in a foreign currency, or investing in offshore investments. To make use of your single discretionary allowance, all you need is a valid green bar-coded South African identity document or smart identity card. You will not have to produce any documentary evidence to your authorised dealer, except if you are making use of your allowance for travel purposes. If you are making use of your allowance for travel, you will need to provide certain mandatory documentation, which your foreign exchange provider should be able to offer guidance on.

FOREIGN INVESTMENT ALLOWANCE

In addition to your single discretionary allowance, every South African resident over the age of 18 also entitled to a foreign investment allowance (FIA) of up to R10 million per calendar year.

This can be used to purchase property in foreign countries, invest amounts exceeding R1 million, or for transfers for other purposes where you may have already exceeded your R1 million SDA. However, when transferring funds

abroad, the externalised amount is not allowed to materialise in the hands of another South African resident. In other words, you cannot transfer funds to a South African resident abroad without prior consent from the SARB.

Additionally, unlike your SDA, your FIA comes with additional restrictions. For instance, the FIA is subject to you obtaining a tax clearance certificate and the verification of your tax compliance status.

EXCEEDING YOUR ALLOWANCE

If you wish to transfer abroad funds in excess of your SDA and FIA, or over the value of R11 million in a calendar year, you can apply to the SARB for permission via an authorised dealer.

You will then need to supply a motivational letter, which details:

• The amount you would like to transfer;

• A supporting tax clearance certificate;

• Details regarding the investment; and

• The reason for the investment. Should you have any questions or concerns regarding foreign exchange transactions or moving money in and out of South Africa, seek the advice of qualified, professional foreign exchange experts.

By using a professional treasury company, you will also receive assistance with all the necessary administration required, including instruction, settlements, compliance and reporting, saving you valuable time and ensuring your peace of mind.

Bianca Botes is a director of Citadel Global.

Bianca Botes unpacks what the limits are on taking money out of South Africa.

It's hard being a 30-something South African living in Cape Town and being asked to comment on my own personal finances.

All of a sudden I can hear my mom saying, “I told you this day would come”. The reality sinks in that I have been working for eight years now and my savings are in Zara clothes and holidays abroad.

I wonder if I can retire on that? (That sarcasm and low-key self-loathing was instilled in me by my mom, who is amazing with money.)

So how did I get the short end of the stick when it comes to saving?

On some self-reflection, I realised that there are two reasons why I am not good with money:

1. I think that I can make it up again, once I spend it and,

2. I have always had a safety net (my mom) Yes, I know I am privileged and will not ask you to help with my new “go fund me” page.

But while I know that I am spoilt, I also know that the safety net I have won't last.

It is with this realisation that I decided to look at my finances, especially in a pandemic.

MILLENNIAL VIEW WHEN DOES THE ‘ADULTING’ STOP?

In mid-2020 I received a substantial salary cut. I also realised I had to make some serious investments in health insurance and my retirement, given the Covid-19 virus.

One key thing I did early on was slow my spending and contact my landlord to reduce my rent. I was lucky as he was amenable.

With the money I was saving I decided to reach out to two investment advisers. According to Asavela Gwele at 10X Investments, the best way to save for retirement is in a retirement annuity, because your contributions are tax-deductible.

When you retire, you can choose a living or a guaranteed annuity to provide you with an income. You need to consider: your health, age, savings, desired income, whether you prefer a secure or a flexible income in retirement, the needs of a spouse, and whether you want to leave money to your children.

This put into perspective the realisation that planning ahead is not an easy decision and that sacrifices would have to be made. Suddenly it dawned on me that being able to go to a restaurant or bar and spend R1000 or more was no longer possible.

Katlego Gaborone is a Momentum Financial Planner and he gave these tips for investing in your thirties:

• Think long-term and invest consistently – you don’t grow rich overnight.

• Don't put all your eggs in one basket – diversify your investments.

• Bulk up your emergency fund so that no emergency will be too big for you to handle.

• Make sure you pay off your credit card in full every month and steer clear of bad debt like clothing accounts.

• Think comfortable, not extravagant. Don’t max out your savings when buying a house.

• Spend less than you earn.

While I know all this advice can be daunting and yes I will say it is a “buzzkill”, 2020 instilled in me the reality that one’s life is not guaranteed. In an instant, one’s current way of life can be shifted or destroyed. It is with this mind that I aim to change my spending habits and make better financial decisions.

VERNON PILLAY Vernon Pillay is a content producer at IOL.

OMBUD CASE FILE

Mr C’s motor vehicle insurance claim during lockdown

On 3 May last year Mr C submitted a motor vehicle insurance claim to his insurer. It was rejected on the basis that Mr C had contravened the Disaster Management Act Regulations 2020 under both the Level 4 and 5 protocols set in place by the government.

Mr C said the accident occurred after he had just received a permit to return to work the following day, 4 May 2020. He was relocating from one residence to another and was travelling to get his laptop, which he needed for his return to work the next day.

Mr C approached the Ombud for Short-Term Insurance (Osti) for assistance because he felt that his claim had been unfairly rejected.

The Osti requested the insurer to provide a copy of the policy wording and to highlight the relevant policy provision that it relied on to justify its rejection of the claim. The Osti mentioned that, if the policy provision on which the insurer relies was not material to the loss, then the insurer should consider settling the claim.

 The insurer’s response The insurer advised that when it investigated the accident, the following was established, which had a material impact on its decision to reject the claim:

“In an interview conducted with the complainant, it was established that the accident occurred at about 18:00 on 3 May 2020 when the complainant was travelling along the Golden Highway near Lenasia South. The complainant had a passenger in his vehicle at the time of the accident.

“The complainant and the passenger, who was in the vehicle with the complainant when the accident occurred, had both confirmed that they had, during the lockdown (Alert Level 5) on 26 April 2020, travelled from Soweto to Orange Farm to the complainant’s second residence. On this date, South Africa was observing Alert Level 5 of the lockdown and travelling was severely restricted and only allowed under strict directions. The complainant, according to his own admission, travelled between his residences in order to cast an eye

over his second house and not for essential services or to move to a new house or to move back to his primary place of residence, should he have been forced into lockdown at his second place of residence. Both the complainant and his passenger further confirmed that on 3 May 2020, when the accident occurred, they were travelling from this residence in Orange Farm back to Soweto.

“Under Alert Levels 4 and 5 people had to remain home and were only allowed to travel under circumstances as published in Gazette 43258 and amendments. In considering the regulations and its directives, the following was found to be true: the complainant was not performing an essential service; the complainant was not moving to a new residence; the complainant was not returning to his place of residence before lockdown; and the complainant was not moving children nor attending a funeral. Therefore, the relaxation on the restriction of movement did not apply to the complainant’s social movement between

his households, as was the case when the event occurred.

“It was noted, at this stage, that the complainant was in possession of a work permit which specifically allowed him to travel between his residence in Chiawelo, Soweto to Bryanston (his place of work). However, this permit did not provide for the travelling between Orange Farm to Soweto, which was the route the complainant was travelling when the accident occurred, and therefore, the complainant failed to have the required permissions to travel between these two locations and was, consequently in contravention of the regulations.

“In consideration of the regulations and the date of the accident, it is clear that the complainant, by being on the road when the accident occurred, contravened the regulations in that his purpose for being on the road was not for any of the instances as provided for in terms of Regulation 16(2).

The Level 4 regulations, as indicated above, took effect from 1 May 2020, and therefore, when the accident occurred

the complainant was in contravention of the Level 4 regulations. Should the complainant have complied with these regulations as it pertained to the movement of people, the accident would not have occurred.”

In response to the Covid-19 pandemic, the insurer stated that it had undertaken to assist its clients in the trying financial times. To this end, it offered clients who were unable to afford their premiums during the lockdown a payment holiday for that month. The insurer said it could offer this due to the change in its insurance risk, resulting from the restriction of movement of people under the regulations, which, in turn, meant a lowered risk of accidents occurring. Were it not for the regulations, the insurer would not have been able to help clients who were unable to afford their monthly premiums. Therefore, clients who contravened Regulation 16 directly impacted its risk.

The insurer said this was the reasoning behind the repudiation of the claim.

It also said that the following clause

from the policy schedule allowed them to repudiate claims where the policyholder or driver of the vehicle breaks the law: “If you or the driver driving your car does not have a valid driver’s license, or if you break the law...”.

 The Osti’s findings

The Osti advised the insurer that its response did not address the materiality of the policy exclusion to the loss itself. In other words, the insurer had not shown that the accident was caused by the policyholder breaking the law. The Osti considered the matter from an equity perspective and found that there was no causal connection or link between the breach of the law and the accident. Accordingly, the Osti recommended that the insurer settle the claim.

The insurer confirmed that it would abide by the Osti’s recommendation and agreed to settle Mr C’s claim.

This is an edited version of an article that appeared in The Ombudsman’s Briefcase, 1st edition of 2021

ABSA BOND FUND

The Absa Bond Fund is a fixed-income fund that provides affordable access to the South African bond market. It is ideal for investors with a medium- to long-term investment horizon who seek lower risk than an equity fund, or who need diversification from the equity market. At this year’s Raging Bull Awards in February, for performance to December 31, 2020, it won the Raging Bull Award for the Best South African Interest-bearing Fund (for straight performance over three years), the Certificate for the Best South African Interest-bearing Variable-term Fund (for straight performance over three years), and the Certificate for the Best South African Interest-bearing Variable-term Fund on a Risk-adjusted Basis (for performance over five years).

According to ProfileData, the fund

delivered 10.39% a year, on average, after costs, over three years to the end of 2020. Its benchmark, the South African All Bond Index, returned 8.88% over that period. The 32 funds in the interest-bearing variableterm sub-category that qualified for inclusion in the awards averaged an annual return of 7.12% over that period.

The fund’s latest factsheet, for March 2021, shows the fund has continued outperforming: it returned 20.96% over 12 months, compared with 16.96% achieved by the benchmark and the 16.00% averaged by its peers.

The fund invests primarily in South African government and corporate bonds of varying durations. Bonds, like equities, are traded on a secondary market, so returns come not only from yield, but also from capital appreciation on bond prices.

Balancing these two aspects of performance requires a skillful manager. Personal Finance found out more from James Turp, head of the fixed income franchise and portfolio manager at Absa Investment Management.

Please outline your investment philosophy.

The Absa Bond Fund aims to beat its benchmark at the lowest acceptable level of risk. This strategy has notably delivered strong periods of outperformance during periods of increased volatility, which has been a signature characteristic of the asset class. Using this philosophy, the fund focuses on delivering the most attractive risk-adjusted returns over the short and long term. This approach does not seek to return the highest yield available, but the

James Turp

Cumulative performance over 5 years

best strategic return given the known risks.

The fund leverages off of intense fundamental and technical analysis of the investment environment, focusing on key influences to the structural bond market, such as inflation, monetary policy, termpremia and liquidity risk.

A low-risk, conservative approach, combined with an unflinching active management style, has helped the fund to deliver attractive returns to our investors. Duration calls are expressed using liquid government bonds relative to the All Bond Index, whereas credit positioning is focused toward the more liquid, higher-quality issuers.

To what do you attribute your fund’s outperformance over the past few years, and specifically during the pandemic?

The fund’s outperformance is largely attributable to its conservative approach to the asset class and the high level of experience and constant asset class research involved in the fund’s management.

The strategy of delivering the most attractive risk-adjusted return, and not simply accumulating the highest available yield, is the starting point of the fund’s performance over the long and short term. The fund managers’ active approach to portfolio management attempts to structure a defensive position to benefit from the prevailing macro-economic environment with minor active adjustments in line with structural changes to the yield curve.

The fund’s bias to outperforming during negative market moves while participating

in the positive moves is testament to the integrity and consistency of this approach.

How have you positioned the fund for the 2021, considering the ongoing effects of the pandemic and other local and global opportunities and risks?

After the incredible year that was 2020, the fund will continue to focus on its investment philosophy to deliver its mandated benchmark. The fund will seek opportunities as they present themselves across the yield curve and fixed income market. It is very possible that volatility will be high through 2021 and, as such, it will be important to remain calm and focused on delivering the best for our investors from this exciting asset class.

– Martin Hesse

Market participants all want the same thing: the best possible return at the lowest level of risk. How you go about securing that, however, is often a source of disagreement. While you might think investment is a black-and-white affair, the assumptions that you use to underpin your calculations can have a decided influence on your decision to invest – or not.

Of course, future returns are never certain. (Even in fixed income markets, bond holders could default.) But add changing macroeconomic variables, irrational markets, unrealistic expectations and investor emotions into the mix, and getting to certainty becomes even more difficult. No wonder many investors settle for the “obvious answer” – whether this is picking last year’s winner or simply following the crowd. Using such decision-making shortcuts can often lead investors astray, and we believe the current market environment has elevated the risks of taking such shortcuts even more.

Markets have become bifurcated, with investors clamouring to invest in the strategies that have proved successful in the past, and so it becomes a self-reinforcing cycle, with popular winners continuing to win.

What is risk?

ON THE CONTRARY RETHINKING RISK

Risk is often defined as the potential to lose money, although it should also be viewed as the possibility that your return expectations won’t be met. In a world of deeply divergent markets, the definition of risk for many seems to have shifted to “the risk of missing out”.

Exuberant and irrational markets create opportunities for patient investors who are prepared to look for the opportunities others are missing. These are typically found in the uncrowded sectors of the market. Currently, markets are defining risk very narrowly as the “risk of missing out” and more specifically, the “risk of missing out on a repeat of the returns from a narrow subset of assets”.

Risk assumptions

Being careless about the assumptions that

underpin your estimations of fair value and future returns will sway your investment choices. Therefore, we believe that investors should be very clear about what their assumptions of the future imply, to minimise the risk of being disappointed later.

Perceived “low-risk” assets like US government bonds are offering very little yield, while the S&P500 is showing extreme ratings. When the S&P ratings were in similar territory between 1998 and 2000, investors had to wait 13 years before seeing a capital gain (and weather two corrections of more than 45%). With ratings at such extremes, investors should question how much longer such conditions can persist – and what it could mean for portfolios if their underlying assumptions were proven wrong.

More worrying, however, is that current risk perceptions are blinding investors to the areas of the markets that do offer the potential for exceptional future returns, even when we apply currently very negative assumptions that underpin popular narratives. Thus investors are not only investing into a very narrow subset of assets driven by a fear of ‘missing out’, but they are also avoiding investment into a broad range of assets based on prevailing narratives that these assets are “too risky”.

As we methodically unpack the narratives around what is “too risky”, we often find they stubbornly overlook any mitigating factors, and are based on deeply held narratives of fear. The risks of investing in SA Government Bonds are widely discussed (and potentially overstated) while the appeal of high yields and steep yield curves are overlooked. SA Inc shares are all assumed to be write-offs based on poor economic prospects, when these companies have proven they can fare well despite the local economy and even when these companies do not depend only on the South African consumer and economy.

Yes, investors want “the best possible return at the lowest level of risk”, but this is dependent on your ability to correctly assess what risk is. If you get that fundamental insight wrong, your ability to invest successfully in the long term will be severely compromised.

ANET AHERN

Anet Ahern is the CEO of PSG Asset Management.

DATABANK

WHERE TO GET HELP

With BANKING problems:

The Ombudsman for Banking Services is Reana Steyn.

ShareCall: 0860 800 900 or Telephone: 011 712 1800

Fax: 011 483 3212

Post: PO Box 87056, Houghton, 2041

Email: info@obssa.co.za

Website: www.obssa.co.za

With COMMUNITY-SCHEME-RELATED problems: The Community Schemes Ombud Service is a statutory dispute-resolution service for owners and residents of community schemes, including sectional-title schemes share-block companies, homeowners’ associations and schemes for retired persons. The Acting Chief Ombud is Advocate Ndivhuo Rabuli.

Telephone: 010 593 0533

Fax: 010 590 6154

Post: 63 Wierda Road East, Wierda Valley, Sandton, 2196

Email: info@csos.org.za

Website: www.csos.org.za

With CONSUMER-RELATED problems: The National Consumer Commissioner is Ebrahim Mohamed.

Toll-free: 0860 003 600

Telephone: (complaints) 012 428 7000 or (switchboard) 012 428 7726

Fax: 086 758 4990

Post: PO Box 36628, Menlo Park, 0102

Email: complaints@thencc.org.za

Website: www.thencc.gov.za

The Consumer Goods and Services Ombud is Magauta Mphahlele. This is a voluntary dispute-resolution scheme that only has jurisdiction over retailers, wholesalers and manufacturers that subscribe to the Consumer Goods and Services Industry Code of Conduct.

ShareCall: 0860 000 272

Fax: 086 206 1999

Post: PO Box 3815, Randburg, 2125

Email: info@cgso.org.za

Website: www.cgso.org.za

With CREDIT TRANSACTION problems: The Credit Ombud is Howard Gabriels.

MaxiCall: 0861 662 837

Telephone: 011 781 6431

Fax: 086 674 7414

Post: PO Box 805, Pinegowrie, 2123

Email: ombud@creditombud.org.za

Website: www.creditombud.org.za

With DEBT COUNSELLING problems: The National Credit Regulator also deals with disputes that are not resolved by the Credit Ombud. The Chief Executive Officer is Nomsa Motshegare.

ShareCall: 0860 627 627

Telephone: 011 554 2600

Fax: 011 554 2871

Post: PO Box 209, Halfway House, 1685

Email: complaints@ncr.org.za or (debt counselling complaints) dccomplaints@ncr.org.za

Website: www.ncr.org.za

With FIDUCIARY problems:

The Fiduciary Institute of Southern Africa (FISA) is a selfregulating body in fiduciary matters such as wills, trusts and estate planning.

Telephone: 082 449 2569

Post: PO Box 67027, Bryanston, 2021

Email: secretariat@fisa.net.za

Website: www.fisa.net.za

With FINANCIAL ADVICE problems:

The Ombud for Financial Services Providers is Nonku Tshombe.

Telephone: 012 470 9080 or 012 762 5000

Fax: 086 764 1422, 012 348 3447 or 012 470 9097

Post: PO Box 74571, Lynnwood Ridge, 0040

Email: info@faisombud.co.za

Website: www.faisombud.co.za

With INVESTMENT problems:

The Financial Sector Conduct Authority, which is headed by Dube Tshidi, regulates the financial services industry.

ShareCall: 0800 110 443 or 0800 202 087

Telephone: 012 428 8000

Fax: 012 346 6941

Post: PO Box 35655, Menlo Park, 0102

Email: info@fsb.co.za

Website: www.fsb.co.za

With LIFE ASSURANCE problems:

The Ombudsman for Long-term Insurance is Judge Ron McLaren.

ShareCall: 0860 103 236 or Telephone: 021 657 5000

Fax: 021 674 0951

Post: Private Bag X45, Claremont, 7735

Email: info@ombud.co.za

Website: www.ombud.co.za

With MEDICAL SCHEME problems:

The Council for Medical Schemes is a statutory body that supervises medical schemes. The Registrar of Medical Schemes is Dr Sipho Kabane.

MaxiCall: 0861 123 267

Fax: (enquiries) 012 430 7644 or (complaints) 086 673 2466

Post: Private Bag X34, Hatfield, 0028

Email: complaints@medicalschemes.com or information@medicalschemes.com

Website: www.medicalschemes.com

With MOTOR VEHICLE problems:

The Motor Industry Ombudsman of South Africa is an independent institution that resolves disputes between the motor and related industries and their customers. The Ombudsman is Johan van Vreden.

MaxiCall: 0861 164 672

Fax: 086 630 6141

Post: Suite 156, Private Bag X025, Lynnwood Ridge, 0040

Email: info@miosa.co.za

Website: www.miosa.co.za

With RETIREMENT FUND problems:

The Pension Funds Adjudicator is Muvhango Lukhaimane.

ShareCall: 0860 662 837

Telephone: 012 748 4000 or 012 346 1738

Fax: 086 693 7472

Post: PO Box 580. Menlyn, 0063

Email: enquiries@pfa.org.za

Website: www.pfa.org.za

With SHORT-TERM INSURANCE problems: The Ombudsman for Short-term Insurance is Judge Ron McLaren.

ShareCall: 0860 726 890 or Telephone: 011 726 8900

Fax: 011 726 5501

Post: PO Box 32334, Braamfontein, 2017

Email: info@osti.co.za

Website: www.osti.co.za

With TAX problems:

The Tax Ombud is Judge Bernard Ngoepe.

ShareCall: 0800 662 837 or Telephone: 012 431 9105

Fax: 012 452 5013

Post: PO Box 12314, Hatfield, 0028

Email: complaints@taxombud.gov.za

Website: www.taxombud.gov.za

PLEXCROWN RANKING OF MANAGEMENT COMPANIES

DOMESTIC MANAGEMENT

PERFORMANCE OF DOMESTIC SUB-CATEGORIES TO MARCH 31, 2021

PERFORMANCE OF OFFSHORE SUB-CATEGORIES TO MARCH 31, 2021

PERFORMANCE OF DOMESTIC FUNDS TO MARCH 31, 2021

PERFORMANCE OF OFFSHORE FUNDS TO MARCH 31, 2021

WHAT DO THE PLEXCROWN FUND RATINGS TELL YOU?

The last column in the collective investment scheme performance tables on pages 56 to 67 shows the PlexCrown rating of a fund if it qualifies for a rating. The PlexCrown Fund Ratings system encompasses the different quantitative measures used in calculating investment performances in one number and makes it easy for investors to evaluate fund managers on the basis of their long-term risk-adjusted returns.

The PlexCrown Fund Ratings enable investors to know at a glance how a unit trust fund has fared over time on a risk-adjusted return basis, compared with the other funds in its Association for Savings & Investment SA subcategory. Therefore, the ratings assist investors in determining whether or not a fund manager is adding value to their unit trust investments, given the manager’s mandate and the amount of risk he or she is taking.

The PlexCrown Fund Ratings are unbiased and objective because they are based on quantitative measures; no

subjectivity is brought into the research methodology.

In calculating risk-adjusted returns, the methodology accepts that various quantitative formulae each have their unique drawbacks. In order to overcome this, up to five different risk measures are used:

• Total risk (Sharpe Ratio);

• Downside risk (Sortino Ratio and Omega Risk/Reward Measure); and

• Manager’s skill (Jensen’s Alpha and Treynor).

The research method ensures that the unit trust funds under evaluation are exposed to similar risks; therefore, the subcategories for unclassified funds and money market funds are excluded.

The PlexCrown rating system is a measure of consistency because ratings are done over three and five years and are time weighted, with the emphasis on the longer period of measurement. Funds within a unit trust subcategory are ranked only if there are at least five funds in that subcategory with a

track record of at least five years. To qualify for a rating, a fund must have an official track record of at least five years.

Each qualifying unit trust fund is awarded a certain number of PlexCrowns ranging from one to five, with the top-performing funds allocated the highest rating of five.

The PlexCrown ratings distinguish between poor performers and excellent performers, but are based on historical data and should be used only as a first step in the construction of a unit trust portfolio. It remains the responsibility of investors together with their financial advisers, to make sure that the funds they choose suit their risk profiles and that their investment plans include an appropriate level of diversification.

Visit www.plexcrown.com for a full description of the PlexCrown Fund Ratings system.

Information in the above tables was provided by PlexCrown Fund Ratings and ProfileData

COLLECTIVE INVESTMENT SCHEME PERFORMANCE TO MARCH 31, 2021

ABOUT THE LISTINGS

• Results are based on the performance of a lump-sum investment over four periods that ended on MARCH 31, 2021. In each of the periods, there is a percentage (to two decimal places) by which an investment would have grown or shrunk, and the fund’s position or rank relative to other funds.

• Returns for the three- and five-year periods are annualised (that is, the percentage represents the average performance in a year). As unit trust funds are medium- to long-term investments, the most important performance periods are those of three years or longer.

• INITIAL COSTS have not been taken into account and can have an effect on returns.

• ANNUAL MANAGEMENT FEES are included in the returns.

• DIVIDENDS have been reinvested on the ex-dividend date (the day after they are declared) at the price at which the units are sold to you.

• INDICES normally supplied as benchmarks reflect percentage changes and take into account dividends and interest. In the case of new indices, a history is not yet available.

• The PLEXCROWN RATING indicates how a fund has fared over time compared with the other funds in its subcategory on a risk-adjusted return basis. Turn to page 57 for more information about the ratings.

WHAT DOES THE * INDICATE?

The asterisk (*) before a fund’s name indicates that the fund complies with the investment requirements of Regulation 28 of the Pension Funds Act. Funds suitable for retirement savings must comply with Regulation 28, which lays down guidelines about Inv. in different categories of assets. To reduce the risk and volatility of a fund, the Act restricts exposure to equities to a maximum of 75 percent of the fund and its exposure to property to 25 percent.

HOW FUNDS ARE CLASSIFIED

The Association for Savings & Investment SA’s classification system categorises unit trust funds according to their investment universe: where they invest, what they invest in and their main investment focus.

The first tier of the classification system categorises funds as South African, global, worldwide or regional.

South African funds must invest at least 70 percent of their assets in South African investment markets at all times. They may invest a maximum of 25 percent in foreign markets and a maximum of five percent in African (excluding South African) markets.

Global funds must invest a minimum of 80 percent of their assets outside SA. Worldwide funds do not have any restrictions on where they may invest but they typically allocate between South African and foreign markets in line with the manager’s outlook for local versus foreign assets.

Regional funds must invest at least 80 percent of their assets in a specific geographic region, such as Asia or Africa, excluding South Africa, or a country such as the United States. Regional funds may invest a maximum of 20 percent of their assets in South Africa.

The second tier of the classification system categorises funds according to the asset class in which they predominantly invest. At this level, funds are categorised as equity funds, interest-bearing funds, real estate funds or multi-asset funds.

Equity funds must invest at least 80 percent of the net asset value of a fund.

Interest-bearing funds invest in bonds, fixed interest and money-market instruments.

Real estate funds must invest at least 80 percent of their assets in shares in the real estate sector of the JSE or a similar sector of an international stock exchange. A fund may invest a maximum of 10 percent in property shares that are not classified in the real estate sector.

Multi-asset funds save you the trouble of deciding how to allocate your assets between shares, bonds, property or cash. The managers of multi-asset funds decide, for you, which asset classes they believe will produce the best returns and then, within those classes, which securities will perform the best. Some funds have a fixed allocation to the different asset classes whereas others change the mix of asset classes in line with their views of how the different classes or securities will perform.

MONEY MARKET YIELDS

The third tier of the classification system categorises funds according to their main investment focus.

WHAT DOES THE ‘R’ OR ‘A’ MEAN?

These indicate the annual management fees a unit trust company can charge and depend partly on the class of units you buy.

Before June 1998, the fees charged on funds were regulated with a maximum annual management fee of one percent a year plus VAT. Funds launched before this date have the letter “R” behind the fund name and can only change their fees after a ballot of all unit trust holders. Many unit trust companies have closed their “R” class funds to new investments and launched new fund classes.

Funds and fund classes launched after June 1998 can charge any fees. Typically, fees range from 0.25 percent to 2 percent, excluding VAT. Funds with unregulated fees can be “A”, “B”, “C” or “D” class funds.

Typically, “A” class funds are offered to retail investors while cheaper “B” class funds are for institutional investors who invest in bulk. Only the institutional funds available to you through a linked-investment services provider (Lisp) are published here.

The different classes of a single fund are managed collectively and the difference in performance between them is purely a result of the difference in management fees.

Most recently what are known as all-in-fee classes (“C” or “D” classes) have been introduced. These funds charge a single fee covering the management fee, the broker fee and the administration (or Lisp) fee.

Performance figures supplied by ProfileData

Telephone: 011 728 5510

Email: unittrust@profile.co.za

Website: www.fundsdata.co.za

Disclaimer: Although all reasonable efforts have been made to publish the correct data, neither ProfileData nor Personal Finance can guarantee the accuracy of the information on the unit trust fund performance pages.

TAXES AND DEDUCTIONS FOR THE 2021/22 TAX YEAR

INCOME TAX RATES FOR INDIVIDUALS AND SPECIAL TRUSTS*

PROVISIONAL TAX

A provisional taxpayer is any person who earns income by way of remuneration from an unregistered employer income that is not remuneration or an allowance or an advance payable by his or her employer. You are exempt from the payment of provisional tax if you do not carry on any business and your taxable income:

• Will not exceed the tax threshold for the tax year; or

• From interest, dividends, foreign dividends and the rental of fixed property and remuneration from an unregistered employer will be R30 000 or less for the tax year.

Deceased estates are not provisional taxpayers.

CAPITAL GAINS TAX

INCLUSION RATES

DEDUCTIONS FOR RETIREMENT FUND CONTRIBUTIONS

Amounts contributed to pension, provident and retirement annuity (RA) funds are deductible by fund members. Amounts contributed by employers and taxed as fringe benefits are treated as contributions by the individual employee. The deduction is limited to 27.5% of the greater of remuneration for PAYE purposes or taxable income (both excluding retirement fund lump sums and severance benefits). The deduction is further limited to the lower of R350 000 or 27.5% of taxable income before the inclusion of a taxable capital gain. Any contributions that exceed the limits are carried forward to the next tax year and deemed to be contributed in that year. The amounts carried forward are reduced by contributions set off when determining taxable retirement fund lump sums or RAs.

DEDUCTIONS FOR MEDICAL AND DISABILITY EXPENSES

All taxpayers: If you contribute to a medical scheme, you are entitled to a tax rebate (referred to as a medical scheme contributions tax credit) of up to R331 each for the individual who paid the contributions and the first dependant on the medical scheme and up to R224 a month for each additional dependant.

Additional tax credit for taxpayers under 65 years: You are entitled to a tax credit of 25% of an amount equal to your qualifying medical expenses plus an amount by which your medical scheme contributions exceed four times the medical scheme contribution tax credit for the tax year, limited to the amount that exceeds 7.5% of taxable income (excluding severance or retirement fund lump sums).

Additional tax credit for taxpayers with a disability and/or with a disabled family member or taxpayers over 65 years: You are entitled to a tax credit of 33.3% of your qualifying medical expenses plus 33.3% of the amount by which your medical scheme contributions exceed three times the medical scheme contribution tax credit for the tax year.

TAX ON LOCAL AND FOREIGN DIVIDENDS

Dividends received by individuals from South African companies are generally exempt from income tax, but dividends tax at a rate of 20% is withheld by the entities paying the dividends to individuals. Dividends received by resident individuals from real estate investment trusts (Reits) are subject to income tax. Non-residents in receipt of those dividends are subject only to dividends tax. Most foreign dividends received by individuals from foreign companies (a shareholding of less than 10% in the foreign company) are taxable at a maximum effective rate of 20%.

CALCULATE REAL AFTER-TAX RETURNS ON INTEREST-BEARING INVESTMENTS

CPI INFLATION RATE: 3.2% IN MARCH 2021

The real rate of return on money you invest is affected not only by inflation, but also by the rate at which you are taxed. The lower the inflation rate, the better your real rate of interest is likely to be. To calculate your real return, first work out what your after-tax return will be and then subtract the inflation rate. The table provides the marginal tax brackets and the interest rates at which you will start to receive a real (after-tax) rate of return on your money if it is taxed at that rate. The calculations ignore the fact that in the 2020/21 tax year, the first R23 800 (R34 500 if you are over 65 years of age) you earn in interest is tax-free. Any interest you receive above the exempt amount is taxed at your marginal tax rate.

• Individuals special trusts and individual policyholder funds: 40% • Other taxpayers: 80%

MAXIMUM EFFECTIVE RATES

• Individuals and special trusts: 18%

• Other trusts: 36% • Companies: 22.4%

SOME OF THE EXCLUSIONS

• R2 million gain/loss on disposal of primary residence

• Annual exclusion of R40 000 to individuals and special trusts

• R300 000 in the year of death (instead of the annual exclusion)

• Retirement benefits

• Most personal use assets

• Payments in respect of original long-term insurance policies

• R1.8 million for individuals (at least 55 years of age) when a small business with a market value that does not exceed R10 million is disposed of.

ESTATE DUTY

Rate: 20% on the first R30m; 25% on estates above R30m. Amounts in an estate up to R3.5m are not taxed. For the second-dying spouse, amounts up to R7m less the exemption used by the first-dying spouse are not taxed.

TAX-FREE SAVINGS ACCOUNTS

No income tax on interest, dividends withholding tax or capital gains tax. Contributions are limited to R33 000 a year, up to R500 000 over your lifetime. Contributions that exceed the limits will be taxed at 40%.

DONATIONS TAX

• Donations tax payable by the donor is levied at a rate of 20% on property donated with a value up to R30 million. The rate on property with a value of more than R30 million is 25%.

• The first R100 000 of property donated in each year to a natural person is exempt from donations tax.

• Donations between spouses are exempt from donations tax.

• Tax deductions on donations to approved public benefit organisations are limited to 10% of taxable income before deducting medical expenses (excluding retirement fund lump sums and severance benefits).

RETIREMENT FUND LUMP-SUM WITHDRAWAL BENEFITS

LUMP SUM RATE OF TAX

R0 to R25 000 0% of taxable income

R25 001 to R660 000 18% of taxable income above R25 000

R660 001 to R990 000 R114 300 plus 27% of taxable income above R660 000 R990 001 and above R203 400 plus 36% of taxable income above R990 000

Retirement fund lump-sum withdrawal benefits consist of lump sums from a pension, pension preservation provident, provident preservation or retirement annuity fund on withdrawal (including assignment in terms of a divorce order).

The tax on a retirement fund lump-sum withdrawal benefit (X) is equal to:

• The tax determined by applying the tax table to the aggregate of lump sum X plus all other retirement fund lump-sum withdrawal benefits accruing from March 2009, all retirement fund lump-sum benefits accruing from October 2007 and all severance benefits accruing from March 2011; less

• The tax determined by applying the tax table to the aggregate of all retirement fund lump-sum withdrawal benefits accruing before lump-sum X from March 2009, all retirement fund lump-sum benefits accruing from October 2007 and all severance benefits accruing from March 2011.

RETIREMENT FUND LUMP-SUM BENEFITS OR SEVERANCE BENEFITS

R500 001 to R700 000 18% of taxable income above R500 000

R700 001 to R1 050 000 R36 000 plus 27% of taxable income above R700 000 R1 050 001 plus R130 500 plus 36% of taxable income above R1 050 000

Retirement fund lump-sum benefits consist of lump sums from a pension, pension preservation, provident, provident preservation or retirement annuity fund on death retirement or termination of employment due to attaining the age of 55 sickness accident injury incapacity redundancy or termination of the employer’s trade.

Severance benefits consist of lump sums from or by arrangement with an employer due to relinquishment, termination, loss, repudiation, cancellation or variation of a person’s office or employment.

Tax on a retirement fund lump-sum benefit or a severance benefit (Y) is equal to:

• The tax determined by applying the tax table to the aggregate of lump-sum or severance benefit Y plus all other retirement fund lump-sum benefits accruing from October 2007 and all retirement fund lump-sum withdrawal benefits accruing from March 2009 and all other severance benefits accruing from March 2011; less

• The tax determined by applying the tax table to the aggregate of all retirement fund lumpsum benefits accruing before lump-sum Y from October 2007 and all retirement fund lump-sum withdrawal benefits accruing from March 2009 and all severance benefits accruing before severance benefit Y from March 2011.

TRANSFER DUTY RATES

SARS INTEREST RATES

RATES OF INTEREST FROM 1 AUGUST 2020:

Fringe benefits - interest-free or low-interest loan (official rate): 4.5% a year

RATES OF INTEREST FROM 1 NOVEMBER 2020:

Late or underpayment of tax: 7% a year

Refund of overpayment of provisional tax: 3% a year

Refund of tax on successful appeal or where the appeal was conceded by the South African Revenue Service: 7% a year

Refund of VAT or late payment of VAT: 7%

WHO DOES NOT HAVE TO SUBMIT A TAX RETURN?

You do not have to submit a return if: your total pre-tax earnings from one employer were less than R500 000 for the tax year, you have no other sources of income (for example rental or interest) and there are no deductions that you want to claim.

TRAVELLING ALLOWANCES

Rates per kilometre, which may be used in determining the allowable deduction for business travel against an allowance or advance where actual costs are not claimed, are determined by using the following table:

VALUE OF THE VEHICLE FIXED COST FUEL COST MAINTENANCE (INCLUDING VAT)

Note:

• 80% of the travelling allowance must be included in the employee’s remuneration for the purposes of calculating PAYE. The percentage is reduced to 20% if the employer is satisfied that at least 80% of the use of the motor vehicle for the tax year will be for business purposes.

• No fuel cost may be claimed if the employee has not borne the full cost of fuel used in the vehicle and no maintenance cost may be claimed if the employee has not borne the full cost of maintaining the vehicle (for example the vehicle is covered by a maintenance plan).

• The fixed cost must be reduced on a pro-rata basis if the vehicle is used for business purposes for less than a full year.

• The actual distance travelled during a tax year and the distance travelled for business purposes substantiated by a logbook are used to determine the costs that may be claimed against a travelling allowance.

Alternative simplified method:

Where an allowance or advance is based on the actual distance travelled by the employee for business purposes no tax is payable on an allowance by an employer to an employee up to the rate of 398 cents per kilometre regardless of the value of the vehicle. However, this alternative is not available if other compensation in the form of an allowance or reimbursement (other than for parking or toll fees) is received from the employer in respect of the vehicle.

FRINGE BENEFITS: EMPLOYER-OWNED VEHICLES

• The taxable value is 3.5% of the determined value (the cash value including VAT) a month of each vehicle. Where the vehicle is:

– The subject of a maintenance plan when the employer acquired the vehicle, the taxable value is 3.25% of the determined value; or

– Acquired by the employer under an operating lease, the taxable value is the cost incurred by the employer under the operating lease plus the cost of fuel.

• 80% of the fringe benefit must be included in the employee’s remuneration for the purpose of calculating PAYE. The percentage is reduced to 20% if the employer is satisfied that at least 80% of the use of the vehicle for the tax year is for business purposes.

• On assessment the fringe benefit for the tax year is reduced by the ratio of the distance travelled for business purposes (substantiated by a logbook) divided by the actual distance travelled during the tax year.

• On assessment further relief is available for the cost of the licence, insurance, maintenance and fuel for private travel if the employee has borne the full cost thereof and if the distance travelled for private purposes is substantiated by a logbook.

SUBSISTENCE ALLOWANCES AND ADVANCES

If you are obliged to spend at least one night away from your usual place of residence on business and you receive an allowance or advance for accommodation in South Africa, which is to pay for:

• Meals and incidental costs: R452 a day is deemed to have been spent; or

• Incidental costs only: R139for each day is deemed to have been spent. Where the allowance or advance is for accommodation outside South Africa, a specific amount per country is deemed to have been spent. Refer to www.sars.gov.za > Legal counsel > Secondary legislation > Income tax notices > 2018.

FOR MICRO BUSINESSES

Financial years that end on any date between March 1 2021 and February 28 2022.

ANNUITY RATES

Rates valid for April 1, 2021. Information supplied by the relevant life assurance companies.

COMPULSORY ANNUITIES

ABOUT THE TABLES

These tables show initial monthly pensions guaranteed for 10 years and then for life if, at the ages listed, you buy a life annuity (see definition below) with R1 million. In these tables. the amount escalates at a rate of 6 percent a year.

WHAT IS AN ANNUITY?

An annuity is a payment you receive annually. The life assurance industry has adapted the word to mean any amount you receive regularly (normally monthly) from an investment, usually in the form of a pension, when you retire.

COMPULSORY PURCHASE ANNUITY

VOLUNTARY ANNUITIES

VOLUNTARY

JOINT LIFE AND SURVIVORSHIP ANNUITIES

OFFSHORE ALLOWANCES

HOW MUCH YOU CAN TAKE OUT OF SOUTH AFRICA

Offshore investment allowance: R10 million each year

Discretionary allowance for adults: R1 million each year

Travel allowance for children under 18: R200 000 each year

The tax on international air travel is R190 per passenger or R100 for flights to Southern African Customs

This must be bought with at least two-thirds of the benefits you receive from your pension fund or retirement annuity when you retire (provident funds are excluded from this requirement). If you are a member of a defined-benefit pension fund, the annuity is normally provided to you without any choice.

VOLUNTARY ANNUITY

This is an investment you choose to make with a lump sum from any source. With voluntary annuities, you can invest for a fixed period. For example, for 10 years – or for life. Note that compulsory and voluntary annuities are taxed differently, both on the investment itself and on your income from it. This is because you buy a compulsory annuity with pre-tax savings whereas you buy a voluntary annuity with after-tax savings.

TRADITIONAL (LIFE) ANNUITY

You buy this type of annuity from a life assurance company. You are guaranteed a fixed income for life, which may or may not escalate annually at a certain rate, depending on whether you have a level or escalating annuity. In the initial years, you will receive less from an escalating annuity than from a level annuity but the level annuity will be eroded over the years by inflation. Because the life assurance company takes on your longevity risk, your investment normally dies with you. You can, however, buy an annuity “guaranteed for X years and then for life”, which means your nominated heir will receive the income if you die before the X years are up. After X years, the annuity dies with you. Joint life annuities are based on a pension being paid to the surviving spouse after the death of his or her partner.

LIVING (INVESTMENT-LINKED) ANNUITY

You buy this type of annuity from an asset manager and can choose the underlying Inv. You must decide each year how much of your investment you want to draw down as a pension with a minimum of 2.5 percent and a maximum of 17.5 percent. When you die, what is left of your investment is passed on to your heirs. However, you take the risk of outliving your capital.

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