MoneyMarketing February 2021

28 February 2021 | www.moneymarketing.co.za

@MMMagza

@MoneyMarketingSA

First for the professional personal financial adviser

WHAT’S INSIDE

YOUR FEBRUARY ISSUE

‘Things will start to get better’

BY JANICE ROBERTS Editor, MoneyMarketing

“

The global economy is improving as the world overcomes the COVID-19 pandemic, so things will start to get better,” says David Shapiro, Chief Global Equity Strategist at Sasfin Securities. Although it’ll be a shaky start as the world tussles with distributing the vaccine, once vaccines become widespread, economies will start to gather steam.

“The pandemic has brought forward the future,” he adds. “The adoption of technology – such as video conferencing and online shopping during the lockdown – has fast tracked the use of technology to levels that weren’t expected for years. When the pandemic passes, the world will move to a new order, rather than looking back or trying to repair what we’ve come out of.”

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The crisis that hit the world in largely underestimated. “The damage 2020 wasn’t a financial one, but caused by the Trump administration rather a crisis that was imposed by has really shaken market sentiment, governments. “And for that reason, the and it’s going to take a long time obligation is still upon them to make and even a number of cycles for it to sure we get back to where we were.” bounce back, but at least it’s a start in While there has been recent the right direction.” speculation in financial markets that Biden has already said that he will the US Federal Reserve might start immediately take action to contain reducing its bond purchases as early the United States’ coronavirus crisis, as this year, Shapiro doesn’t believe with science dominating the this will happen. “Governments national response. Joining the Paris have learned from past mistakes not Agreement will also be a priority, as to reduce the levels of support too well as transforming America’s energy early… They will keep policies, but the rivalry businesses and workers between the US and THE PANDEMIC China will continue. on life support until well after the pandemic.”

“Biden will remain HAS BROUGHT At its January policy tough on China,” Shapiro FORWARD THE says, “but he’ll seek a meeting, the Fed FUTURE indicated that it would multilateral approach rather risk erring on the with America’s allies side of removing accommodation too against China’s assertiveness – in other slowly than removing it too quickly, as words, he’ll talk to them about how heightened uncertainty surrounding they should approach the China issue.” the COVID-19 pandemic remains, and In terms of headlines this year, both the economy and labour market a troubling issue will be that of are far from a full recovery. Federal inequality. “A lot of vulnerable Reserve Chair Jerome Powell signalled countries and vulnerable workers that it is premature at this stage to are going to remain hardest hit by discuss rate lift-off or the tapering of the COVID-19 pandemic. A lot of QE asset purchases. jobs are concentrated among the less Against this backdrop, Shapiro skilled. Factory workers, waiters, believes there is room for equities “to construction workers – these go a lot higher”. He also believes that people can’t work from home, the importance of Joe Biden’s victory in while border restrictions will hurt the US presidential election has been migrant labour.”

While globally the pandemic has brought several themes to the fore, such as climate and health issues, cybersecurity and workplace diversity, Shapiro says he’s excited by the buzz that the world has seen around technology and the difference it’s going to make in people’s lives.

People are now connected to the world by mobile phones and Zoom, with most finding that they are more productive.

Continued on page 3

David Shapiro, Chief Global Equity Strategist, Sasfin Securities

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NEWS & OPINION

28 February 2021

“The question I keep asking myself is: When the pandemic passes, will I ever slip back into my old routine? My answer is no. I think, like so many other people and businesses, I’ve pressed the reset button.

The pandemic has shaken up how we live, and how we conduct our lives.

“When repositioning our portfolios, it’s not a matter of whether or not we should buy equities. It’s a matter of which equities we should buy, and who can be the winners and who are going to be the losers. I think we’re in for exciting times.”

He says e-commerce will develop and evolve even further – an example being the new technologies that are bridging the gap between offline and online retail by offering immersive experiences that replicate in-person shopping. In brick-and-mortar shops, customers try, touch, and experience products before buying them – something that e-commerce will now seek to replicate with technologies that include augmented reality.

The global COVID-19 pandemic has also meant that cashless transactions are becoming the new normal. “They’ve jumped to levels that were only expected in about two to five years. When people venture out now, they want to use contact-free systems as they don’t want to touch anything,” he adds. In this environment, mobile wallets like Apple Pay are thriving.

All advances in technology will undoubtedly be made possible with both 5G and Cloud services.

“Faster download speeds and seamless transmission are reliant on 5G, while a massive amount of data will be stored in the Cloud.”

A lot of attention will be given to healthcare, he points out, with massive amounts of money having been put into biotech companies last year as they raced to find treatments and vaccines for COVID-19, while there is also expected to be developments in precision diagnostic and treatment equipment, and minimally invasive surgery equipment. “The other big story is renewable energy, which is becoming a lot cheaper than fossil fuel.”

Shapiro describes big tech as his main theme. “It’s still dominant and its very difficult for the competition to replicate its scale, infrastructure and ecosystems.”

While there is presently unease at the level of big tech’s power, he views this is “just temporary”.

Big tech stocks he favours include: • Alibaba, the beneficiary of China’s fast-growing e-commerce industry • Amazon, which is positioned to increase its share of online and total retail sales • Apple, which shows steady growth in iPhone units • Alphabet, which has dominant internet products and applications • Facebook, the company that leads social networking worldwide through mobile devices and PCs • Tencent, whose main source of revenue is mobile and PC gaming, as well as online advertising • Microsoft, which develops and supports software services, devices and solutions.

One of his favourite tech enablers is ASML, located in the Netherlands. The company gives the world’s leading chipmakers the power to mass

STRATOS BRILAKIS / SHUTTERSTOCK.COM

Continued from page 1

produce patterns on silicon, helping to make computer chips smaller, faster and greener.

Turning to the Cloud, he favours Salesforce, a US company that designs and develops cloud-based enterprise software for customer relationship management. In the digital payment service space, Shapiro likes Visa, the global payments technology company that enables consumers, businesses, banks and governments to use digital currency.

From a streaming point of view, he believes that Walt Disney, the diversified international family entertainment enterprise, “will give Netflix a huge run for their money as they expand their services”. In the healthcare sector, Philips is one of his choices. “They don’t make fridges anymore – they are a technology company engaged in healthcare and the consumer wellbeing markets.”

Companies in China and the rest of Asia cannot be ignored, he says. JD Com is the second largest e-commerce company in China that has scale and cost advantages, while a Singapore company, Sea, is the largest internet conglomerate in South East Asia. Its business includes gaming, e-commerce, food delivery and financial services, and the company has expanded into Malaysia, Indonesia, Thailand, the Philippines, Vietnam and Taiwan.

Luxury brands like LVMH cannot be overlooked.

“There’s a lot more people who have saved and they’re not spending on services, but rather spending more on luxuries.” Travel-related companies that were hurt by the pandemic include aircraft designer and manufacturer Airbus, aircraft engine manufacturer Safran, as well as aerospace solutions company Honeywell. “These companies are exceptionally well run and will come back,” he adds.

“My conclusion is that as vaccines are distributed, we’re going to get out of this mess. And once we do, economic conditions are going to improve, and they could improve dramatically and continue like that for some time.”

THE IMPORTANCE OF JOE BIDEN’S VICTORY IN THE US PRESIDENTIAL ELECTION HAS BEEN LARGELY UNDERESTIMATED

David Shapiro, Chief Global Equity Strategist at Sasfin Wealth, addressed a Sasfin webinar last month, entitled Opportunities for 2021 and beyond.

EDITOR’S NOTE

T

he first webinar of the year that I ‘attended’ was addressed by Sasfin’s David Shapiro and it cheered me up immensely (see our cover story). So many in the fund management industry share David’s view.

I do, however, believe in examining different outlooks in order to edit this publication in a meaningful way, and when I came across an article by investment guru Jeremy Grantham of Boston-based GMO, I was intrigued by its suggestion that “the long, long bull market since 2009 has finally matured into a fully-fledged epic bubble” (See pages 12-14). I’d like to thank Steve Shaefer in New York for obtaining permission for me to re-publish the article.

You’ll see from some of the articles on our website that we are taking a keen interest in the COVID-19 vaccination programmes around the world and locally.

This is because the pandemic has caused an economic shock three times worse than the 2008 financial crisis. Fortunately, I am part of a journalist WhatsApp group that shares facts and news freely, and I must thank my colleagues for providing excellent information. Some of us are business journalists while others write for the health industry, but we’re all in this together, and the camaraderie has been heart-warming.

Also, I must thank the SA National Editors Forum and the Treasury for organising a webinar last month to deal with various questions that journalists had recently posed.

It is highly unusual for the Treasury to set time aside when the February Budget Speech is just around the corner.

Finally, it was with great sadness that journalists heard of the death of Minister in the Presidency, Jackson Mthembu. He was always so kind and gracious when Subscribe dealing with the media. I to our met him many moons ago NEWSLETTER when I was at the SA Press bit.ly/2XzZiMV Association and he was the ANC’s spokesperson. RIP, Comrade Mvelase.

Janice janice.roberts@newmedia.co.za @MMMagza www.moneymarketing.co.za

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NEWS & OPINION

28 February 2021

VERY BRIEFLY

PROFILE PHILIP BRADFORD PORTFOLIOMETRIX, HEAD OF INVESTMENTS SA

How did you get involved in financial services – was it something you always wanted to do?

After university, I spent a year in Chicago, the home of the world’s commodity exchanges. Some friends of mine were floor traders and took me onto the massive trading floor surrounded by huge brightly coloured pricing screens. As I walked around the trading pits, I was fascinated by the traders in multicoloured jackets placing their orders by shouting and waving their hands at each other. It had the energy of a live sports event and I knew then that I somehow wanted to be involved. I then started reading everything I could about investments and trading, and luckily got a job with Investec Asset Management in their investment call centre. It was humble beginnings but a foot in the door.

What was your first investment – and do you still have it?

My first real investment was when I bought some Dimension Data shares in 2000. It was at the height of the tech boom and, like now, there was a lot of hype around tech shares. I was very lucky to sell the shares before the price collapsed dramatically – a good lesson that I carry with me today.

What have been your best – and worst – financial moments?

Probably my worst investment was buying a piece of vacant land in a game reserve.

For me, any asset that doesn’t generate a cash flow shouldn’t be considered an investment.

My best investments have been low-risk investments that are offering high and certain returns. These are usually bonds that have sold off dramatically.

A low-risk investment with a high guaranteed return allows an investor to confidently invest a much greater portion of their wealth than they would into a speculative investment. For example, you should

never put most of your wealth into what you hope is the next Tesla or Bitcoin, but you can into a high yielding bond when there is very little risk of permanent loss.

I always ask myself: Would I borrow money to make this investment? That forces me to look for low-risk investments with a high rate of return.

What do you tell investors who are worried about their investments due to SA’s current economic environment and COVID-19?

Investment markets are forward looking and in the short run can behave very differently and often move in opposite directions to the economy. Investments factor in bad news and future good news very quickly. Ironically, you can make the most money in investments when things go from ’very bad’ to ‘just bad’. A good example of this, at the moment, is SA bonds. Our economy is weak and the outlook is poor, but our bonds are reflecting this bad news and some are offering over 12% interest.

What’s the best book on investing that you’ve ever read – and why would you recommend it to others?

I have read many, many books on investing, trading, behavioural finance and the history of finance. You will not learn everything from one book but I would recommend The Most Important Thing by Howard Marks.

However, the most important ‘reading’ in my career was studying for my CFA Charter. This was the hardest thing I have ever done, but was also by far the investment that continues to pay the best dividends.

I ALWAYS ASK MYSELF: WOULD I BORROW MONEY TO MAKE THIS INVESTMENT?

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After 15 years at the helm, 10X Investments’ founder and CEO, Steven Nathan, has resigned in order to pursue other interests. In a statement, the company says that in line with 10X’s succession plans, its Executive Chairman, Henk Beets, will assume responsibility as acting CEO. A search for a permanent successor will be launched as soon as practicable and an appointment will be announced in due course, the statement adds.

“On behalf of 10X, we’d like to thank Steven for his contribution to the success of the company and wish him well in his future endeavours,” Beets says. “I will work very closely with 10X’s strong and experienced management team to ensure that we continue to deliver on our promise of providing our clients with superior investment outcomes through our simple, low-cost and transparent offering.” Old Mutual Private Equity (OMPE) and DiGame Africa (DiGame), together with the management team, now own the substantial majority interest in the company. “OMPE and DiGame have been partners in 10X since 2017 and will continue to support the company to allow it to achieve its long-term strategic objectives,” the statement says.

Franklin Templeton has announced the launch of its new Investment Institute, an innovative hub for research and knowledge-sharing that will unlock the firm’s competitive advantage as a source of global market insights. Stephen Dover, currently Head of Equities, has been named Chief Market Strategist and Head of the Investment Institute. Terrence Murphy, CEO of ClearBridge Investments, will take on an expanded leadership role as Head of Equities for Franklin Templeton.

“With these appointments and the launch of the Investment Institute, we are doubling down on what sets our firm apart – unmatched insight and research from experts on the ground in over 70 offices around the globe,” says Jenny Johnson, President and CEO of Franklin Templeton. “In this time of significant uncertainty, we are uniquely positioned to help clients find signal amid the noise. Whatever the issue, whatever the region, we will marshal diverse perspectives and proprietary analysis to best serve our clients. I am thrilled to have Stephen Dover leading this new effort.”

She continues, “Terrence Murphy has done a phenomenal job at ClearBridge, and I know he will be very effective in this expanded role. More broadly, this appointment Stephen Dover demonstrates our commitment to propelling the business forward by harnessing the great talent across our organisation.”

Dover and Murphy began their new roles on February 1, 2021. Both will report to Johnson.

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NEWS & OPINION

28 February 2021

DR ALBERTUS MARAIS Director, AJM Tax

I

n a much-anticipated move, the South African Reserve Bank’s Financial Surveillance Department published its first circular on 6 January 2021, whereby it ended the long-standing exchange control prohibition against so-called ‘loop’ structures. Previously, such ‘loop’ structures would involve South Africa exchange control residents holding interests in SA assets via an offshore structure, be it through an offshore company or trust. Previously, these regimes were the subject of strict regulation and ‘loop’ structures would only be allowed in very limited instances, such as where SA residents held 40% or less of the shares in a foreign company that held interests back into SA. The prohibition existed to address tax avoidance being perpetrated through using such structures,

Exchange control prohibition lifted

predominantly SA capital gains and dividend taxes. For example, if an SA individual would hold shares in an SA company through a Mauritian entity, the Mauritian entity would have been able to receive dividends and realise gains on sale of the SA shares at a much-reduced tax cost, had the SA individual held those shares directly.

IT IS GOOD TO SEE THAT INVESTMENT INTO SA WILL BE ENCOURAGED AS A RESULT OF THE AMENDMENT In terms of a policy reconsideration, communicated by the Minister of Finance during

the Budget of last year, government took a decision to no longer combat tax avoidance through use of exchange controls, but took the encouraging decision rather for tax avoidance to be addressed through tax avoidance legislation. In accordance with new government policy, exchange controls should be employed primarily to protect the rand; tax legislation should be developed to tax ‘loop’ structures more effectively. In advancing this policy narrative, government has introduced tax legislation over the past few years to more effectively tax both direct SA shareholdings in offshore companies, as well as distributions of trust capital from offshore trusts in low-tax jurisdictions.

While some uncertainty existed until recently whether government was going to proceed with this

significant relaxation of exchange controls, the circular now issued confirms that that policy decision has been implemented.

The relaxation applies only to ‘loop’ structures created from 1 January 2021; it does not cater for unauthorised ‘loop structures’ that existed prior to that. It also only applies to persons who are both SA tax and exchange control residents.

It is good to see that investment into SA will be encouraged as a result of the amendment, as previously it was often the case that legitimate, non-tax-related reasons existed why investments from offshore were sought to be made in this country, yet hamstrung due to that investor having some distinct indirect SA interests held in them. The policy decision of the Reserve Bank, therefore, even though somewhat overdue, is to be applauded.

The questions you should ask your clients when it comes to protecting their estates

W

hether your clients inherit cash, investments or property, as their financial planner it is your responsibility to advise them of the best way to protect their estates, especially from the taxman. David Thomson, Senior Legal Adviser from Sanlam Trust, explains that as a financial planner you are responsible for asking the right questions, putting the best options forward to your clients, and ensuring you are aware of any tax and regulatory changes that could affect them.

The COVID-19 pandemic and lockdown has resulted in thousands of job losses due to retrenchments, as well as the collapse of many businesses – so clients need good advice now more than ever. More than 70% of working South Africans also do not have a will, which compounds the confusion and uncertainty AS A FINANCIAL brought about by lockdown, PLANNER, YOU he adds.

ALSO MUST BE “For many AWARE OF ANY TAX people, their life expectancy AND REGULATORY has been cut CHANGES THAT tragically COULD AFFECT YOUR short due to COVID-19.

CLIENT’S ESTATE Putting off executing a will and engaging in estate planning is short-sighted. Every day we hear of people who have passed away due to COVID-19, which significantly aggravates the situation for those who are already vulnerable, in poor health, obese or with so-called comorbidities. The time to act is now,” says Thomson.

Below, Thomson shares the top 10 questions financial planners should be asking their clients to

6 WWW.MONEYMARKETING.CO.ZA

establish how to structure their estate in the most effective manner: 1. Are they married and, if so, is it in community of property or not? Or, if they are recently divorced, have they changed their will and beneficiary nominations on all policies to reflect their current needs and wants?

2. Do they have children and other dependants who rely on them for financial support and have they considered guardians for their minor children, if they have any?

3. Ask your client for a copy of their last will and testament. If no will exists, do nothing before you have prepared a will for them. Failure to have a will means failure to plan from day one.

4. Have they considered a trust for special needs or disabled beneficiaries?

5. Have they considered whether they have enough liquidity at date of death to ensure the proper finalisation of their will?

6. What is their taxable income and income tax rate?

7. What are their total assets and debt (both long-term and short-term debt)? You must also obtain their insurance portfolio and beneficiary nominations.

8. Are they a member of a retirement fund?

Acquire the details of the type of fund and the benefits in monetary terms. Ensure that your client’s nomination forms are up to date as their circumstances might have changed. It is also vital to understand when they intend to retire and what they will need as far as income is concerned at that time.

9. Are they planning to emigrate?

10. Engage your client on their lifestyle and attitude towards tax. You may be surprised to find that many people do not want to structure their lives

around tax and prefer to maximise what appeals to them, regarding tax as a necessary evil. For example, some people regard having a family trust as an administrative burden and offshore trusts as very expensive.

Retirement funds, which include pension, provident and preservation funds, all provide taxexempt ‘roll-up’, which means taxpayers enjoy taxexempt growth in their portfolio and have the right to deduct certain contributions for tax purposes.

Endowment plans also provide tax-exempt proceeds on the maturity of the investment. Thomson advises that the best way to protect your clients from the taxman is to ensure they file their tax return on time, thereby avoiding penalties and interest.

As a financial planner, you also must be aware of any tax and regulatory changes that could affect your client’s estate. Thomson advises that, considering the fiscal shortfall the government of South Africa finds itself in, there may possibly be an increase this year in the rates of estate duty, donations tax and capital gains tax, as recommended by the Davis Tax Commission. “We anxiously await the Minister’s budget speech,” he adds.

“Effective tax decisions must give rise to effective estate planning – which means your client’s estate actually passes to the people they want to benefit, and not into a structure that their heirs find costly and burdensome.”

David Thomson, Senior Legal Adviser, Sanlam Trust

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NEWS & OPINION

28 February 2021

I

f you’re panicking about compliance with the Protection of Personal Information Act (POPIA), don’t. That’s the word from Elizabeth de Stadler of Novation Consulting who recently spoke at a Compli-Serve SA webinar on POPIA compliance.

While there is work to be done, there are also myths circulating about what falling behind could mean, along with incorrect information.

In this article, we debunk five myths around POPIA, while setting out top tips to get businesses closer to POPIA compliance. Having the right (and the right to) information is really what it’s all about.

1. POPIA is overwhelming and the deadline is threatening While you shouldn’t sit back and relax, don’t spend time panicking when it comes to POPIA compliance.

Chances are, the regulator also needs time to get his ducks in a row, so focusing on just a few key strategies to enhance compliance is the best approach to take.

2. Personal information is already in the public space – sorry, this is not a defence You can’t just do what you like with personal information. POPIA makes scraping the internet for personal information about potential customer leads a lot riskier. Just because contact information, for example, is available on the internet, does not necessarily mean you can just use this information for commercial purposes. The default rule in Section 12 of POPIA is that you must always collect personal information directly from the relevant data subject involved.

There are a couple of exceptions to this default rule, for instance when the data subject deliberately made the information public or where the personal information is in a public record administrated by a public body. There is also the frustratingly grey option of where it is ‘not reasonably practicable in the circumstances of the particular case’ to collect the personal information directly from the relevant data subject involved.

The point is, not everything on the internet was made public by the

Dispelling five POPIA myths relevant person (hardly any of it is), and the internet is not administrated by a public body. Your key takeaway should be that if you want to collect personal information from another source other than the relevant data subject for commercial purposes, seek legal advice first.

3. Consent will save you ‘By signing this, you accept this…’ is a typical example. But this type of consent is not valid under POPIA. Additionally, under POPIA, selling personal information without a valid legal basis to do so is like selling a stolen car. Section 11 of the POPIA Act lists six legal bases for processing (aka using) personal information. You have to be able to legally justify processing personal information on one of these grounds to comply with POPIA. Think about it first – consent should always be your last resort as a legal basis for processing personal information.

Summed up, you can lawfully process personal information if: • it is necessary to conclude or perform in terms of a contract; • you need to comply with an obligation imposed by law; • you are protecting the legitimate interest of a data subject; • it is necessary for the proper performance of a public law duty; • you are pursuing the legitimate interest of the responsible party or of a third party; or • you are processing the personal information with the consent of the data subject.

If you’re still not sure which option applies, De Stadler suggests you ask yourself the following questions: • Is the processing necessary to conclude a contract, or to comply with legislation?

• Are you protecting a vital interest of the data subject? (It’s important they are given the choice to opt out) • Are you a public body performing a public law duty? (Objection by the data subject also applies) • Are you protecting a legitimate interest of your organisation or a third party? (The option to object must be included too)

THE DEFAULT RULE IN SECTION 12 OF POPIA IS THAT YOU MUST ALWAYS COLLECT PERSONAL INFORMATION DIRECTLY FROM THE RELEVANT DATA SUBJECT INVOLVED 8 WWW.MONEYMARKETING.CO.ZA

If the answer to all of these questions is no, then this is when you should ask the data subject’s consent to process their personal information.

By way of example, employment information doesn’t necessarily require consent, as employers are required to collect certain records of their employees to comply with relevant labour legislation.

De Stadler shared another example: Amazon using personal information through predictive analytics. They suggest products you might like based on your shopping behaviour, but they let you know that you can opt out of these suggestions. “I can unsubscribe, but the way they’ve approached it ensures I see some shopping deals too. You might prefer to opt out, but allowing predictive analytics also makes for a better experience on the Amazon app.” Amazon gets away with this process because they are using the information for legitimate reasons (you are likely to be interested in the suggested products), and they have given you an out.

4. If you have a breach, you will get fined You won’t get fined for having a breach if you can prove you had satisfactory measures in place to prevent it.

No business will be consistently compliant with POPIA either (POPIA compliance can be a moving target because your organisation is going to be processing new personal information in new ways all the time). Still, you are required to have proactive risk management controls in place. “This is called behaving reasonably and avoiding negligence where you could,” De Stadler adds.

“You can, however, get fined for not reporting a breach.”

5. POPIA only applies to information gathered from 1 July 2021 Wrong again. It pertains to processing all information gathered from any time. “Even if you collected the data 100 years ago, POPIA compliance needs to be applied.” You are still going to need the law on your side under POPIA to process this personal information and to comply with POPIA’s other requirements for storing, sharing and securing this personal information.

Keeping these five tips in mind on your journey to POPIA compliance will certainly help, as will working with a trusted compliance officer who can lead the way.

Redditors play hedge funds for billions TY LIM / SHUTTERSTOCK.COM

JAMES GEORGE Compliance Manager, Compli-Serve SA

L

ast month, the markets were treated to the spectacle of a few million retail investors ganging up on social media platforms (mainly r/wallstreetbets on Reddit) to take on Wall Street titans, and winning. In one particularly notable case, they bid up the share of struggling retailer GameStop when it became known that hedge funds were betting against the share (shorting it). This, in turn, caused a so-called short squeeze as these hedge funds were forced to buy back the share as it was rising, pushing the price even higher, until the company was briefly valued at $24bn.

“While this episode – and watching billionaire hedge fund owners get bloody noses – was quite entertaining to outsiders, it increased volatility, partly because large hedge funds and other investors had to quickly reassess some of their positions.

We know investors are not always rational, and speculation is often rife, but this kind of behaviour takes that to a new level. It should not ultimately matter much in the long term, but can add to short-term uncertainty,” Izak Odendaal and Dave Mohr, Investment Strategists at Old Mutual Wealth, said in a note.

For more stories about GameStop, the Reddit traders, and the Wall Street short sellers, see our website at www. moneymarketing.co.za

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28 February 2021

MOHAMED MAYET CEO and Portfolio Manager, Sentio Capital Management

Transformation: Investing in the investment industry

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ating agencies have often singled out South Africa’s financial services sector as being both world-class and a leader in emerging markets, even ahead of some developed markets. Specifically, the asset management industry is highly regarded globally due to the calibre and technical excellence of its professionals. However, this ‘first-world financial infrastructure’ needs to be sustainable in order to ensure that this centre of excellence continues to compete at the highest level. What many critics of continued transformation in the sector forget, is that one of the defining features of a sophisticated financial infrastructure is that it is inclusive and diverse and that it drives the development and social agenda of a stable economy. So, when and how do we get there?

also remove the ‘friction costs’ for previously disadvantaged people (especially Africans). These friction costs are the reason why 27four’s BEE. THE BEST WAY TO economics 2020 survey highlights that only 9% of the SA savings and TRANSFORM THE investment pool is managed by black ASSET MANAGEMENT managers and, of this, 90% is sourced INDUSTRY IS TO from large institutional investors.

Dig deeper and you will find the stats TRANSFORM THE show even more concentration in ENTIRE VALUE CHAIN the savings pool being managed by a To understand the complex select few. issue of transformation, we need Sentio believes that the best way to understand that it is not a static to transform the asset management concept, it is continuously evolving. industry is to transform the entire Moreover, we need to define what value chain. It’s not enough just transformation means in simple asking clients or institutions to terms (not in complex scores that are invest with black managers, nor is it easily gamed), and what longer-term adequate to just populate the industry transformation means – it has to be with black professionals. To achieve more than just a ‘seat at the table’. this, the following needs to happen: The evolution of transformation in 1. We need to make it easier for the industry should not only reflect smaller firms (who happen to broader society’s demographics, but be1 black managers) to compete Sentio_MM Feb 21_Transformation.pdf 2021/01/21 15:18

without putting the end-client at risk in any way. With technology, and the kind of services available nowadays, this can be easily achieved with better compliance and oversight too.

2. We all need to focus on growing the talent pool in the industry in an unselfish way, recognising that we might not necessarily retain the apprentices we train but that this is an investment in the industry. At Sentio, we take this very seriously and have developed an in-house academy that goes beyond mere internships but rather seeks to find the smartest talent and make them ‘corporate ready’.

3. We need to proactively contribute to the society we operate in through assisting vulnerable groups directly.

Sentio works with two women’s groups that, among other things, operate on the ground to provide the unemployed and destitute

educational-based support, feeding schemes, as well as medical and frail care. These communities will produce our future leaders and customers and we need to change our thinking about them.

4. And finally, we need to look at the financial products we sell and their relevance to the broader market.

Have we evolved with the market needs or are we still ‘pushing’ our products onto the public? Sentio has an astute product development team that is able to work with our clients to produce innovative solutions for them, utilising our unique AI and machine-learning capabilities.

In our view, transformation is not just a tick-box exercise nor a hurdle but rather an economic opportunity for the sector to show its leadership, and we are comfortable and committed to playing our part.

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FOR GOOD.

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A majority black-owned asset manager.

Sentio Capital Management (Pty) Ltd is an authorised FSP.

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28 February 2021

PAUL RACKSTRAW Managing Director, Futuregrowth Asset Management

Rising to the challenge of what it means to be a responsible business

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he COVID-19 pandemic has raised many challenges for companies over the past few months. It has also highlighted the critical role firms play in the broader fabric of society and how much they can, and should, contribute as responsible businesses.

From supporting staff and facilitating comfortable remote working conditions through to providing other stakeholders with a seamless experience of the business through potentially disruptive lockdown conditions, companies have had to step up to the challenge of navigating the changes imposed on them by this unprecedented health crisis.

Business responsibility is not a new concept. It is a process and culture in an organisation where the management and staff choose to take responsibility for all their actions and ensure they have a positive impact on everything they do when it comes to: • The environment • The communities within which they operate • Transformation • Their clients • Their staff and shareholders • Their suppliers • The industry in which they operate.

With a growing proportion of clients and investors now prioritising responsible and ethical behaviour in where they choose to work, companies are coming to understand that they cannot adopt a box-ticking approach and need to embrace being a responsible business in a genuine way.

It’s more than deciding where to spend money Being a responsible business is not only about how you spend your profits but, more importantly, how you make them. Before doing anything, a company needs to approach all decisions and actions with the ethical consequences top of mind.

If the action or decision has the potential to cause harm to society or the environment in which the company operates, then it should be considered socially irresponsible.

Looking at the world through a responsible business lens will also guide you in the partnerships you are willing to establish.

Being responsible and ensuring the company you run has a bigger purpose than merely generating profits is also about tackling the challenges facing society as a whole.

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There are a few main areas you need to consider when looking at what it means to be a responsible business: • How you do business with clients • How you can contribute to the betterment of the industry in which you operate • How you should treat clients/ staff/shareholders • How you should treat the environment • How you should respond to specific social requirements in the countries/environments in which you operate.

These are tough asks and have an impact on all aspects of how you do business. For example, how do you approach the rules and regulations that govern your industry? Do you make sure you are always on the right side of the regulations, operating within the spirit of the law, or are you always looking for grey areas and loopholes that you can exploit? Are you always looking at what you can get away with as a business, or do you ask yourself the following question: If you read about an action or decision your business had taken in the headlines of the newspaper, would you be embarrassed or proud of it?

Partner with clients for the long term To be a responsible business, in our case as an asset manager, you need to view every client investment as a performance promise and a commitment to making a difference in their life by improving their living conditions, for example facilitating access to water or electricity or enabling them to retire respectably.

TRYING TO FOSTER CHANGE IN AN INDUSTRY CAN BE TOUGH Several businesses view their clients only as a way of making money, prioritising how much profit can be extracted from each client. This shortsighted approach does not take the long-term best interests of the business or your client into account. Your business is far more likely to benefit from treating each client as a longterm investment and as a partnership with yourself.

To establish whether you are treating customers purely as profit generators, you need to ask yourself the following questions:

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28 February 2021

• If there is an error, will you always make good on it for the client, even if they are not aware of it?

• If pricing has changed and your client is still paying too much for historical reasons, will you adjust the client fee without being prompted by the client?

• If you have underperformed, or have not delivered on your client promises, will you consider reimbursing them a portion of the fee?

These are essential questions you need to answer because if your clients don’t benefit from what you’re doing, then your work and your business quickly becomes irrelevant – and so do you.

Another crucial question to ask yourself is whether you will take on any client at any cost, and whether you consider the reputational and ethical risk of doing business with clients that may operate in an unethical manner or in grey areas of the law. As a company, where do you draw the line on whether you are comfortable taking on that business?

Play a role in uplifting the industry as a whole All businesses operate in an industry, and in Futuregrowth’s case, it is in the financial services industry. As an industry player and a responsible company, it is critically important that you play an active role in improving the sector to the benefit of clients and other stakeholders.

Business leaders can do this in many different ways. They can participate in industry bodies that press for change, call out unfair business practices, and actively promote regulatory changes that will benefit the industry and its clients.

Trying to foster change in an industry can be tough, though. You are dealing with many vested interests and, as a result, you will sometimes need to make brave and unpopular moves to have an impact. It is much easier for businesses to operate underneath the radar, rather than spend time and resources on improving the industry to the benefit of clients and investors.

Some practical things you can do to improve the industry in which you operate include: • Highlighting the areas where regulations and client protections are weak and actively fighting for change; for instance, Futuregrowth has been an active participant in challenging the shortfalls in the JSE bond listing requirements and pushing for these to be changed • Standing up when other stakeholders

DO YOU PAY BEE LIP SERVICE AND SKIRT AROUND THE EDGE OF THE REGULATIONS? are compromised; for instance, in August 2016, Futuregrowth decided to withhold funding from state-owned enterprises due to the corruption and malfeasance taking place in these entities • Calling out any malfeasance you see happening in an entity and standing up for what is right, even if it imposes a cost on your business.

Taking transformation seriously Black economic transformation is an important initiative aimed at broadening the economic base of the country, stimulating further economic growth, and creating much-needed employment in a country that suffers from massive unemployment and income disparity.

As a responsible business, you need to ask yourself the following when you apply the BEE legislation in your business: • Do you pay BEE lip service and skirt around the edge of the regulations?

• Do you try to do as little as possible, using smoke and mirror structures to maximise your points by aiming to spend the minimum rand per point?

There is another way to approach transformation and that is to tackle it as a responsible corporate citizen of the country. If your goal is to be a responsible business, you need to ask the following questions: • Do you make sure that you never get involved in any tenders that appear to be corrupt?

• Do you embrace the spirit of what the legislation is trying to achieve?

• Do you encourage your staff to get

involved in your company’s CSI projects?

• Are your employment policies and practices set up to ensure your organisation transforms your staff complement, ensuring there are no unfair biases in your processes?

• Do you reach your staff targets by poaching staff from other organisations, or are you actively bringing young students into the asset management industry and giving them opportunities by creating an environment of learning and growth?

• Do you make decisions only to score points on a scorecard, or are your efforts part of your organisation’s higher purpose of doing business by investing to make a difference in people’s lives and improve our country?

Treating the environment responsibly Part of being a responsible business also entails being environmentally conscious and investing in its sustainability. You can do this in many ways, including: • Investing in, and applying pressure on, investee companies to be more environmentally friendly • Maximising effectiveness when you are engaged in activities that will result in carbon emissions; for example, when you have to fly somewhere on a business trip, you can increase the number of appointments and engagements you schedule so that you minimise the amount of flights you need to take • Making recycling available in the office • Considering the environment when making investment decisions • Using efficient lighting and turning off screens overnight • Educating your staff to be environmentally responsible • Eliminating plastic water bottles in the office • Minimising the use of paper.

Treating staff fairly and with respect A crucial part of being a responsible business is treating your staff fairly and humanely – and that does not mean offering the legislated minimum benefits. It does mean doing what is right for your staff members, including providing flexibility during times of hardship or illness and building a productive and fair work environment for your staff. Measures you should take include: • Creating a conducive work environment, with ample resources available to your staff, enabling them to fulfil their responsibilities • Implementing fair employment policies • Treating people fairly and as part of the organisation’s family when they experience hardship or severe illness, instead of treating them as a disposable item you can replace • In the COVID-19 environment, making business decisions around your operating practices that prioritise your staff and their families’ health, safety and security.

Conclusion Operating as a responsible business does not mean you are running a charity that has no focus on performance. Instead, it means thinking deeply about everything you do and considering whether your actions are adding positively to society, communities, the environment and people. Acting as an agent of change could well pay off even more than focusing on shortterm revenue generation because your business will be built on solid, sustainable foundations and benefit from the improvements you make in society, your industry and the country as a whole.

Futuregrowth Asset Management is a licensed financial services provider.

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JEREMY GRANTHAM Chief Investment Strategist, GMO

Waiting for the last dance

The hazards of asset allocation in a late-stage major bubble.

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he long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behaviour, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.

These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.

But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time.

THE ONE REALITY YOU CAN NEVER CHANGE IS THAT A HIGHER-PRICED ASSET WILL PRODUCE A LOWER RETURN THAN A LOWER-PRICED ASSET. YOU CAN’T HAVE YOUR CAKE AND EAT IT. YOU CAN ENJOY IT NOW, OR YOU CAN ENJOY IT STEADILY IN THE DISTANT FUTURE, BUT NOT BOTH – AND THE PRICE WE PAY FOR HAVING THIS MARKET GO HIGHER AND HIGHER IS A LOWER 10-YEAR RETURN FROM THE PEAK. 1 Most of the time, perhaps three-quarters of the time, major asset classes are reasonably priced relative to one another. The correct response is to make modest bets on those assets that measure as being cheaper and hope that the measurements are correct. With reasonable skill at evaluating assets, the valuation-based allocator can expect to survive these phases intact with some small outperformance. ‘Small’ because the opportunities themselves are small. If you wanted to be unfriendly, you could say that asset allocation in this phase is unlikely to be very important. It would certainly help in these periods if the manager could also add value in the implementation, from the

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effective selection of countries, sectors, industries and individual securities, as well as major asset classes.

The real trouble with asset allocation, though, is in the remaining times when asset prices move far away from fair value. This is not so bad in bear markets because important bear markets tend to be short and brutal. The initial response of clients is usually to be shocked into inaction, during which phase the manager has time to reposition both portfolio and arguments to retain the business. The real problem is in major bull markets that last for years. Long, slow-burning bull markets can spend many years above fair value and even two, three or four years far above. These events can easily outlast the patience of most clients. And when price rises are very rapid, typically toward the end of a bull market, impatience is followed by anxiety and envy.

As I like to say, there is nothing more supremely irritating than watching your neighbours get rich.

How are clients to tell the difference between extreme market behaviour and a manager who has lost his way? The usual evidence of talent is past success, but the long cycles of the market are few and far between. Winning two out of two events or three out of three is not as convincing as a larger sample size would be. Even worse, the earlier major market breaks are already long gone: 2008, 2000, or 1989 in Japan are practically in the history books.

Most of the players will have changed. Certainly, the satisfaction felt by others who eventually won long ago is no solace for current pain experienced by you personally. A simpler way of saying this may be that if Keynes really had said, “The market can stay irrational longer than the investor can stay solvent,” he would have been right.

I am long retired from the job of portfolio management but I am happy to give my opinion here: it is highly probable that we are in a major bubble event in the US market – of the type we typically have every several decades and last had in the late 1990s. It will very probably end badly, although nothing is certain. I will also tell you my definition of success for a bear market call.

It is simply that sooner or later there will come a time when an investor is pleased to have been out of the market. That is to say, he will have saved money by being out, and also have reduced risk or volatility on the round trip. This definition of success absolutely does not include precise timing.

(Predicting when a bubble breaks is not about valuation. All prior bubble markets have been extremely overvalued, as is this one. Overvaluation is a necessary but not sufficient condition for their bursting.) Calling the week, month, or quarter of the top is all but impossible.

I came fairly close to calling one bull market peak in 2008 and nailed a bear market low in early 2009 when I wrote the research paper entitled Reinvesting When Terrified. That’s far more luck than I could hope for even over a 50-year career.

Far more typically, I was three years too early in the Japan bubble. We at GMO got entirely out of Japan in 1987, when it was over 40% of the EAFE benchmark and selling at over 40x earnings, against a previous all-time high of 25x. It seemed

prudent to exit at the time, but for three years we underperformed painfully as the Japanese market went to 65x earnings on its way to becoming over 60% of the benchmark! But we also stayed completely out for three years after the top and ultimately made good money on the round trip.

Similarly, in late 1997, as the S&P 500 passed its previous 1929 peak of 21x earnings, we rapidly sold down our discretionary US equity position, then watched in horror as the market went to 35x on rising earnings. We lost half our Asset Allocation book of business, but in the ensuing decline we much more than made up our losses.

Believe me, I know these are old stories. But they are directly relevant. For this current market event is indeed the same old story. This summer, I said it was likely that we were in the later stages of a bubble, with some doubt created by the unique features of the COVID-19 crash. The single most dependable feature of the late stages of the great bubbles of history has been really crazy investor behaviour, especially on the part of individuals. For the first 10 years of this bull market, which is the longest in history, we lacked such wild speculation.

But now we have it. In record amounts. My colleagues Ben Inker and John Pease have written about some of these examples of mania in the most recent GMO Quarterly Letter, including Hertz, Kodak, Nikola and, especially, Tesla. As a Model 3 owner, my personal favourite Tesla titbit is that its market cap, now over $600bn, amounts to over $1.25m per car sold each year versus $9 000 per car for GM. What has 1929 got to equal that? Any of these titbits could perhaps be dismissed as isolated cases (trust me: they are not), but big-picture metrics look even worse.

The Buffett indicator, total stock market capitalisation to GDP, broke through its all-timehigh 2000 record. In 2020, there were 480 IPOs (including an incredible 248 SPACs)2 – more new listings than the 406 IPOs in 2000. There are 150 non-micro-cap companies (that is, with market capitalisation of over $250m) that have more than tripled in the year, which is over three times as many as any year in the previous decade.

The volume of small retail purchases, of less than 10 contracts, of call options on US equities has increased eightfold compared to 2019, and 2019 was already well above long-run average. Perhaps most troubling of all: Nobel laureate and long-time bear Robert Shiller – who correctly and bravely called the 2000 and 2007 bubbles and who is one of the very few economists I respect – is hedging his bets this time, recently making the point that his legendary CAPE asset-pricing indicator (which suggests stocks are nearly as overpriced as at the 2000 bubble peak) shows less impressive overvaluation when compared to bonds. Bonds, however, are even more spectacularly expensive by historical comparison than stocks. Oh my!

So, I am not at all surprised that since the summer the market has advanced at an accelerating rate and with increasing speculative excesses. It is precisely what you should expect from a latestage bubble: an accelerating, nearly vertical stage of unknowable length – but typically short. Even

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if it is short, this stage at the end of a bubble is shockingly painful and full of career risk for bears.

I am doubling down, because as prices move further away from trend – at accelerating speed and with growing speculative fervour – my confidence as a market historian increases that this is indeed the late stage of a bubble. A bubble that is beginning to look like a real humdinger.

The strangest feature of this bull market is how unlike every previous great bubble it is in one respect. Previous bubbles have combined accommodative monetary conditions with economic conditions that are perceived at the time, rightly or wrongly, as near perfect, which perfection is extrapolated into the indefinite future. The state of economic excellence of any previous bubble of course did not last long, but if it could have lasted, then the market would justifiably have sold at a huge multiple of book. But today’s wounded economy is totally different: only partly recovered, possibly facing a double-dip, probably facing a slowdown, and certainly facing a very high degree of uncertainty. Yet the market is much higher today than it was last fall when the economy looked fine and unemployment was at a historic low. Today the P/E ratio of the market is in the top few percent of the historical range and the economy is in the worst few percent. This is completely without precedent and may even be a better measure of speculative intensity than any SPAC. This time, more than in any previous bubble, investors are relying on accommodative monetary conditions and zero real rates extrapolated indefinitely. This has in theory a similar effect to assuming peak economic performance forever: it can be used to justify much lower yields on all assets and therefore correspondingly higher asset prices. But neither perfect economic conditions nor perfect financial conditions can last forever, and there’s the rub.

All bubbles end with near universal acceptance that the current one will not end yet… because.

Because in 1929 the economy had clicked into “a permanently high plateau”; because Greenspan’s Fed in 2000 was predicting an enduring improvement in productivity and was pledging its loyalty (or moral hazard) to the stock market; because Bernanke believed in 2006 that “US house prices merely reflect a strong US economy” as he perpetuated the moral hazard: if you win you’re on your own, but if you lose you can count on our support. Yellen, and now Powell, maintained this approach. All three of Powell’s predecessors claimed that the asset prices they helped inflate in turn aided the economy through the wealth effect.

Which effect we all admit is real. But all three avoided claiming credit for the ensuing market breaks that inevitably followed: the equity bust of 2000 and the housing bust of 2008, each replete with the accompanying anti-wealth effect that came when we least needed it, exaggerating the already guaranteed weakness in the economy. This game surely is the ultimate deal with the devil.

Now, once again, the high prices this time will hold because… interest rates will be kept around nil forever, in the ultimate statement of moral hazard

EXHIBIT 1: BUBBLES – GREAT WHILE THEY LAST

Housing bubble as of 11/30/2011; Tech bubble as of 2/28/2003 Source: S&P 500 (Tech bubble); National Association of Realtors, U.S. Census Bureau (Housing bubble)

– the asymmetrical market risk we have come to know and depend on. The mantra of late 2020 was that engineered low rates can prevent a decline in asset prices. Forever! But of course, it was a fallacy in 2000 and it is a fallacy now. In the end, moral hazard did not stop the Tech bubble decline, with the NASDAQ falling 82%. Yes, 82%! Nor, in 2008, did it stop US housing prices declining all the way back to trend and below – which, in turn, guaranteed, first, a shocking loss of over eight trillion dollars of perceived value in housing; second, an ensuing weakness in the economy; and third, a broad rise in risk premia and a broad decline in global asset prices.

All the promises were in the end worth nothing, except for one: the Fed did what it could to pick up the pieces and help the markets get into stride for the next round of enhanced prices and ensuing decline.

And here we are again, waiting for the last dance and, eventually, for the music to stop.

Nothing in investing perfectly repeats. Certainly not investment bubbles. Each form of irrational exuberance is different; we are just looking for what you might call spiritual similarities. Even now, I know that this market can soar upwards for a few more weeks or even months – it feels like we could be anywhere between July 1999 and February 2000. Which is to say it is entitled to break any day, having checked all the boxes, but could keep roaring upwards for a few months longer. My best guess as to the longest this bubble might survive is the late spring or early summer, coinciding with the broad rollout of the COVID-19 vaccine. At that moment, the most pressing issue facing the world economy will have been solved. Market participants will breathe a sigh of relief, look around, and immediately realise that the economy is still in poor shape, stimulus will shortly be cut back with the end of the COVID-19 crisis, and valuations are absurd. “Buy the rumour, sell the news.” But remember that timing the bursting of bubbles has a long history of disappointment.

Even with hindsight, it is seldom easy to point to the pin that burst the bubble. The main reason

for this lack of clarity is that the great bull markets did not break when they were presented with a major unexpected negative. Those events, like the portfolio insurance fiasco of 1987, tend to give sharp down legs and quick recoveries. They are, in the larger scheme of things, unique and technical, and are not part of the ebb and flow of the great bubbles. The great bull markets typically turn down when the market conditions are very favourable, just subtly less favourable than they were yesterday.

And that is why they are always missed.

Either way, the market is now checking off all the touchy-feely characteristics of a major bubble.

The most impressive features are the intensity and enthusiasm of bulls, the breadth of coverage of stocks and the market, and, above all, the rising hostility toward bears. In 1929, to be a bear was to risk physical attack and guarantee character assassination.

For us, 1999 was the only experience we have had of clients reacting as if we were deliberately and maliciously depriving them of gains. In comparison, 2008 was nothing. But in the last few months, the hostile tone has been rapidly ratcheting up. The irony for bears, though, is that it’s exactly what we want to hear. It’s a classic precursor of the ultimate break; together with stocks rising, not for their fundamentals, but simply because they are rising.

Another more measurable feature of a latestage bull, from the South Sea bubble to the Tech bubble of 1999, has been an acceleration3 of the final leg, which in recent cases has been over 60% in the last 21 months to the peak, a rate well over twice the normal rate of bull market ascents. This time, the US indices have advanced from +69% for the S&P 500 to +100% for the Russell 2000 in just nine months. Not bad! And there may still be more climbing to come. But it has already met this necessary test of a late-stage bubble.

It is a privilege as a market historian to experience a major stock bubble once again. Japan in 1989, the 2000 Tech bubble, the 2008 housing and mortgage Continued on page 14

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Continued from page 13

crisis, and now the current bubble – these are the four most significant and gripping investment events of my life. Most of the time, in more normal markets, you show up for work and do your job. Ho hum.

And then, once in a long while, the market spirals away from fair value and reality. Fortunes are made and lost in a hurry, and investment advisers have a rare chance to really justify their existence. But, as usual, there is no free lunch. These opportunities, to be useful, come loaded with career risk.

So, here we are again. I expect once again for my bubble call to meet my modest definition of success: at some future date, whenever that may be, it will have paid for you to have ducked from midsummer of 2020. But few professional or individual investors will have been able to have ducked. The combination of timing uncertainty and rapidly accelerating regret on the part of clients means that the career and business risk of fighting the bubble is too great for large commercial enterprises. They can never put their full weight behind bearish advice, even if the P/E goes to 65x as it did in Japan. The nearest any of these giant institutions have ever come to offering fully bearish advice in a bubble was UBS in 1999, whose position was nearly identical to ours at GMO. That is to say, somewhere between brave and foolhardy. Luckily for us, though, they changed their tack and converted to a fully invested growth stock recommendation at UBS Brinson and its subsidiary, Phillips & Drew, in February 2000, just before the market peak. This took

SHAUN LE ROUX Fund Manager, PSG Asset Management

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he multi-year outperformance of growth over value stocks is well documented and has been amplified by the COVID-19 pandemic. In fact, cheap (value) stocks have underperformed by the biggest margin seen in over a century. Hence, it should not come as a surprise to find that the investing public has given up on value stocks and value funds. The effect of this capitulation out of cheap and unloved stocks has been profound.

It has given rise to some of the widest discrepancies in relative valuations and some of the highest levels of crowding in growth (particularly technology) stocks on record.

Growth investors are highly convicted in the relative attractiveness of secular growth companies in a low growth world. Little attention is given to the price paid for future growth and the fact that the largest part of investment returns has come from multiple expansion in recent years. The backdrop of low valuations and a post-COVID-19 economic recovery could result in a more constructive view on the merits of investing in undervalued businesses.

Are South African assets value traps?

South African assets are deeply

out the 800-pound gorilla that would otherwise have taken most of the rewards for stubborn contrariness.

So, don’t wait for the Goldmans and Morgan Stanleys to become bearish: it can never happen. For them it is a horribly non-commercial bet. Perhaps it is for anyone. Profitable and risk-reducing for the clients, yes, but commercially impractical for advisers. Their best policy is clear and simple: always be extremely bullish. It is good for business and intellectually undemanding. It is appealing to most investors who much prefer optimism to realistic appraisal, as witnessed so vividly with COVID-19. And when it all ends, you will, as a persistent bull, have overwhelming company. This is why you have always had bullish advice in a bubble and always will.

However, for any manager willing to take on that career risk – or more likely for the individual investor – requiring that you get the timing right is overreach. If the hurdle for calling a bubble is set too high, so that you must call the top precisely, you will never try. And that condemns you to ride over the cliff every cycle, along with the great majority of investors and managers.

What to do?

As often happens at bubbly peaks like 1929, 2000, and the Nifty Fifty of 1972 (a second-tier bubble in the company of champions), today’s market features extreme disparities in value by asset class, sector and company. Those at the very cheap end include

traditional value stocks all over the world, relative to growth stocks. Value stocks have had their worst-ever relative decade ending December 2019, followed by the worst-ever year in 2020, with spreads between Growth and Value performance averaging between 20 and 30 percentage points for the single year! Similarly, Emerging Market equities are at one of their three – more or less co-equal – relative lows against the US of the last 50 years. Not surprisingly, we believe it is in the overlap of these two ideas, Value and Emerging, that your relative bets should go, along with the greatest avoidance of US Growth stocks that your career and business risk will allow. Good luck!

Jeremy Grantham, CNBC, November 12, 2020.

A SPAC is a Special Purpose Acquisition Company, a shell that is created for the specific purpose of merging with some private company to take that company public more quickly than could have been the case with a normal initial public offering (IPO) process.

3 My paper of January 2018, Bracing Yourself for a Possible Nearterm Melt-up (to be found on the GMO website), has substantially more data and exhibits on this topic.

1 2

The views expressed are the views of Jeremy Grantham through the period ending January 5, 2021, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Copyright © 2021 by GMO LLC. All rights reserved.

Have your portfolios considered some of the most extreme financial markets ever? unloved by both foreigners and locals.

Foreigners have consistently reduced exposure to SA equities over the past several years and have aggressively sold domestic bonds in 2020. Local investors may have been big buyers of local bonds, but they have turned their backs on domestic equities. Pension funds have their lowest exposure to domestic equities since the 1980s, and fixed income unit trusts have enjoyed mammoth inflows over the past two years while equity and balanced funds have seen large outflows. South African investors have heavily tilted portfolios to cash, bonds and offshore assets at a time when domestic shares trade at very low valuations in both absolute and relative terms. Our equities are among the cheapest in the emerging market universe at a time when emerging markets are already very cheap relative to developed markets.

By their positioning, both foreign and domestic investors are expressing high conviction that South African assets, and particularly domestic stocks, will continue to underperform.

Furthermore, the 2020 recession is testing an already fragile domestic fiscal position and reducing government debt levels will be a significant challenge.

Understandably, this is receiving a lot

14 WWW.MONEYMARKETING.CO.ZA

of attention from market participants with many expressing a view that a sovereign debt default scenario is insurmountable. What gets less attention at times of heightened fear are the mitigating factors that necessitate a more balanced approach to local investing. These include the structure of our sovereign debt maturity profile; deep sophisticated local financial markets; the diversified nature of many of the opportunities on the JSE; building evidence of economic reform implementation and the tackling of corruption; and the reasonable likelihood of an emerging market growth cycle off a low base.

Most market participants seem committed to their views, and they are positioned for extreme conditions to persist. While they may do so, it implies that if the truth lies somewhere in between the extremes (as it usually does) it is possible to foresee a dramatic reversal in performance.

There are ample examples of extreme conditions in markets: • Highest levels of passive (index) investing on record • Extremely high levels of concentration within indices • Extremely crowded positions among active managers

• Very extreme valuation discrepancies between what is being crowded into (growth and tech) and what is out of favour (value and emerging markets) • Sovereign debt has ballooned, yet interest rates in developed markets are at multi-century lows • An explosion in money supply • The most expensive stocks have become the ‘safe havens’.

The market thinks it is unlikely that the future will look different to the recent past This is effectively an all-in bet that a handful of companies will continue to be priced for multi-year domination, that the global economic recovery is anaemic, and that South Africa will become a failed state. Any outcome other than what is embedded in expectations, will likely give rise to extreme reversals and rotations.

This environment is providing a remarkable opportunity to build a portfolio of well-diversified, quality businesses at exceptional valuations.

These can be expected to generate excellent long-term returns at just the time that most portfolios are heavily weighted in stocks that could disappoint elevated expectations.

SHOW YOUR MONEY THE WORLD WITH INVEST INTERNATIONAL

BY GETTING A BETTER EXCHANGE RATE WITH OUR GLOBAL ENDOWMENT

The Global Endowment provides you with a simple solution to hold international assets. It allows you to invest below the prevailing exchange rate and offers you maximum efficiency through the most optimal tax and estate structuring, investment liquidity and cost effective international trust options.

Speak to your financial adviser today.

www.discovery.co.za

Product rules, terms and conditions apply. This document is meant only as information and should not be taken as financial advice. For tailored financial advice, please contact yourfinancial adviser. The Global Endowment Plan is a unit-linked life insurance policy contract, issued by Discovery Life International, the Guernsey branch of Discovery Life Limited(South Africa), licensed by the Guernsey Financial Services Commission under the Insurance Business (Bailiwick of Guernsey) Law 2002, to carry on long-term insurance business. Discovery Life is a licensed insurer under the South African Insurance Act and an authorised financial services provider (registration number 1966/003901/06). Discovery Invest is an authorised financial services provider (registration number 2007/005969/07). All benefits are offered through the insurer.

The insurer reserves the right to review and change the qualifying requirements for benefits at any time. The information given in this document is based on Discovery’s understanding of current law and practice in South Africa and Guernsey. No liability will be accepted for the effect of any future legislative or regulatory changes.

RCK_77843DI_15/12/2020_V1

INVESTING

28 February 2021

OREN KAPLAN Co-Founder and CEO, SharingAlpha

The TripAdvisor-style fund rating platform for investors

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haringAlpha.com is the first user-generated fund rating platform that has become the world’s largest fund rating agency in terms of the number of fund selectors contributing to its ratings.

On SharingAlpha, individual vetted fund selectors are ranked in terms of their talent in selecting funds.

They build a long-term provable track record of their ability, enabling them to test their analysis – and if they choose, the raters are able to present their proven track record to existing and potential clients. Since a long-term track record is more meaningful, fund allocators are encouraged to start building a personal proven track record early on.

The fact that the SharingAlpha fund selectors determine which funds will be rated, and they give that rating – knowing it will influence their track record – creates a robust model for reliable ratings based on the wisdom of a large number of professional participants, while solving potential conflict of interest present in the traditional rating industry.

SharingAlpha offers professional fund selectors a way to improve their career prospects, and to complement their fund research activities by leveraging on insights gathered from a large group of specialists.

Beyond a fund selection ranking, allocators have the possibility of building a virtual fund of funds and, in turn, SharingAlpha ranks them based on their performance not only as fund selectors but also as asset allocators.

Another advantage that SharingAlpha brings to the market is the possibility to grow to scale more rapidly and effectively. This is done by moving from the current rating model where fund selectors work in silos, to a more centralised approach in which their views are shared on a dedicated platform.

fund managers they want to hear from, which means better-targeted leads through a process that is entirely independent from its fund rating methodology.

During the past year, due to the shift toward digital distribution channels, a long list of large international fund providers decided to use SharingAlpha’s services – firms such as Vanguard, M&G, Janus Henderson, Jupiter, Franklin Templeton, Nomura, Hermes, Baillie Gifford, MFS, TCW, Allianz, Robeco and many smaller boutiques.

The methodology behind the fund rating Step 1 The fund selectors are asked to rate the funds based on their expectations in terms of the fund’s chances of outperforming in the future. The three parameters on which the overall rating is determined are factors that are expected to influence future performance: • People: The experience and competitive edge of the fund manager and their team • Price: The cost of the fund • Portfolio: The way the strategy is run in terms of risk management, etc.

Step 2 SharingAlpha calculates the average ratings assigned by its users to each fund. It’s important to note that only ratings from users that can be identified as professional fund selectors are taken into account.

Hence, anyone can technically sign up and rate funds; however, in the fund rating calculation, ratings coming from users that are, for example, non-financial industry members or fund providers, are not included.

DURING THE PAST YEAR, DUE TO THE SHIFT TOWARD DIGITAL DISTRIBUTION CHANNELS, A LONG LIST OF LARGE INTERNATIONAL FUND PROVIDERS DECIDED TO USE SHARINGALPHA’S SERVICES

The shift towards digital distribution SharingAlpha’s revenue model isn’t based on charging fund managers for appearing on our platform; the same chances are offered to all fund managers, be they large international firms or small local boutiques.

Furthermore, buyers are empowered to take control of the distribution process by deciding which

Old Mutual Investment Group appoints Naledi as its new MD

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ld Mutual Investment Group has announced the appointment of Tebogo Naledi as its new Managing Director. The company says in a statement that the appointment will see Naledi replace current MD Khaya Gobodo, who will now focus on his role as the overall MD of Old Mutual Investments.

Gobodo, until now, held dual roles as MD of Old Mutual Investment Group and Old Mutual Investments, an entity that comprises Old Mutual Investment Group, Old Mutual Alternative Investments, Futuregrowth Asset Management, Old Mutual Specialised Finance and Marriott Asset Management. “The appointment of Naledi will allow Gobodo to apply a more focused lens on growing the overall Old Mutual Investments business,” the statement adds.

“With 23 years of experience in investments –

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Furthermore, in order to improve the quality of the aggregate ratings, instead of using an equal averaging of the rankings, a higher weighting is provided to raters that have a better track performance on the platform.

Step 3 A fund rating of above three implies that our raters expect the fund to create alpha in the future, which makes this a powerful and unique rating. Funds with an average rating of above four, based on at least 10 professional raters, are entitled to present the ‘Highly Rated Fund’ SharingAlpha rating logo.

Fund selection ranking methodology SharingAlpha’s fund selection ranking is determined by professionals’ ability to assess the future performance of the funds relative to a comparable ETF. In a case where the rater expects the fund to outperform the ETF, the overall rating they assign to the fund will be over three. It will be closer to five where they have a strong conviction. Hence, a rating of between one and three is given to funds that are expected to generate negative alpha, and a rating of between three and five is given to funds that are expected to generate positive alpha.

On a monthly basis, the ratings are compared with the actual performance of the fund versus the ETF; the closer the prediction with the actual reality, the higher the score will be for this rating.

This is called the ‘Hit Score’ by SharingAlpha – they compare the overall average Hit Score of all the funds rated by the member and compare it to other members’ average Hit Scores and rank them accordingly.

mostly in leadership roles within asset management businesses, with 13 of those years spent as either CEO or MD – Naledi has played a significant role in the reshaping of OMIG’s institutional sales and client management capability, having held the role of Director of Institutional Business since May 2018.

He has also played a critical part in driving the transformation strategy and actively contributed to the development of the current business strategy.”

Tebogo Naledi, Managing Director, Old Mutual Investment Group

INVESTING

28 February 2021

JUNAID BRAY Co-Portfolio Manager and Research Coordinator, Laurium Capital

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Looking ahead into 2021

he year 2020 will certainly go down in history term structural effects on economies, industries books as one of the most turbulent in modern and companies? history. We entered the year with a reasonable degree of optimism. As the global impact of the The last question is particularly pertinent to our COVID-19 pandemic dawned upon markets, we local economy. The pandemic has widened the gap witnessed one of the most severe drawdowns during between countries with more resources to reboot the first quarter of the year. With governments their economies, compared to those with less. The around the world unleashing unprecedented levels of more developed economies have more resources monetary and fiscal stimulus to (and substantially lower costs support their COVID-19 bruised debt) to support their ANECDOTAL FEEDBACK of economies, we subsequently economies and also have earlier FROM SEVERAL SOUTH access to vaccines, so they may experienced one of the most aggressive recovery rallies recover sooner than their less AFRICAN CORPORATE on record. developed counterparts.

MANAGEMENT TEAMS We enter 2021 with the The economic impact of IS THAT THE RECOVERY COVID-19 will be felt for years tailwinds of monetary and fiscal support, coupled with the rollout to come. Economic growth HAS GENERALLY BEEN of vaccines, as well as the low in SA is generally expected to FASTER THAN THEY HAD decline by around 8% during base set by the near economic standstill induced by the initial 2020, followed by a muted ANTICIPATED COVID-19 extreme lockdown recovery of less than 4% in measures during the first half of calendar 2020.

2021. It is expected to take several years to recover We are cognisant that the recovery is not without to 2019 levels. The weak economic environment and risks and constantly ask ourselves questions such as: resultant tax revenue shortfall has exacerbated our • How sustainable is the recovery and what is budget deficit, highlighting the unsustainability of priced in? our debt trajectory, unless drastic steps are taken to • What are the risks that could derail the recovery? avert a debt crisis.

• How effective will the vaccines be? Will there be However, markets tend to be forward-looking and, severe side-effects, and will they work against we think, have largely priced in this sombre backdrop. mutations of the virus?

In some domestically focused sectors, such as banks • Most importantly, what are the medium-to-longer and insurers, we feel that this negative backdrop

VICKI TAGG Head: Indexation, Ashburton Investments

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fter years of chasing the outperformance of US stocks, we expect South African investors to exercise caution this year by taking a more global stance as worries rise about rich valuations of long-favoured American names.

Despite steep falls in March in response to the COVID-19 outbreak, US indices like the S&P500 and the Nasdaq100 bounced back spectacularly in 2020 and, at the time of writing this article, they had continued to make record highs.

This was driven mostly by ‘Big Tech’ names like Apple, which rose 85% in 2020, while Amazon, Netflix and Tesla rose 78%, 60% and 740% respectively.

While investors bid up prices of tech-related stocks last year, they ignored ‘old economy’ stock – like traditional financial services companies, travel and energy stocks.

But things have changed.

And while the US stock market contains many of the world’s best companies, which remain excellent long-term investments, the dramatic

has been overly priced in and some stocks offer an attractive risk-reward trade-off. Anecdotal feedback from several South African corporate management teams is that the recovery has generally been faster than they had anticipated, especially relative to the extremely cautious environment they had planned for.

Additional factors that could see the local SA market outperforming from current levels: • The ALSI was only up 7% for the year and has lagged global markets, with the MSCI World up 16.5%. Emerging markets have broadly lagged and may benefit from rotational inflows (out of developed markets and into emerging markets) – some of which may flow into SA.We believe that more ‘value’ real economy companies should outperform, were some of this to unwind. Many of the domestic sectors, such as banks and insurers, would benefit from continued value outperformance.

• In the US, the ‘Blue Wave’ with the democrats having won the Georgia run off, will likely see the democrat majority usher in a larger US stimulus, which in turn may lead to USD weakness, which is broadly supportive for emerging markets and real economy companies.

We believe our funds are well positioned and diversified, and offer attractive upside, while pragmatically weighing up the inherent risks in order to achieve the best risk-adjusted returns for our clients going forward.

SA ETF investors expected to favour a more global view this year

rise in prices has led many analysts to question their lofty valuations.

So, as hopes rise for a normal world towards the end of 2021 – thanks to vaccines – are the stocks and regions shunned last year due for a comeback?

Because of this uncertainty, in 2021 we expect South African investors to hedge their bets by also looking to markets that perhaps offer better value.

These areas include Europe and Japan in particular, both of which are attracting strong flows to their best companies, like French multinational luxury goods company LVMH Moët Hennessy Louis Vuitton, and Japanese car giant Toyota.

SO ARE THE STOCKS AND REGIONS SHUNNED LAST YEAR DUE FOR A COMEBACK THIS YEAR? Already this year we have seen rising flows into the Ashburton Global 1200 Equity Fund of Funds ETF (ASHEQF),

pushing its assets under management over R1bn for the first time.

It captures 70% of the world’s market capitalisation by investing in seven geographically diverse Exchange Traded Funds (ETFs) to keep costs low while ensuring tracking efficiency.

These are the S&P500 (US), MSCI Europe, S&P TOPIX 150 (Japan), S&P/TSX 60 (Canada), S&P/ASX All Australian 50, S&P Asia 50 and S&P Latin America 40.

The ETF has delivered just shy of 50% in total returns (price appreciation plus dividends) in the past two years, far outstripping the returns in the Johannesburg Stock Exchange (JSE) Top40 and JSE All Share Indices.

It provides hard currency diversification in one simple JSE-listed investment that doesn’t require the use of offshore allowances. We reduced its management fee last year from 0.37% to 0.25%, which has also added to the appeal of the fund.

It is a regionally well-balanced ETF, suited to current market conditions by keeping exposure to winning US

shares while being broad enough to capture any strong gains elsewhere in the world.

Country weightings US

62.49%

Europe

19.36%

Japan

7.39%

Canada

3.13%

Australia

2.09%

Asia

4.80%

Latin AM

0.74%

At the time of writing this, the fund’s biggest sector weightings are technology (22%), healthcare (12.3%), consumer discretionary (12.4%) and financials (13.3%). The biggest individual stock holding is Apple at 4%.

All stocks mentioned in this article are held within the Ashburton Global 1200 Equity Fund of Funds ETF.

WWW.MONEYMARKETING.CO.ZA 17

TAX-FREE INVESTING

28 February 2021

New 12J offering from venture capital firm

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ntrepreneurs for Entrepreneurs (E4E) Africa, an entrepreneur-led South African venture capital (VC) firm, has officially launched its Section 12J offering.

The Section 12J facility grants investors in E4E Africa a 100% write-off for their South African taxes, representing a saving of up to 45% for individuals and trusts, and 28% for companies.

With its 12J offering, E4E says it aims to build on its mandate to invest in and grow transformative South African start-ups, while providing investors with attractive returns.

“The 12J incentive offers South Africans – people or companies – a unique opportunity to invest in high-growth, early-stage businesses in a way that lowers risk and increases potential returns through the tax saving, while helping build a better South Africa,” says E4E partner Bas Hochstenbach.

According to analysis by the 12J Association of South Africa, the incentive has created an estimated 5 250 permanent jobs since its launch in 2009. Over the short term, Section 12J investments also led to an equal number of temporary (mostly construction) jobs. Total assets under management under the scheme, meanwhile, exceeded R9bn.

THE INCENTIVE HAS CREATED AN ESTIMATED 5 250 PERMANENT JOBS SINCE ITS LAUNCH IN 2009 “With our proven track record as entrepreneurs and investors, we believe that E4E is uniquely placed to ensure that anyone using our 12J facility has the best possible chance of achieving real returns,” adds E4E managing partner Philani Sangweni. “This is only advanced by the fact that we invest in innovation-led, transformative businesses that have the potential to scale globally.”

Since its mid-2020 launch, E4E has created a significantly sized fund, investing in a variety of companies that are innovating across key sectors of the South African economy. These include leading township food solutions enterprise YeboFresh, data annotation and labelling startup Enlabeler, and health tech startup Vula Mobile.

Philani Sangweni, E4E Managing Partner

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DINO ZUCCOLLO Principal, Westbrooke Alternative Asset Management

How to enhance yield in a benign interest rate environment

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n the wake of the COVID-19 pandemic, one of the most common responses by governments across the globe has been to slash interest rates.

In South Africa, our repo rate has been reduced to a historic low of 3.5%, equating to a prime lending rate of 7.0%. Internationally, interest rates in many of the world’s largest and strongest economies are now close to zero, or in some cases negative.

One of the downsides to the reduction in interest rates has been a vastly reduced return on the fixed income products that often form a key element of traditional investor portfolios. These portfolios often also include an allocation to equities, many of which have trimmed (or completely cut) the payment of dividends, so as to build cash buffers in response to the pandemic.

The combination of these factors has left many investors in an unenviable cash-flow squeeze.

It is in this context that the private debt industry has emerged from the global investment periphery, to become one of the world’s largest and fastest growing alternative asset classes.

At Westbrooke Alternative Asset Management, we have invested more than R3bn across over 100 private debt transactions since 2016 in South Africa, the UK and Europe. Given the levels of global economic uncertainty and volatility, there are instances where private debt returns have offered similar historic returns to equity investments but with vastly improved security packages (e.g. direct security against a tangible asset). This generates an asymmetric risk/return profile for clients and can ultimately assist in solving the cash-flow squeeze conundrum.

Simply explained, private debt is where a loan is made by a non-bank lender and therefore falls into the broader category of ‘alternative debt’ or ‘alternative credit’. The term private debt is used interchangeably with ‘direct lending’, ‘private lending’ and ‘private credit’.

Private debt investments are used for a multitude of purposes, including to bridge property transactions, real estate development, finance business growth, provide working capital and fund infrastructure.

Compared with traditional fixed income, private debt can provide investors with higher yields, portfolio diversification and lower portfolio volatility.

At a high level, the higher returns generated by private debt investments are not always due to an increase in risk, and can be explained by: • an illiquidity premium (private loans earn higher returns because they are not listed and investors are therefore required to invest for a prescribed period) • a structural/complexity premium (deals are often bespoke and require structuring)

• an off-market/disinformation premium (due to a lack of an efficient market in the space) • the size of loans (as banks have moved resources to larger loans, the mid-market is underserviced and accessibility to cheaper capital is limited).

Although the rise of private debt as an asset class is still in its infancy (especially in South Africa), there are a few access points for sophisticated investors to gain exposure through local alternative asset managers.

While private debt investments may form the foundation for many yield enhancement strategies, alternative asset managers may also be capable of including additional structuring mechanisms in portfolios that ultimately enhance yield. One such mechanism is Section 12J of the South African Income Tax Act, for example. Through Section 12J, clients are able to deduct their full investment against their taxable income in the year they invest, thereby reducing their initial net investment amount by up to 45%. As many Section 12J investment strategies pay an annual dividend, the Section 12J tax break has the impact of almost doubling the net yield received by clients.

In respect of all alternative investment strategies, investors should seek out well-established managers who have deep local and international networks, resources, infrastructure and a track record of performance in providing clients with exposure to these compelling and uncorrelated asset classes.

PRIVATE DEBT INVESTMENTS ARE USED FOR A MULTITUDE OF PURPOSES

TAX-FREE INVESTING

28 February 2021

CARLA ROSSOUW Tax Lead, Allan Gray

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mid the extreme uncertainty brought on by COVID-19 and the ongoing lockdown restrictions, investors are tasked with looking beyond the current crisis and making decisions for their future – a real challenge in an environment where everything seems so unsettled.

Yet, it is true that the decisions made now will impact investors’ financial positions long after the crisis has passed.

It is worthwhile, at this time of year, to remind investors of how to maximise their potential investment returns now by taking advantage of the tax benefits associated with popular product choices such as tax-free investments (TFIs) and retirement annuities (RAs).

Investing with tax benefits in mind during uncertain times

on the requirements of the investor.

The ideal investment vehicle to save towards a comfortable retirement remains the RA. The government allows investors a tax deduction on money invested up to an annual amount of 27.5% of the greater of taxable income or remuneration (capped at R350 000 annually). Investing more than this

compound. Although after-tax money is used to invest in a TFI, no tax is paid on the interest, capital gains, or dividends earned, or on withdrawals. These products are not as restrictive as retirement products.

There are, however, tax implications for overcontributing to a TFI, and money that is withdrawn cannot be replaced.

Making money work harder with compound interest The incentives on both TFIs and RAs can be very attractive, particularly with compound interest at play.

Graph 1 shows how much an initial investment of R33 000 could grow over 20 years. The total growth is shown in nominal terms (i.e. includes inflation) and we have assumed an average annual return of 10%.

At the end of the day, if the goal of an investor is to save, then using a TFI or RA to benefit from long-term tax savings should be encouraged during uncertain times.

Allan Gray is an authorised financial services provider.

KINGJAMESJHB 3490

Understanding the options The tax benefits of both RAs and TFIs are structured differently, and the product rules are quite distinct.

There may be place for both products in an investor’s portfolio, depending

still allows the investor to get the tax benefit in the future. The investor pays no tax on the interest, capital gains or dividends earned while invested.

But the product is restrictive given that investors can only access their money once they retire (after age 55). In addition, only one-third of the amount can be taken as a cash lump sum. The rest must be used to purchase an income-bearing product in retirement, such as a living or guaranteed life annuity.

A TFI, on the other hand, is a great way to boost savings and the true benefit is felt over the long term as tax-free returns

Die beste tyd wat geld kan koop.

3490_2020_You get what you preserve_155x220.indd

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WWW.MONEYMARKETING.CO.ZA 19 2020/12/02 13:31

ESG INVESTING

28 February 2021

MIKE ADSETTS Deputy Chief Investment Officer, Momentum Investments

Six degrees of separation commission. Responsible investing practices have always resonated with our outcome-based investing philosophy and the alignment of our clients’ long-term goals to positively influence the world they will retire to. Responsible investing has come into the mainstream in the mind of investors, and rightly so. As we increasingly question not just warming that followed, was a good example of how the return on our investments but the effect and consideration of Environmental (E) factors is going purpose thereof, there is a real opportunity not to become increasingly important when considering only to achieve healthy returns but also affect the energy (and renewable energy) investments in the health of the interconnected world. Responsible future. Societal (S) effects of COVID-19 and the investing can help to create investments that are need for re-invigorating the economy good for clients and the world we after South Africa endured one of live in. This is why Momentum the hardest lockdowns globally is Investments plays an active role RESPONSIBLE evident all around us. Investments in proxy voting as institutional INVESTING HAS in infrastructure have been flagged investors (Governance), invests COME INTO THE as one mechanism for reigniting in wind farming projects economic growth. There are good (Environmental), and helps alleviate MAINSTREAM and bad infrastructure investments challenges such as a shortage of IN THE MIND OF but undoubtedly this will warrant student accommodation close to INVESTORS, AND universities, by investing in our a lot of focus in South Africa over the next few years. Governance (G) unique Rise Student Living project RIGHTLY SO failures and the destruction of capital in Pretoria (Societal). We’re here to was brought into sharp focus through the Zondo help clients achieve their goals on their investment Commission. If there is ever a need to evidence journey, because when it comes to sustainable the role for good governance and the devastation investment growth, for us it’s personal. wrought by bad governance, there is no better 1 Wikipedia teacher than the revelations at the state capture

Six degrees of separation is the idea that all people on average are six, or fewer, social connections away from each other. As a result, a chain of ‘a friend of a friend’ statements can be made to connect any two people in a maximum of six steps…. It is sometimes generalised to the average social distance being logarithmic in the size of the population.1

I

f we ever needed a real-life demonstration of the interconnectedness of all of us, the events unfolding in 2020 showed us that we are part of a highly unified global family. The other feature that typified 2020 was how timelines have been redacted – be it the speed with which information is carried around the world, the speed and depth of the market crash in March, followed by an equally dizzying and rapid market recovery and, as the end of 2020 approached, the development of numerous vaccines.

In the context of 2020, it is no surprise that investors are increasingly starting to question the effect of their investments beyond just return. ‘Capital with purpose’ is a good descriptor of this shift in mindset. Responsible investing and environmental, social and governance (ESG) risk factors received unprecedented attention, and rightly so. The importance of each of the three ESG factors in sound and sustainable investment decision-making was evident in 2020. The high temperature of 54,4°C in the aptly named ‘Death Valley’ in California on 16 August, with the public outcry on the effect of global

KHAYA GOBODO Managing Director, Old Mutual Investments

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sset managers are in a unique position to make decisions that influence the economy, the environment and society as a whole. As an industry, they direct a material portion of capital flows in the economy, and so have a genuine interest in ensuring that the economy sustains itself. Critical in this work is an appreciation of the interconnected nature of the economy, society and the environment.

WE HAVE THE RESPONSIBILITY OF UNDERSTANDING THE IMPACT OF OUR INVESTMENT AND STEWARDSHIP DECISIONS ON SOCIETY AND THE ENVIRONMENT

Pandemic exposes home truths about critical need for responsible investment

The continuing COVID-19 pandemic has heightened this awareness and laid bare the vulnerability of the economy to outside biophysical system shocks.

A measure of this vulnerability is the scale of fiscal stimulus presently being rolled out around the globe, far outstripping the stimulus packages post the 2008 global financial crisis.

There are questions to be asked around how this capital will be deployed. Will it be directed to enable more of the same kind of economic growth and its attendant social and environmental system risk? Or will it be used to build back better in a manner that drives socially inclusive, low-carbon and resource-efficient growth?

Asset managers will have to choose which side of the fence they sit on in respect of this issue. The side they choose could well define their future prospects. This is all while focusing on the fiduciary responsibility to act in the best interest of clients and deliver investment outcomes that meet or

22 WWW.MONEYMARKETING.CO.ZA

exceed their expectations.

Capturing the green growth and build-back-better opportunity will require collective action by asset managers, asset owners and asset consultants. As industry partners, we have the responsibility of understanding the impact of our investment and stewardship decisions on society and the environment.

A critical element of this will be formulating long-term partnerships based on measurable sustainability outcomes. Asset managers will not only need to engage proactively with investee companies on sustainability issues, but will similarly need to engage asset owners on their views.

Seeking alignment on these issues, solutions that deliver appropriate risk-adjusted returns and impact will remain at the forefront of innovation in the asset management industry for the foreseeable future. Long-term partnerships will be a key to success here, as will the ability of managers to collect and report on ESG impact

metrics. For asset managers, it is clear that it’s no longer enough to only focus on providing appropriate risk-adjusted returns, excellent client servicing and competitive fees. The type and scale of impact will rightfully also become an important consideration when selecting a long-term partner.

Furthermore, we expect large-scale asset owners, with long-term time horizons, to start exercising their fiduciary right in a more co-ordinated fashion. As such, an important means of driving impact in the listed markets is through active stewardship. This is a material opportunity to drive market transformation while, at the same time, reducing long-term systemic risk.

While we cannot possibly anticipate all the factors impacting the asset management industry going forward, we can be sure that the COVID-19 pandemic has strengthened and hastened the pre-existing trend of responsible investment and green growth.

When it comes to the well-being of students, this is how we rise to the occasion.

At Momentum Investments, student living is something we take very personally. Today’s students are tomorrow’s leaders. So, we’ve brought them Rise Student Living – fully-furnished student accommodation just around the corner from the University of Pretoria. It’s a perfect example of impact investing – investments made to generate positive, measurable social and environmental impact alongside a financial return. We support responsible investing to help create investments that are good for clients and the world we live in. We want our clients to do well and do good. Because when it comes to sustainable investment growth, for us, it’s personal.

Speak to your Momentum Consultant or visit momentum.co.za

Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.

MI-CL-3-AZ-563705

ESG INVESTING

28 February 2021

ESG leaders outperform their peers: Mobius

BY JANICE ROBERTS Editor, MoneyMarketing

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here is growing evidence that if companies adhere to environmental, social and governance (ESG) standards, they will outperform companies that do not, says veteran emerging markets investor Mark Mobius. “We’re finding this to be true in our own experience, but also, if you look at companies around the world, this is the case; the evidence is very, very clear,” he told Nedgroup Investments Responsible Investment Summit last month.

Mobius left Franklin Templeton in 2018 after 30 years with the firm to set up active investment manager Mobius Capital Partners, launching the Mobius Emerging Markets Fund and the Mobius Investment Trust. The firm’s strategy is focused on improving governance standards in emerging market companies.

Governance For Mobius, the governance part of ESG standards is the most important. “We get commitments from the management of any company in which we invest that they will be willing to engage with us in a friendly manner to improve governance.

And that, of course, includes many things such as an independent board of directors and good communication with shareholders. By getting those commitments, we can then impact both the social and environmental factors.”

He describes his firm as being “very, very engaged” with each of the companies in which it invests.

“We invest in no more than 30 companies, so that we can really engage with them and we are with them for the long term. We’ve seen incredible benefits as a result of our engagement, because share prices have gone up, and these companies

Mark Mobius, Founder, Mobius Capital Partners

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have made improvements in not only governance, but how they behave towards environmental and social issues.”

Corporate culture Not content with ESG factors alone, Mobius has added corporate culture (ESG+C). He believes that while good governance may be in place, if the culture of the company is not in line with the objectives of the ESG component, there is a problem. “So, we are also measuring culture and of course that’s a very subjective thing, but we find that it’s important when evaluating companies.”

He believes that because active investors can engage more with corporate management, they have an advantage over passive investors when it comes to assessing culture.

WE DON’T LIKE “If you’re engaged, that means you’re TO USE THE communicating with TERM ‘ACTIVIST’ the company on an almost continuous BECAUSE basis. We have IT IMPLIES conversations with SOME SORT OF our companies on almost a monthly AGGRESSIVE basis in which we ORIENTATION talk to them about improving their governance. And by the way, I have been so gratified by the incredible reception we’re getting from companies. They really are interested in improving their ESG standards because they’re getting pressure from their constituents, from their customers, from their workers and from the shareholders to improve these standards.”

Mobius explains that his firm engages with companies in what he calls ‘a friendly way’. “We don’t like to use the term ‘activist’ because it implies some sort of aggressive orientation and we do not have that kind of orientation. We believe in a friendly, engaging way of working with companies and if the company is not interested, we won’t invest.”

There have been occasions when engagement with companies on governance has been unproductive. Mobius explains that his firm had suggested to a Brazilian company that it appoint independent directors to its board. When family members refused to leave the board, Mobius Capital Partners sold its interests in the company.

“There are times when you just can’t be successful,” he says.

Corruption Many markets around the world have corrupt governments in place, yet many companies in these countries don’t accede to corruption. “In other words, they’re willing and able to work without being involved in corruption and they do so in many ways. They stay away from areas in which they see corrupt practices and they adhere to very high standards, not willing to give in, even though this may lose some business for them.”

Mobius says the US Foreign Corrupt Practices Act has gone a long way towards remedying the situation, because any company, regardless of where in the world it is situated, if it is involved in corruption and it does business in the US, it can be charged under the Act. Mobius has served as a director on the board of several emerging market companies, including Russian oil firm Lukoil, as well as OMV Petrom in Romania – and this has helped him focus on the ESG standards of those companies. “It’s very important to sit on a board of directors as you get a lot more insight into what is really going on in a company. I find that by the mere fact of me being on the board as an independent director, companies tend to be much more cautious in the way they behave. And the fact that they want to have an independent director means they really want to do the right thing.”

He adds that his experience with Lukoil in Russia was a very good one. “A lot of people don’t realise that Lukoil had nothing to do with the Russian government in terms of ownership or anything like that. It’s an independent company, but of course, it has to adhere to Russian rules and regulations. They’ve done a good job, and the same can be said of OMV Petrom in Romania, where that company didn’t become involved in any kind of corruption.”

Portfolio His fund stays away from the so-called ‘sin stocks’, such as those companies involved in tobacco and gaming.

“We also tend to stay away from resources companies, like mining companies, because there are so many risks involved. But it doesn’t mean we’re going to stay away from them permanently. If we do become involved, we’re going to watch them very, very carefully as to what they are doing when it comes to the environment.

“Our portfolio, however, is pretty diversified and we’re big on technology, consumer products and industrial products. We have an investment in a steel tube company in India. And of course, medical is big for us.”

South Africa’s Clicks Group is also part of the portfolio. “The company is really good when it comes to corporate governance – they have independent directors on their board and they’re very good in communicating with shareholders.

We continue to work with them to monitor what they’re doing, and make suggestions in different directions, but frankly, there’s not many suggestions we can make because they’ve been doing a good job.”

KINGJAMES 52289

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At Sanlam, we understand that every pensioner is unique in terms of their needs and circumstances.

That is why we offer a variety of annuities, so that they can choose the one that’s right for them.

The Sanlam With-Profit Annuity is a new addition to the Sanlam annuities product range, launched to enhance the range and quality of retirement solutions available to pensioners. It provides a guaranteed income for life, offers pension increases linked to market performance and a generous starting pension.

Annual increases will depend on the returns of two funds: 50% invested in SIM Balanced Fund, which drives long-term performance.

50% invested in SIM Moderate Absolute Fund, which ensures stability while targeting inflation-beating returns.

Underlying investments in these funds are smoothed over six years before declaring pension increases.

Pensioners can choose from various pension increase options based on their preference for a higher starting pension or higher future pension increases. The guarantee offered ensures that pension increases are never negative, even in poor market conditions. Pensions are paid for as long as the pensioner or selected spouse is alive.

To help pensioners secure a comfortable retirement, now is the time to plan.

For assistance with quotations or questions, please email annuitysupport@sanlam.co.za.

www.sanlam.co.za Sanlam is a Licensed Financial Services Provider.

RETIREMENT

28 February 2021

KAREN WENTZEL, FIA, FASSA, CFP® Head: Annuities, Sanlam Corporate

Demystifying with-profit annuities

What is a with-profit annuity?

A with-profit annuity provides a guaranteed income for life with increases dependent on the performance of the underlying investment. Although the bonus formula depends on market returns, the application of smoothing significantly reduces the effects of market volatility, generating stable returns for investors. Decisions about the increases are partly subjective, as they allow discretion of how to distribute profits from, for example, INVESTORS mortality experience.

IN A WITHSuch decisions PROFIT ANNUITY are, however, well regulated and made WANT SOME by experts and INVESTMENT actuaries in the industry.

EXPOSURE TO

THE MARKET RETURNS OF A BALANCED FUND

What is a purchase rate?

The purchase or discount rate is the net investment return required to provide a level pension. The lower the discount rate, the more it costs to purchase a given initial level of pension, but the higher the expected future increases in pension.

Once a bonus has been declared, the purchase rate is deducted from the bonus to determine the increase, e.g. given a declared bonus of 10% and a 3% purchase rate, the pension increase will be 7%.

What is the philosophy for declaring bonuses?

The aim with bonus declarations is to declare a bonus as high as possible without jeopardising the financial stability and security of the with-profit annuity portfolio. This will be in line with the stated bonus formula and subject to underlying fund performance and adjustments based on the mortality experience of the pool.

What are the risks covered by a with-profit annuity?

In a with-profit annuity, the longevity and investment risks of an individual is carried by the insurance company. Pensioners receive a guaranteed monthly income for as long as they are alive. For joint life pensions, the surviving spouse will receive a pension for as long as they are alive, even after the death of the main pensioner. Even if the underlying portfolio returns are negative, your income cannot decrease, although poor returns would limit the increases.

Who should invest in a with-profit annuity?

Investors in a with-profit annuity want some investment exposure to the market returns of a balanced fund. These investors are willing to take a bit of risk to earn some upside potential, but also seek the security of a guaranteed pension for as long as they live.

Three questions to ask your annuity provider Comparing with-profit annuities from different providers is a difficult and complicated exercise. To help you make a decision, here are three important questions you should ask your with-profit annuity provider before buying an annuity product: 1. Are my funds being placed with a company I can trust to survive for the rest of my life?

Get information about the company’s financial stability, the solvency ratio of the insurer and reports by investment analysts.

2. How are the increases calculated?

With-profit annuity products designed in the 90s were often referred to as ‘black boxes’ due to the discretion of the providers to determine the increases; despite this, such decisions are made by experts in the field (actuaries). Current product providers should be able to give you details on how increases are calculated, as well as any discretionary adjustments that may apply.

3. What is the long-term track record of the provider and what is the expectation of the level and stability of bonuses?

Realistic returns and sustainable and stable increases over the long term should be a feature before opting into a with-profit annuity.

Looking at recent increases, and the impact of the economic conditions on future increases, will give an understanding of the sensitivity to market conditions.

With-profit life annuity increases comfortably beat inflation

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ith the cost of living continually escalating, the ability to secure inflationbeating annual increases on your retirement income is a recurring challenge, especially in a volatile, lowreturn investment environment.

Retirement income specialist, Just, has announced 2021 with-profit annuity increases that comfortably beat inflation, benefitting pensioners with a much-needed boost to their retirement income.

The StatsSA average year-on-year inflation over the last 12 months is 3.4%, and Just’s with-profit annuity provides its pensioners with an increase of between 4% and 8% in 2021,

depending on the product selection.

Since its launch in 2015, Just has focused on enhancing the features, transparency and performance of withprofit annuities in South Africa for the benefit of pensioners and advisers.

With-profit life annuities offer retirees an income for life, which will never reduce regardless of what happens to investment markets or how long a retiree lives. An underlying investment component drives the annual increase, and it can be boosted by how astutely an insurer manages its product.

“Usually when a pensioner buys an annuity, they expect to earn some investment return and then pay a charge to an insurer for longevity insurance and product management,” says Just SINCE ITS LAUNCH IN 2015, JUST CEO, Deane Moore.

HAS FOCUSED ON ENHANCING THE “However, over the past five years, Just has FEATURES, TRANSPARENCY AND effectively paid its own PERFORMANCE OF WITH-PROFIT charges for longevity insurance and product ANNUITIES IN SA

26 WWW.MONEYMARKETING.CO.ZA

management, and added around a further 8% in value to clients. This is unique, where an insurer adds net value to asset performance rather than simply levying a charge against it.”

The table shows the increases to pensioners on the Just Lifetime Income StableGro product, which is expected to track inflation when investment returns are CPI + 6% after investment management fees. The product has beaten inflation through the value-added product management of Just, even though investment performance has been significantly less than expected.

According to Moore, in recent times retirement fund trustees and individual clients have focused on reducing fees to improve long-term value. While admirable, he says it’s even more important to focus on the value-add

after taking account of all fees, which should be disclosed transparently.

“With-profit annuities offer peace of mind through their lifetime income guarantees, combined with increases linked to investment market performance. They are available both as standalone life annuities, or as portfolio choices within a living annuity. We believe they are useful as a foundational building block in the retirement portfolio of every retiree,” says Moore.

Deane Moore, CEO, Just

AF21171

Uncertain times call for a steady partner We can’t eliminate risks from market shocks but we can manage them.

As we weather the Covid-19 storm together, Alexander Forbes is helping you and your members navigate uncharted territory: ■ Our strong focus on risk management strikes the right balance in taking advantage of growth opportunities while protecting against market downturns.

■ Our advice helps your members make better decisions about their retirement fund savings, including loss of earnings or retrenchment.

■ Our integrated consulting is based on outcomes, best advice and holistic needs. We’ve heightened our operational excellence now and into the future.

You can count on us, through the good times and the bad.

Staying the course – together

Alexander Forbes Financial Services (Pty) Ltd is a licensed financial services provider (FSP 1177 and registration number 1969/018487/07).

RETIREMENT

28 February 2021

Tax advantages of formal retirement savings

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overnment provides a meanstested old age pension benefit primarily targeting the most vulnerable individuals in society. The current benefit is a pension of up to R1 860 per month from age 60 years and up to R1 880 per month from age 75 years, on condition that you don’t earn more or have assets more than specified amounts.

Therefore, for most working South Africans, formal retirement savings vehicles are their only source of retirement income. However, insights from the Alexander Forbes Member WatchTM show that the current retirement savings environment is characterised by low contributions, a culture of low preservation rates, and a significant proportion of the working population not making provision for retirement.

John Anderson, Executive of Investments, Products and Enablement at Alexander Forbes says that, on average, 8% of people retire comfortably. “This is despite South Africa’s real returns being one of the highest in the world over the last 120 years.” The reasons for this include the fact that 33% of people don’t make provision for retirement and, where they do, less than 10% preserve their retirement savings when leaving jobs throughout their working career. To assist in improving this outcome, the government has provided tax incentives to encourage saving for retirement. However, it appears that some savers don’t fully understand and make use of the tax benefits.

According to Anderson, investors may think they are getting the best possible retirement outcome by investing in discretionary savings vehicles that offer more investment flexibility, but these may not produce the best results in terms of asset accumulation over their working lifetime and provide an income into retirement. “This is because formal retirement savings vehicles have significant tax advantages to assist in maximising the accumulation of capital and in providing an income in retirement.”

He explains that the relatively flexible nature of discretionary savings vehicles may seem less restrictive and attractive, but the ‘retirement’ outcomes they ultimately deliver are likely to be misaligned to one’s desired retirement goal expectations. “Discretionary savings vehicles do serve a purpose and offer solutions to a myriad of investors’ needs, but they are in most instances sub-optimal solutions for purposes

of maximising the full potential of retirement funding outcomes.”

The government offers South Africans tax exemptions where savings and investments are retained within a contractual savings vehicle targeting a retirement outcome, such as an employer-sponsored pension fund, provident fund or retirement annuity.

The tax incentives offered up include no tax on interest, no capital gains tax, no dividend withholding tax, no estate duties and tax-free lump sum concessions at retirement. Furthermore, contributions to these contractual savings vehicles are tax deductible, lowering investors’ taxable income.

These are considerable and noteworthy incentives that the government has provided. “Government is looking to put the right frameworks in place to improve the country’s retirement safety nets. In exchange for these incentives, the framework also encompasses oversight bodies and an array of supplementary prudential protections, such as Regulation 28, that are rooted in ensuring diversified investments aimed at meeting randbased retirement income liabilities, as well as fostering responsible investment practices and sustainable retirement outcomes,” says Anderson.

REGARDING THE DEBATE AROUND OFFSHORE ALLOCATIONS, INCREASING REGULATION 28-COMPLIANT FUNDS’ OFFSHORE EXPOSURE OUTSIDE SOUTH AFRICA FROM THE CURRENT 30% ALL THE WAY TO 100% IS NOT THE MOST PRUDENT RETIREMENT STRATEGY FOR THE VAST MAJORITY OF SOUTH AFRICANS “Regarding the debate around offshore allocations, increasing Regulation 28-compliant funds’ offshore exposure outside South Africa from the current 30% all the way to 100% is not the most prudent retirement strategy for the vast majority of South Africans. Most South Africans’ liabilities – such as school fees, bonds and food expenses – are in South Africa and, for these, having a greater allocation to South African assets makes sense.

“Offshore allocations are necessary

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and do provide diversification benefits to improve the likelihood of meeting retirement income goals and in managing risks. In addition, the most optimal allocation depends on the individual circumstances and risk appetite. Hence, additional flexibility around the current prudential offshore limits would be welcomed to improve outcomes. However, it is understandable that this needs to be balanced against the other goals the regulations are looking to achieve – especially as these restrictions are a condition of the significant tax benefits provided.”

For investors currently looking to unshackle themselves from the prudential investment limits prescribed under Regulation 28, an entry into discretionary savings vehicles to achieve retirement objectives may not be justifiable in most instances.

“Discretionary growth portfolios with greater flexibility to invest 100% offshore rarely beat Regulation 28 funds in rand terms in the long run once tax effects are considered,” says Anderson.

In order to compare formal retirement savings and discretionary savings vehicles, Alexander Forbes modelled the outcomes over a 35-year period using a range of asset class assumptions, tax assumptions and taxable income levels.

The modelling also looked at various scenarios where offshore returns are expected to be higher than local returns, and vice versa.

Comparing retirement outcomes between formal retirement savings vehicles and discretionary savings, Anderson notes that the tax benefits realised from formal retirement savings vehicles result in accumulated capital being significantly greater.

The after-tax lump sums and income at retirement was shown to be between 35% and 70% higher when making use of a retirement savings vehicle in the base case scenario.

As well as the initial income being better, the income in retirement is also expected to last longer, using formal retirement savings vehicles.

Retirement outcomes under a formal retirement savings vehicle continued to outperform those achieved under discretionary savings vehicles – even in the modelled scenarios where local equities disappoint and offshore returns do well.

“The case for matching formal retirement savings vehicles with the objective of saving for a retirement income is extremely strong. Best advice for meeting retirement objectives with the highest likelihood is to save for retirement through formal retirement savings vehicles (despite the restrictions in relation to Regulation 28). Additional and gradual flexibility of Regulation 28 would be welcome and would improve the outcomes further. Any advice suggesting that individuals should cash in their formal retirement savings, pay tax, and then invest the proceeds outside the formal retirement savings system (in, for example, offshore schemes), should be treated with extreme caution,” Anderson says.

John Anderson, Executive Head: Investments, Products & Enablement, Alexander Forbes

EMPLOYEE BENEFITS

28 February 2021

DAVID POTGIETER Co-Head: Institutional Discretionary Fund Management, RisCura

Choosing employee benefits that go the distance

T

he days of enticing prospective employees with only a great job description and a salary to match are long gone. Prospective staff want to know about the firm’s purpose, flexibility, the wider available benefits and future career opportunities. There has been a large shift towards how employers ‘care’ more for their employees, but the employee benefits portion does require some careful thinking too.

Employee benefits is a term that regularly comes up in corporate conversations when talking to staff. It covers a range of elements and usually includes retirement and risk.

Reviewing retirement fund options With people expected to live longer due to medical and technological advances, more awareness exists around saving enough for retirement. Increasingly, employees want to know what the prospective employer offers in terms of a retirement fund, and if the company allows for additional voluntary contributions.

The options around the investment solutions, the performances of those solutions, and the fees (referred to as total investment costs) all play a vital role in how much a person ultimately saves for retirement. These should be considered carefully and should be transparent enough for employees to easily understand.

Too much choice is often provided, which can be problematic, as very often members select the wrong portfolio for their needs, or delay making a decision due to lack of knowledge. Ideally, employers should have three or four options, including a default lifestage solution, where retirement fund members need KEEPING to elect to opt out as opposed to having to choose EMPLOYEES to opt in. A well-costed multi-manager solution, ENGAGED incorporating active and passive, is often a good idea WITH THEIR here, in terms of diversifying across asset classes, managers and styles.

OWN FUTURE FINANCIAL PLANNING IS CRUCIAL

Preparing proper post-retirement solutions Retirement fund members approaching retirement are often shocked at the cost of annuities and other postretirement solutions, relative to what they are paying in the company retirement solution, when investigating market options.

Being able to offer a post-retirement, in-fund annuity solution, leveraging off the same cost base as active members, can ensure members who retire can do so with the comfort of lower institutional pricing of their annuity investments, compared to what they would obtain if they were to purchase them directly from the market.

Risk benefits require real solutions When acquiring risk benefits such as life cover, income protection and funeral benefits, a person can obtain the level of cover they need at a much lower cost as a member of a group scheme, and often without underwriting. As an individual, in their personal capacity, trying to obtain the same level of cover can be more expensive depending on health conditions, or it may be loaded or have a benefit category omitted as part of the cover on offer. So, being provided with risk benefits by an employer plays a big role in terms of what is being offered.

Member training is a must Obtaining ongoing training on the various elements of employee benefits allows members to make decisions with the insight and knowledge that improves their chances of retiring comfortably. Keeping employees engaged with their own future financial planning is crucial.

Thinking about the above helps employers to offer competitive options, increases the retention rate of current staff, and strengthens their offering when talking to prospective employees.

Health and financial wellbeing are key to employee retention

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mployee benefits are one of the best ways of attracting top talent, but keeping employees can be difficult, even in challenging economic times.

With medical expenses constantly on the increase and ongoing concerns around employee health due to the COVID-19 pandemic, group gap cover is an excellent benefit to add to the basket. Not only does it act as a differentiating factor for forward-thinking employers, it is also mutually beneficial in safeguarding employee health, productivity and financial wellbeing.

COVID-19 has highlighted the importance of having healthy employees, as well as why medical aid is so important. But as lockdown is lifted and more people enter the workplace, so the risk of contracting the virus increases, which has a knock-on impact for businesses. In addition, medical expense shortfalls are a growing reality, not only around the virus, but with medical treatments in general. These unanticipated out-of-pocket expenses can put financial strain on employees, and in turn on employers – an outcome that group gap cover can help to prevent.

“COVID-19 may be classified as a Prescribed Minimum Benefit (PMB), which means that treatment will be covered by medical aids, but there are still shortfalls involved. If a member has to go to casualty over a weekend or after hours, there will be additional fees involved, and if they chose to make use of a non-network designated service provider (DSP), there will be copayments,” says Tony Singleton, CEO at Turnberry.

“During the pandemic, we have assisted our members with shortfalls, co-payments and penalties related to the virus, as well as other medical conditions. We have also taken our assistance a step further, assisting members’ families through our critical illness benefit, which provides a R10 000 benefit pay-out on the death of the policyholder due to COVID-19.

At a time where disposable income is stretched to the limit, this can be invaluable in easing financial strain,” he adds.

The pandemic has put everyone under financial strain, including businesses. Employers that used to offer comprehensive medical aid as an employee benefit may no longer be in a position to do so. However, downgraded medical scheme contributions could leave employees exposed.

Group gap cover is a cost-effective option to increase cover and provide additional advantages such as casualty benefits, increased cancer cover and trauma counselling benefits, among others.

“The reality is that, in our current situation, there is no single medical aid option that will cover 100% of the costs for hospitalisation or medical procedures. There will always be shortfalls and co-payments, which can run into tens of thousands of rand. With the low increase in medical aid rates for 2021, we will no doubt see even greater out-of-pocket expenses,” says Stephen Desmet, Financial Adviser at Accolade Financial Planning.

“When employees need treatment and cannot afford a co-payment, they may defer, negatively impacting their health and thus their productivity. They may also ask their employer for a loan to cover shortfalls or co-payments, which creates an increased financial burden on the employer. Human Resources departments are often left trying to manage microlending facilities and understand medical claims, creating an administrative nightmare. A group gap cover policy can address all of these challenges,” he adds.

Group gap cover offers preferential rates and more lenient underwriting, as well as reduced waiting periods, which means that it is more attractive and cheaper than individual rates. It can be tailored to complement the medical aid options available to employees to ensure that it provides comprehensive cover. It can be offered as a voluntary or compulsory benefit.

“Aside from these benefits, having group gap cover in place can actually help to improve employee health, wellbeing and productivity. Gap cover reduces out-of-pocket expenses resulting from medical expense shortfalls, co-payments, sub-limits and other bills, so that people can seek the help they need. It also provides additional benefits that can assist with the mental and financial strain of living in the pandemic. This results in reduced rates Tony of absenteeism, shorter recovery periods Singleton, CEO, and generally higher levels of happiness, Turnberry health and productivity,” says Singleton.

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RISK

28 February 2021

The ransomware epidemic

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ansomware is, by multiple measures, the top cyber threat facing businesses today, with damages caused including downtime costs and recovery time. Current incident statistics are sobering: • Every eleven seconds a company will be hit by a ransomware attack in 2021 • The average ransom demand in 2020 was $178 000 (R2.7m) • The largest 2020 ransomware demand, made to French construction firm Bouygues, was €10m (R150m) • Predicted damages from ransomware are expected to be $20bn (R600bn) in 2021.

difficult issue facing a victimised entity is the time-consuming and technically taxing decryption process,” says Zamani Ngidi, Client Manager: Cyber Solutions at Aon South Africa, a leading global professional services firm providing a broad range of risk, retirement and health solutions.

“At present, many ransomware victims handle aspects of the incident response investigation themselves, including root-cause analysis of the incident, the scope of the intrusion and restoration of the business. The inherent challenge that comes with handling such a matter internally, is taking up a responsibility that the team may not be adequately equipped or sufficiently experienced to handle, which is why transferring that risk to an experienced cyber risk expert is crucial to save on time and costs,” Zamani explains.

What is ransomware?

In a ransomware attack, threat actors gain unauthorised access to company networks and files using malicious software or malware. After gaining access, these cybercriminals encrypt files making them inaccessible, and demand a ransom payment Risk mitigation strategies in cryptocurrency in exchange for At its core, cybercrime is committed the digital key code(s) to decrypt by sophisticated and motivated threat the files. Ransomware attacks have actors, who are actively trying to become more advanced in their gain access for financial gain. Better approach, including pre-emptive protection inherently translates into measures intended to coerce ransom sensitive, ergo valuable, information payment such being guarded, as targeting which could THE SOUTH AFRICAN and destroying be leveraged CYBERCRIMES AND data backups against a to prevent company during CYBERSECURITY BILL restoration, a ransomware (B6–2017) CRIMINALISES attack. and stealing data prior to The recent CYBER EXTORTION IN encryption SolarWinds SECTION 10 OF THE BILL with the threat debacle of public release. This leaves many highlights the fact that billions victims with the difficult choice of of rand of IT security can be either permanent loss of data and undermined by one weak entry extended business disruption, or point, an example of the ingenuity of paying a ransom to regain access and criminal attackers and their methods restore operations. to obtain access.

Aon offers seven tips to help The payment conundrum mitigate the risk of falling victim to The South African Cybercrimes ransomware and better prepare for a and Cybersecurity Bill (B6–2017) ransomware incident: criminalises cyber extortion in • Be proactive – Being victimised by Section 10 of the Bill. But at present, ransomware is a jarring experience. the legal route is often a lengthy one It tests an organisation’s emotional that most companies do not have the responses to crisis, escalation time to venture down, explaining procedures, technical prowess, why many ransomware victims opt business continuity preparedness to pay the ransom to recover critical and communication skills. Ensure files or restore the operation of that the Incident Response critical systems.

(IR) Plan/Playbooks, and/ “For most victimised entities, their or Business Continuity Plan/ decision to pay the ransom is based Disaster Recovery Plan has been on whether it makes business sense to recently assessed, reviewed and do so and, if so, how to both engage updated. But, most important, with the threat actor to negotiate these plans and playbooks must be and navigate the often-unfamiliar tested through simulated practice cryptocurrency landscape to facilitate across realistic scenarios to help payment. Post-payment, the most improve resilience.

30 WWW.MONEYMARKETING.CO.ZA

• Educate employees on cybersecurity and phishing awareness – Phishing is still a leading cause of unauthorised access on a corporate network, including being the entry point for ransomware attacks. Training users to not only spot a phishing email, but to also report the email to their internal cybersecurity team is a critical step in detecting a ransomware attack. Phishing awareness is a critical cornerstone to such a cybersecure culture.

• Employ multi-factor or ‘two-step’ authentication – Multi-factor authentication (e.g. a password – something employees know, plus an authentication key – something employees have) across all forms of login and access to email, remote desktops, external-facing or cloud-based systems and networks (e.g., payroll, time-tracing, client engagement) should be a requirement for all users. Multifactor access controls can be even more effective if coupled with the use of virtual private network (VPN) interaction.

• Keep systems patched and upto-date – The rudimentary cyber hygiene activity of system updates and patching often falls by the wayside, especially as operations and security teams are stretched, systems and endpoints age and move towards legacy status, and new systems, hardware and applications are introduced as businesses grow, mature, merge and divest. Attackers can identify a vulnerable system with a simple scan of the Internet using free tools, looking for exploitable systems on which to unleash ransomware and other cyberattacks.

• Install and properly configure endpoint detection and response tools – Tools that focus on endpoint detection and response can help decrease the risk of a ransomware attack and are useful as part of incident investigation and response.

Properly configured security tools give a much greater chance of detecting, alerting on, and blocking threat actor behaviour.

• Design your networks, systems and backups to reduce the impact of ransomware – Ensure your privileged accounts are strictly controlled. Segment your network to reduce the spread of adversaries or malware. Have strong logging and alerting in place for better

detection and evidence in the event of incident response. Having a technical security strategy that is informed by industry experts that know the latest attacks and adversary trends is important, as is the use of continuous threat intelligence monitoring in open source and on the dark web.

• Pre-arrange your third-party response team – An effective ransomware response will often include all or some third-party expertise across the disciplines of forensic incident response, legal counsel, crisis communications and ransom negotiation and payment.

As time is of the essence, it is critical to pre-vet and pre-engage a team of professionals to monitor and be ready to respond to a ransomware attack when it happens.

“While the complete risk of ransomware is unlikely to be fully mitigated when considering your brand’s reputation and goodwill, as well as legal repercussions, it is crucial for organisations to consider risk transfer options by obtaining appropriate cyber insurance coverage. In doing so, organisations should review how coverage addresses indemnification for financial loss, business interruption, fees and expenses associated with the ransom and incident response, as well as considerations for service providers, such as the ability to work with incident response providers of choice. The process is best undertaken with the aid of an expert broker to address every eventuality in its entirety,” says Zamani.

Zamani Ngidi, Client Manager: Cyber Solutions, Aon South Africa

EDITOR’S BOOKSHELF

28 February 2021

BOOKS ETCETERA

HOW TO LEAD - WISDOM FROM THE WORLD’S GREATEST CEOS, FOUNDERS, AND GAME CHANGERS

BY DAVID M RUBENSTEIN

JOE BIDEN: AMERICAN DREAMER

BY EVAN OSNOS President Joseph R Biden Jr has been called both the luckiest man and the unluckiest – fortunate to have sustained a fifty-year political career that reached the White House, but also marked by the deep personal losses he has suffered.

Yet, even as Biden’s life has been shaped by drama, it has also been powered by a willingness, rare at the top ranks of politics, to confront his shortcomings, errors and reversals of fortune. His trials have forged in him a deep empathy for others in hardship – an essential quality as he addresses a nation at its most dire hour in decades.

Blending up-close journalism and broader context, Evan Osnos illuminates Biden’s life and captures the characters and meaning of an extraordinary presidential election. He draws on lengthy interviews with Biden and revealing conversations with more than a hundred others, including President Barack Obama, Cory Booker, Amy Klobuchar, Pete Buttigieg, and a range of progressive activists, advisers, opponents, and Biden family members. In this nuanced portrait, Biden emerges as flawed, yet resolute, and tempered by the flame of tragedy – a man who just may be uncannily suited for his moment in history.

HOW I LEARNED TO UNDERSTAND THE WORLD

BY HANS ROSLING It was facts that helped him explain how the world works, but it was curiosity and commitment that made the late Hans Rosling, Swedish statistics mastermind and author of worldwide bestseller Factfulness, the most popular researcher of our time.

How I Learned to Understand the World is Hans Rosling’s own story of how a young scientist learned to become a revolutionary thinker, and takes us from the swelter of an emergency clinic in Mozambique, to the World Economic Forum at Davos. In collaboration with Swedish journalist Fanny Härgestam, Hans Rosling wrote his memoir with the same joy of storytelling that made a whole world listen when he spoke.

For the past five years, David M. Rubenstein – author of The American Story, visionary cofounder of The Carlyle Group, and host of The David Rubenstein Show – has spoken with the world’s highest performing leaders about who they are and how they became successful. How to Lead distils these revealing conversations into an indispensable leadership guidebook, containing advice and wisdom from CEOs, presidents, founders and master performers from the worlds of finance (Warren Buffett, Jamie Dimon, Christine Lagarde, Ken Griffin), tech (Jeff Bezos, Bill Gates, Eric Schmidt, Tim Cook), entertainment (Oprah Winfrey, Lorne Michaels, Renee Fleming, Yo-Yo Ma), sports (Jack Nicklaus, Adam Silver, Coach K, Phil Knight), government (President Bill Clinton, President George W Bush, Ruth Bader Ginsburg, Nancy Pelosi), and many others.

How to Lead shares the extraordinary stories of these pioneering agents of change, describing how each luminary got started and how they handled decision making, failure, innovation, change and crisis. The book enables the reader to learn from their decades of experience as pioneers in their field, and emphasises that no two leaders are the same.

SUDOKU ENTER NUMBERS INTO THE BLANK SPACES SO THAT EACH ROW, COLUMN AND 3X3 BOX CONTAINS THE NUMBERS 1 TO 9.

THE LAST DAYS OF JOHN LENNON

BY JAMES PATTERSON Even before John Lennon left The Beatles, becoming a solo artist and making a life with Yoko Ono in New York City, Mark David Chapman had become obsessed with murdering his former hero. Chapman was convinced that Lennon had squandered his talent and betrayed fans with messages of hope and peace. In December 1980, Chapman quit his security job in Hawaii, signing out as ‘John Lennon’, and boarded a flight to New York with a handgun and bullets stowed in his luggage. He was never going home again.

Enriched by exclusive interviews with Lennon’s friends and associates, including Paul McCartney, The Last Days of John Lennon is a true-crime drama about two men who changed history. One whose indelible songs enliven our world to this day, and the other who ended the beautiful music with five pulls of a trigger.

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