MoneyMarketing February 2019

1

28 February 2019 | www.moneymarketing.co.za

First for the professional personal financial adviser

WHAT’S INSIDE

YOUR FEBRUARY ISSUE

WHY THE ANC IS EYEING YOUR PENSION

JACK BOGLE, INDEX FUND PIONEER, DIES AT 89

CHOOSING BETWEEN TAX-FREE UNIT TRUSTS

The idea of a prescribed assets regime is nothing new

“He was a tremendously intelligent, driven and talented visionary” Page 12

It’s worthwhile considering listed property as part of a tax-free investment Page 17

Page 6

What new retirement fund default regulations mean for members Amendments to the Pension Funds Act will be implemented from 1 March 2019.

MoneyMarketing spoke to Katherine Barker, Head of Momentum’s FundsAtWork, about what these regulations mean for members.

Katherine Barker, Head: FundsAtWork, Momentum

As retirement funds will shortly have to make available fund-endorsed solutions for preserving workers’ savings and for providing an annuity when they retire, do you think workers’ chances of retiring comfortably will greatly improve?

We believe that the retirement outcomes of members will improve, mostly because of increased access to easier-to-understand information.

This will empower members to make better decisions and/or to engage more productively with their financial advisers when changing jobs, retiring, or at any point for that matter.

In addition, the default options will, in most instances, be the most cost-effective options for members.

Trustees have to consider the costs of these default options and need to make sure the charges are reasonable, competitive, not overly complex and adequately disclosed. A lot of thought and deliberation is going into the

careful selection of each default option by boards of trustees to ensure that members’ retirement outcomes are enhanced to their utmost.

Another big positive is that the information needs to be in ‘clear and understandable language’ – so the industry will have to move towards using less jargon and demystifying complex concepts to members.

In addition, retirement benefit counselling doesn’t have to stop at providing access. Funds and administrators can be more proactive and provide counselling and financial education services to all members, regardless of their time to retirement.

THE INFORMATION NEEDS TO BE IN ‘CLEAR AND UNDERSTANDABLE LANGUAGE’ SO THE INDUSTRY WILL HAVE TO MOVE TOWARDS USING LESS JARGON

Do you think preservation will increase when solutions are put in place to make it easier for exiting members to preserve their savings?

Yes, and we have experienced this firsthand with our Smart Exits solution and in-fund preservation option. It might not take the preservation rate from 10% to 90%, but it will definitely improve preservation rates. It is important to note that preservation is not an ‘all or nothing’ thing – members can choose which percentage of their retirement savings they would like to preserve and which portion they would like to take as a cash lump sum.

Tell us about the Smart Exit strategy created for Momentum FundsAtWork and how it assists employees Smart Exit is a tool that members who resign have access to. This includes interactive scenario analysis that shows members what the impact of Continued on page 3

LAURIUM BALANCED PRESCIENT FUND

3 YEARS OF STAYING AHEAD NO MATTER THE TERRAIN.

Ranked 6 / 135 funds in the South African Multi-Asset High Equity Sector since inception. Beating the median cumulative return by 4.1% per annum after fees.

Source: Morningstar

WE KNOW INVESTMENTS T +27 11 263 7700 E laurium@lauriumcapital.com www.lauriumcapital.com Annualised performance shows longer term performance rescaled to a 1 year period. Annualised performance is the average return per year over the period. Actual annual figures are available to the investor on request. Collective Investment Schemes (CIS) should be considered as medium to long-term investments. The value of your investment may go up and as well as down as past performance is not necessarily a guide to future performance. CIS’s are traded at a ruling price and can engage in script lending and borrowing. Performance has been calculated on the C1 class using net NAV to NAV numbers with income reinvested. The performance for each period shown reflects the return for investors who have been fully invested for that period. Individual investor performance may differ as a result of initial fees, the actual investment date, the date of reinvestments and the dividend withholding tax. A schedule of fees, charges and maximum commissions is available on request from the Manager. There is no guarantee in respect of the capital or returns in a portfolio, A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Prescient Management Company (RF)(PTY) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). Laurium Capital (Pty) Ltd, Registration number: 2007/02629/07 is an authorised Financial Services Provider (FSP34142) under the Financial Advisory and Intermediary Services Act (No.37 of 2002). For any additional information such as fund prices, brochure and application forms please go to www.lauriumcapital.com

Money Marketing Strip Ad.indd 1

2019/01/17 09:45

Helping over a million members retire more comfortably Through research and analysis of our Member WatchTM data we empower our clients to secure the financial well-being of their employees.

The numbers speak for themselves and now you can harness the power of this data.

If you don’t yet have your fund with us, contact us today. www.alexanderforbes.co.za

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

AF16807

Member Watch uses data from all the retirement funds we administer, making it the most extensive membership and employer data sample of retirement fund surveys in South Africa.

28 February 2019

NEWS & OPINION

their choices at resignation – in terms of their fund benefits – will have on their ultimate retirement outcomes.

Through the use of behavioural science in the development of this tool, the intention is to nudge members into new ways of action. For example, we have specifically used the concept of loss-aversion, where we show members how much less income they will receive in retirement if they were to take their full retirement savings as a lump sum. This is because science shows that people dislike losses more than they like gains of an equivalent amount. Additionally, showing people how much tax they will be paying on their withdrawal from their fund tends to make members think twice about what they plan to do with their retirement savings on resignation.

How important is retirement benefit counselling?

To me, this is the regulation that brings all the defaults together because of the access to clear and understandable explanations and disclosures for each of the defaults, namely the default investment portfolio, default preservation option and annuity strategy. In most instances, the defaults will be chosen in such a way as to maximise the benefits without restricting individual choice. Many funds and administrators are using retirement benefit counselling as an opportunity to provide further financial education. Momentum’s Retirement Benefit Counselling will comprise three different elements: 1. Smart Counsel – this encompasses telephonic and face-to-face counselling provided to members, as well as financial coaching/ education.

2. Smart Conference – this is an annual regional workshop that will be held for members of Momentum FundsAtWork (focussed on those within five years of retirement) and, as far as I’m aware, is still the first and only of its kind in South Africa. Smart Conference will include topics like: • My retirement fund benefits and options • My insurance benefits • Saving for my golden years • Understanding different types of annuities • How to spend wisely.

3. Smart Solutions – these are our Loerie award-winning tools: • Smart Exits: a tool to determine the impact on retirement outcomes on decisions made at resignation, as well as the impact of tax.

• Smart Retirements: an educational tool to differentiate between the types of annuities, allowing members to incorporate all of their retirement savings from different sources. It can be used on a no-obligation try-before-you-buy basis by all members of FundsAtWork, regardless of how far they are from retirement.

• Smart Onboarding: this is currently in Beta phase and will assist members when they join the fund (either because their employer has moved into the umbrella fund or because they have joined a new employer who is already on FundsAtWork) to be aware of their benefits and to make more empowered decisions from the get go.

How will the counselling service benefit financial advisers?

Financial advisers will be in a position to deliver the greatest value by doing what they do best – providing professional advice and delivering their ‘best of advice’ solutions for clients. We see counselling and advice living in a symbiotic relationship, as they complement each other very well. Counselling provides the information and empowers the member to engage more productively with their financial adviser. We will have a very active leads management system so that where a member requests advice, they can be referred to either their individually-appointed investment adviser or to the scheme-appointed financial adviser.

The regulations will be put in place next month, so when do you think definite trends will be evident (eg. six months or a year later?)

Unfortunately, people’s behaviour doesn’t change overnight, so I don’t expect miracles to happen within a few months. I do, however, believe that this is an incredible opportunity for the industry to engage more proactively with members and empower them with appropriate and easy-to-understand information. In the short term (i.e. less than five years) we can definitely expect to see an improvement in preservation and a shift in the number of people retiring more comfortably. In the longer term, however, I think we will see a generation that is more financially literate, informed and aware of the impact of their decisions. Education and financial education are key to the success of South Africa.

SUBSCRIBE TO

GET A 12-MONTH SA SUBSCRIPTION FOR ONLY R494!

(SA postage only, including VAT)

EDITORIAL EDITOR: Janice Roberts janice.roberts@newmedia.co.za LAYOUT & DESIGN: Julia van Schalkwyk SUB EDITOR: Anita van der Merwe

ADVERTISING ADVERTISING SALES EXECUTIVE: Mildred Manthey Direct: +27 (0)11 877 6195 Cell: +27 (0)72 832 5104 mildred.manthey@newmedia.co.za

DISTRIBUTION & SUBSCRIPTION Felicity Garbers felicity.garbers@newmedia.co.za

PUBLISHING TEAM GENERAL MANAGER: Dev Naidoo PUBLISHING MANAGER: Sandra Ladas sandra.ladas@newmedia.co.za PRODUCTION MANAGER: Angela Silver angela.silver@newmedia.co.za ART DIRECTOR: David Kyslinger

Published by New Media, a division of Media24 (Pty) Ltd.

PRINTING Printed by Novus Print Solutions © Copyright MoneyMarketing 2019

EDITOR’S NOTE

I

think most readers would agree that 2019 has started on a rather ‘noisy’ note. We’ve had the release of the ANC’s election manifesto containing the party’s wish list, which includes changing the mandate of the SA Reserve Bank (SARB) and imposing a prescribed assets regime on pension funds (see page 6). Both measures are likely to be economically destructive should they be implemented – and would likely lead to further downgrades by ratings agencies.

We can only hope that the SARB’s Governor, Lesetja Kganyago, who has regularly emphasised the importance of SARB independence, will be called upon to stay at the central bank’s helm beyond November when his term expires. As I write, we are still awaiting the appointment of a SARB deputy governor to replace Francois Groepe, as well as an appointment to the Monetary Policy Committee to replace Brian Kahn. If both positions are filled soon, this will go a long way to settle investors’ nerves.

We’ve also heard disturbing revelations at the Zondo Commission of Inquiry into State Capture, where former Bosasa COO Angelo Agrizzi stated under oath that Bosasa (now African Global) spent between R4m and R6m per month on bribing ANC officials, making sure that the company was awarded tenders and contracts worth over R10bn from the government. It’s now clear that corruption in the country extends way beyond the Guptas.

President Cyril Ramaphosa, to his credit, has admitted that state capture damaged several critical institutions, negatively impacted confidence in the economy and resulted in the theft of billions from the state. However, he has confirmed that as damaging as some of the testimony to the Zondo Commission may be, this is a vital process that must be seen through to its conclusion. The president has also stated that as regards the Bosasa debacle, his own conscience is clear.

In the famous words of former SA statesman, Field Marshal Jan Christiaan Smuts: “Let the situation develop.”

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

Contact Felicity Garbers

Email: felicity.garbers@newmedia.co.za Tel: (021) 701 1566

JOHANNESBURG OFFICE: Ground floor, Media Park, 69 Kingsway Avenue, Auckland Park, 2092 Postal Address: PO Box 784698, Sandton, Johannesburg, 2146 Tel: +27 (0)11 877 6111 | Fax: +27 (0)11 877 6198 HEAD OFFICE: New Media House, 19 Bree Street, Cape Town, 8001 Postal Address: PO Box 440, Green Point, Cape Town, 8051 Tel: +27 (0)21 417 1111 | Fax: +27 0)11 877 6198 newmedia@newmedia.co.za

Unless previously agreed in writing, Money Marketing owns all rights to all contributions, whether image or text.

SOURCES: Shutterstock, supplied images, editorial staff.

While precautions have been taken to ensure the accuracy of its contents and information given to readers, neither the editor, publisher, or its agents can accept responsibility for damages or injury which may arise therefrom. All rights reserved. © MoneyMarketing. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, photocopying, electronic, mechanical or otherwise without the prior written permission of the copyright owners. © MoneyMarketing is not a financial adviser. The magazine accepts no responsibility for any decision made by any reader on the basis of information of whatever kind published in the magazine.

NEWS & OPINION

Continued from page 1

3

PROFILE

4

NEWS & OPINION

28 February 2019

ELIZE BOTHA MD OF OLD MUTUAL UNIT TRUSTS

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

My big passion as a child was to be a teacher. I then decided to rather become a lawyer and after my studies I realised the judicial path was not for me. I started working in a financial company and enjoyed it. The wonderful thing is that we, as an industry, have the capability to help South Africans realise their dreams. So, despite not wanting to be in finance as a youngster, I now absolutely love what I do.

How do you view your role as Managing Director of Old Mutual Unit Trusts?

I believe the role is in service of our clients.

This mainly comes to play in four ways: • Demystifying investments for clients • Making sure we have a fit-for-purpose product suite • Making sure we deliver consistent investment returns to investors • Making sure that we do this in a responsible way – by considering environmental, social and governance factors.

Clients are always at the epicentre of our thinking.

VERY BRIEFLY

What makes a good investment in today’s economic environment?

A diversified portfolio is always a great idea. No single asset class outperforms all the time and getting an investment professional to manage the split in asset classes is responsible.

To bring costs down, blending with indexation is another way to enhance your returns.

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

A retirement annuity – most definitely!

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

My best moments were connected to discovering how investments enhance people’s lives – there are a number of stories like these. People that were able to educate their children as they were not able to go to university; people travelling abroad for the first time… These stories always warm my heart. One of my worst was seeing a client destroying investment value by chasing investment market noise. He halved his life savings by one switch at the wrong time. Our mantra remains: Don’t listen to market noise and invest for the long term.

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

Oh dear, there are quite a few. But one I particularly like is The Intelligent Investor by Benjamin Graham. He has a beautiful take on how not to lose money.

There is also a lovely blog (aimed at women) offering some wonderfully practical ideas,

by Mapalo Makhu called Women & Finance.

Absolutely worth a read.

CLIENTS ARE ALWAYS AT THE EPICENTRE OF OUR THINKING

UPS & DOWNS

The World Bank expects to see South Africa’s economy grow by 1.3% this year. This is an improvement from a forecast of 0.9% for 2018. According to the bank, GDP growth will be supported by the implementation

of structural reforms under President Cyril Ramaphosa, including relaxed visa regulations, progress on the Mining Charter and the establishment of an infrastructure fund. The bank puts the country’s growth in 2020 at 1.7%.

Agricultural industry organisation Agri SA conducted a survey in December 2018 among its members to accurately assess the impact of the widespread drought – which began in 2016 – on farming and job creation. Since January 2018, the agricultural sector shed 31 000 jobs in provinces severely affected by the drought

and lost approximately R7bn (turnover) due to drought. Approximately two-thirds of the respondents reported severe to critical stress levels of groundwater and surface water, while the general condition of pastures was reported to be worse than expected.

Lindsey Ord has been appointed to the management board of Climate Fund Managers (CFM) as chief financial officer.

CFM is a joint venture between Sanlam InfraWorks and the Dutch Development Bank and invests in climate-related projects in emerging markets. Lindsey has 20 years’ experience in private equity fund management, specifically in financial and risk management and endto-end transaction design and implementation. She played an integral role in the establishment of CFM and Climate Investor One, an innovative finance investment vehicle focused on renewable energy Lindsey Ord, projects in Africa, SouthChief Financial East Asia and Latin America. Officer, CFM

PPS has acquired the remaining 49% shareholding held by Santam in the PPS short-term business. The deal results in PPS Short-term Insurance becoming a whollyowned subsidiary of PPS. “The purchase of Santam’s stake was approved by both the Santam Board and the PPS Board,” says Izak Smit, CEO of PPS. He explains that the major reason for the acquisition of Santam’s share is competition related. “It is somewhat sad to lose Santam as an equity partner, but we always have to be very mindful of competition legislation, and this made the partnership, especially in relation to certain strategic objectives that we want to pursue, difficult.

However, the decision was also related to the maturity of the business – it can now stand on its own legs without the need for an equity partner. It is growing, the claims ratio is good, the fundamentals are in place.”

A new internationally recognised professional qualification is available to South Africans who have a professional degree and are looking to expand into an analytical career in the financial services sector. The Certified Actuarial Analyst (CAA) qualification is now supported in South Africa, following the recent accreditation of the Actuarial Society of South Africa (ASSA)

by CAA Global as a professional home for individuals completing this qualification. CAA Global is a joint venture between the UK’s Institute and Faculty of Actuaries and the US Society of Actuaries, and was established to offer the CAA qualification around the world. Mike McDougall, CEO of ASSA, says by introducing the CAA qualification in South Africa, the Society aims to address the growing demand for professional analysts, particularly in financial services. Individuals wanting to pursue the CAA qualification can register through CAA Global. Once they have completed their examinations, they can then join the Actuarial Society, which will support them with professional guidance and continuing professional development.

6

NEWS & OPINION

28 February 2019

Why the ANC is eyeing your pension

A

ccording to the ANC’s 2019 Election Manifesto, the party will “investigate the introduction of prescribed assets on financial institutions’ funds to mobilise funds within a regulatory framework for socially productive investments (including housing, infrastructure for social and economic development, and township and village economy) and job creation while considering the risk profiles of the affected entities”.

That means that the pensions and savings of ordinary South Africans could be used to build houses and roads – but they could also be used to prop up state-owned enterprises such as Eskom and SAA. While MoneyMarketing acknowledges that the prescribed assets regime is presently only on the ANC’s wish list, we believe there is no certainty that it will die a quick death. There is clearly a faction within the ANC that wants to continue having access to more funds.

MoneyMarketing has pursued this issue in depth, speaking to various players in the savings and retirement industry. Unsurprisingly, not one of these people thought that the imposition of prescribed assets was a good move.

‘No need to panic’ We also asked Minister of Finance, Tito Mboweni – at a briefing that took place shortly after the publication of the ANC’s election manifesto – if National Treasury would be in charge of an investigation into the feasibility of a prescribed assets regime.

He replied that he had noted, from his position as the Minister of Finance of the Republic of South Africa, the contents of the ANC manifesto and that he was due to have a conversation with Treasury’s Director-General,

Dondo Mogajane. However, the minister said they would wait for all the political parties to submit their manifestos and only then would they begin the process of costing each and every manifesto. “We are civil servants, that’s our job,” Minister Mboweni stated. All the political parties would then be briefed as to what the financial implications of their manifestos would be if they won the election.

The minister added that there was “no need to panic” about a prescribed assets regime.

“What I know about prescribed assets, historically, is that you have to be very careful how you go about imposing them, because the Prudential Authority at the SA Reserve Bank has to look into this very, very carefully.” He explained that the Prudential Authority considers limits for both offshore investments and domestic investments, and even limits of domestic investments into state entities. “At the end of the day, the institutional investors are custodians of people’s money and need to make sure that, wherever the funds are invested, there is preservation and growth of the investments. We’ll look into all of those things… but there’s no need to panic as we have a Prudential Authority in South Africa.”

While MoneyMarketing acknowledges that a prescribed assets policy is unlikely to be implemented while President Cyril Ramaphosa is leading the country, there is indeed reason to be cautious in the long term.

“The mention of prescribed assets is in line with NASREC policy but its more explicit exposition again

shows a win for the Zuma faction in the manifesto formation process, and should be a wake-up call for the local asset management community that the issue of prescribed assets is alive, even if it will not be pushed forwards with the current leadership of the National Treasury,” says Peter Attard Montalto, Head of Capital Markets Research at Intellidex.

Hunt for solutions for Eskom “The issue is current, however, because the hunt for solutions for Eskom will likely lead to a debate around the need to dictate that the asset management community and banks lend to Eskom to keep it afloat – this is very much a topic that will rear its head in 2019. Even if we don’t see the policy move forwards in the short term, the risk is there in the long term,” Attard Montalto adds.

Eskom and its debt are undoubtedly the greatest risks to South Africa’s economy. Investors have lost confidence in the power utility that is rated at sub-investment grade, leaving it struggling to borrow funds. A faction in the ruling party appears to consider that one of the ways to stop the rot is to use the savings and pensions of the country’s citizens to prop up Eskom.

did not have direct vested interests in how the assets were invested, and they were also not represented on the boards of trustees. Under definedcontribution arrangements, the assets that a member saves and invests determines the amount of their final pension benefit. Members now also have the right to elect 50% of the board, and they have one objective and one objective only – to maximise their returns subject to an acceptable level of risk.”

Wierzycka warns that the introduction of prescribed-assets requirements in the current environment may well encounter resistance, and even court challenges, from members and trade unions that take an active interest in the investments of funds that fall under their auspices.

“On the other hand, government may well argue that since retirement funds enjoy tax breaks, government should have a say over how the money is invested.

If such an eventuality should take place, existing funds may demand ‘grandfathering’ of existing investment strategies, i.e. a demand that savings to date are not affected by the new provision.

Smaller retirement industry Prescribed assets “Going forward, members may opt nothing new out of retirement funds altogether The idea of a prescribed assets and choose to save directly, which regime is nothing new and is similar could ultimately result in insufficient to the tactics used up until 1989 by savings down the line,” she adds. the National Party during apartheid.

Peter Armitage, CEO of Anchor “Under the old Capital, believes that regulation, 53% of a possible outcome THE IDEA OF A a retirement fund’s of a prescribed assets assets were required policy would be a PRESCRIBED to be invested in smaller retirement ASSETS REGIME parastatal and industry as concerned IS NOTHING NEW contributors put away government bonds, leaving only 47% as little as possible to be invested in ‘growth assets’ into pension funds and withdraw such as equities. No international their funds as soon as allowed. “A investments were permitted,” move of this nature might also have says Magda Wierzycka, CEO of negative consequences for the SA the Sygnia Group. bond and equity markets. If fund “In reality, much has changed managers are forced to allocate a since the early 1990s, and the portion of funds into a prescribed biggest change has been the asset, it has to come from somewhere move from defined-benefit else, resulting in lower absolute to defined-contribution demand for other listed assets. arrangements as a common Hence, a move of this nature has the legal structure for retirement risk of having an impact on the value fund provision. Under the of investments that are currently defined-benefit arrangement, held,” he adds. investment risk was borne by His expectation, though, is the corporate, and members for a watered-down version of were guaranteed a salary prescribed assets. relative to their final “The government desperately salary at retirement. needs funding to solve many “Consequently, balance sheet issues for state-owned individual members enterprises and growth projects.

28 February 2019

Hence, it is not surprising that the government sees prescribed assets as a method to fund these. As it stands in the manifesto, the ANC will be under pressure to have a form of prescribed assets implemented.

However, the finance minds in the ANC and government will be well aware of the negative implications of this and therefore it is likely to result in a compromise policy, which is partially palatable to investors.

“It is clear there are different factions within the ANC and a great deal of compromise is required. The precarious situation of SOEs means that the government needs to keep all its options open. Raising capital for certain SOEs and growth initiatives is challenging, but not impossible. This would be part of the solution set.”

Pension funds can assist While all South Africans should work in unison to solve the country’s

issues, Armitage says pension funds cannot be viewed as a funding pot on uneconomic terms.

“The asset management industry has been very supportive of the fund-raising programmes of many state-related entities, but on a basis where the risk and return is priced on an arm’s-length basis. Removing this element from the investment decision of fund managers would not be viewed in a positive light. Pension funds can assist by playing a role in funding growth projects and initiatives, but on terms that are reasonable from a risk/ return perspective.”

Wierzycka points out that many socially responsible investment vehicles and infrastructure funds are already in place to deploy assets into viable projects that generate an acceptable rate of return.

“The problem is not an unwillingness on the part of the asset management industry to participate,

so much as it is a dire shortage of such projects and a complete lack of trust that the money will not be wasted for other purposes.

Consequently, before deploying such short-term solutions, it is imperative

NEWS & OPINION

that the National Treasury and the Prudential Authority engage with the industry to find out which assets are available and what the breaks are on such investments. I think they will find the answers surprising.”

SA’s Minister of Finance, Tito Mboweni

Investors more confident when they have advisers

U

S investors who work with financial advisers (FAs) are more than twice as confident that they will have enough money to enjoy a comfortable life in retirement.

This is according to the latest global investment survey carried out by American investment management firm, Legg Mason.

“Investors with FAs were more confident their investments will perform well over the next 12 months,” the survey states. “They also reported having more diversified portfolios, less reliance on US stocks, and were markedly more willing to invest in ESG-oriented products.”

Still, concerns about retirement are top of investors’ lists. Just over a third of investors with an FA reported being ‘very confident’ about having enough money saved for a comfortable retirement, versus only 13% among those who did not use an adviser.

Of those who were less confident, almost twice as many investors without an adviser (20%) were ‘very concerned’ about having enough saved for retirement, compared to only 11% of those with an adviser.

With market uncertainty on the rise, investors with advisers were also more likely to perceive volatility as an opportunity: 44% said volatility is ‘positive’ and that if managed properly, returns can be higher than usual, compared to 27% of investors without FAs. Perhaps that is why 72% of investors with FAs are ‘confident’ in their investments (with 32% ‘very confident’) over the next 12 months, compared to 52% (and 7% ‘very confident’) for those without an adviser. In addition, 61% of those with FAs will increase how much they invest for retirement over the next five years, compared to 34% of investors without.

“By helping investors focus on the long term,

financial advisers can provide a steadying voice of reason,” Thomas K Hoops, EVP and Head of Business Development for Legg Mason, says.

“Investing can be a very emotional process, especially in times of market volatility, and an experienced FA is often integral to keeping investors on track to achieving their goals.”

Hoops adds that advisers can help deliver better results against key goals and often enable investors to hedge more effectively against downside risks.

“Working with a financial adviser does not preclude investors from acting with conviction and placing money in assets they choose, but FAs more often help them focus on specific goals and investment outcomes. Given the strong need to focus on retirement savings that our survey exhibits, this is a good thing.”

Financial advisers encourage diversified investing Legg Mason’s research found that advised investors are more open to new ways of investing, taking into account goals-based investing. They also tended to have long-term goals, often as a result of the risk profiling done by the FAs. Investors with advisers reflected a more diversified perspective of market opportunity, while the view of investors without an adviser was more concentrated in US equities.

Specifically, 60% of investors without an adviser believed US equities are the best opportunity over the next 12 months, compared to 44% of investors with an FA. Investors who use an adviser are far more likely to say that other asset classes also present the best opportunity over the same timeframe, including: • Real estate: 31% with FAs; 18% without • Domestic bonds: 24% with FAs; 13% without

7

• Alternatives: 21% with FAs; 12% without • Gold/metals: 19% with FAs; 11% without • International bonds: 14% with FAs; 1% without Both agreed on international stocks: those with an FA (25%) and those without (30%) ranked the asset class a top-three choice, along with domestic stocks and real estate.

How does this compare to financial advisers’ views? When asked the same question in a Legg Mason survey of FAs who collectively manage more than $2.2bn in client assets, the top three investment opportunities over the next 12 months were: • International stocks • Domestic stocks • Alternative investments.

“Optimism for alternatives has increased as investors understand the benefits of diversifying portfolios away from stocks and bonds,” Victoria Rock, Head of Alternative Products at Legg Mason Global Asset Management, says. “Investors are worried about the high valuations in equity markets, and the prospect of low yields in bond markets is causing them to look at other asset classes such as real estate. FAs understand and are leading this trend.”

Financial advisers also reported seeing volatility largely as an opportunity, rather than a threat: 55% of them agreed with investors who use an FA in saying volatility is positive.

Thomas K Hoops, EVP and Head of Business Development, Legg Mason

8

NEWS & OPINION

28 February 2019

Earning foreign Concept of ‘sovereign income? Prepare equity’ launches at Davos for new tax now or W get hit hard later

S

outh Africans living and working abroad should be doing more to prepare themselves for the implementation of the country’s new expatriate tax on 1 March 2020. That’s according to Ruaan van Eeden, Managing Director, Tax Advisory at the Geneva Management Group (GMG).

Under the new legislation, South African tax residents abroad will be required to pay tax to SARS of up to 45% of their foreign employment income, where it exceeds the R1m exemption threshold.

The only practical ways to avoid doing so are to financially emigrate through a formal process which, as a consequence, ceases tax residency, or to cease tax residency without the need to formally emigrate.

But, van Eeden warns, many South Africans living abroad aren’t aware of the new requirements or the consequences of choosing to follow the financial emigration or cessation of tax residency route.

“My concern as a tax practitioner is that not many expatriates in this position understand what the impact is going to be,” he says.

Unfortunately, van Eeden says, many expats “believe that they are non-residents from a tax perspective, because of the fact that they’ve spent a number of years outside South Africa, and their stated intention is to never come back to the country”.

This is simply not the case.

Unless you have financially emigrated, or ceased tax residency (without necessarily emigrating), you are still a South African taxpayer as far as SARS is concerned. And this means that you should have been submitting information about your income to the revenue authorities during the years you worked outside the country.

Choosing which option to take isn’t always easy either.

“What a lot of expats have discovered as part of this process is that if they cease South African tax residency, there’s a deemed exit charge from a capital gains tax perspective at a maximum effective rate of 18%, which most of them haven’t budgeted for,” says van Eeden.

This is particularly true of South Africans living in low tax jurisdictions like Dubai – where no income tax is levied – who may have built up substantial offshore assets with tax-free income.

According to van Eeden, expatriates in this position “need to take a very hard look at their finances and see whether or not it makes financial sense to formally exit the South African tax net and suffer a once-off capital gains tax charge at a maximum effective rate of 18% on their worldwide assets.”

Figuring out what action to take can be challenging. As van Eeden notes, “It’s an emotionally and technically delicate position with a number of variables to consider.”

What is clear, however, is that doing nothing is not an option.

Ruaan van Eeden, Managing Director, Tax Advisory, Geneva Management Group

ith the need to address entrenched inequalities firmly on the ‘Globalisation 4.0’ agenda, investment migration advisory firm Henley & Partners launched the concept of ‘sovereign equity’ in Davos last month. Sovereign equity is a means for governments to achieve fiscal balance and economic growth without increasing their debt – meaningfully addressing the growing imbalances and inequalities inherent to traditional sovereign debt financing by engaging with the global community of high-net-worth investors.

In a multi-stakeholder public discussion that brought together government heads and ministers, leading academics and renowned experts, panellists considered the transformative effects that well-regulated investment migration programs have on the economy and society at large, supporting growth and creating employment opportunities.

Explaining the potential for sovereign equity to bring about a fundamental change in sovereign funding, foreign direct investment and government spending, Dr Christian H Kälin, Group Chairman of Henley & Partners, says: “Sovereign equity is both self-evident and revolutionary. The 2008 financial crisis and its continuing aftermath makes it evident that constantly increasing sovereign debt is not a sustainable solution. In particular, sovereign states without abundant natural resources or the ability to raise significant revenue from taxation must find an alternative – one that will allow them to compete in global markets and avoid the dangerous levels of debt that are serious threats to their economies and societies.”

Dr Kälin adds that “well-managed investment migration programs help drive non-debt liquidity into countries, in addition to attracting significant foreign direct investment, as well as valuable skills and experience. This combination – launched in Davos as the concept of ‘sovereign equity’ – can create fiscal independence and opportunities for a society at every level, which also benefits the international community.”

Sovereign equity: Innovative access to capital for governments There is also an urgent need to redress the imbalances caused by globalisation.

The panellists – including international relations specialist and best-selling author Dr Parag Khanna and nation brands expert Simon Anholt – examined how sovereign states without natural resources or the ability to raise significant funds through taxation or capital markets can attract capital and investment that creates societal value and economic

opportunity, without adding to the burden of sovereign debt.

Speaking about the extraordinarily positive impact that Antigua and Barbuda’s citizenship-by-investment program has on the country, the Hon Gaston Browne, Prime Minister of Antigua & Barbuda, said that the program constitutes 15% of the Treasury’s annual revenue and has become a significant source for the repayment of debt – both domestic and international.

“Sovereign equity is about investors ‘buying into’ Antigua. It has helped us pay off our IMF debt in full, develop multiple industries that create employment opportunities for our citizens, and make strategic investments that will benefit everyone on our islands – be that through infrastructure or pensions provision.”

Similarly, the Hon Prof Edward Scicluna, Malta’s Minister of Finance, commented that investment migration programs have had a profound impact on his country, pointing out that just four years after the launch of the Malta Individual Investor program (IIP), Malta had one of the highest GDP growth rates and one of the lowest unemployment rates of any EU member state. “Our economy has proved remarkably strong, to the point where we have a budget surplus with or without the IIP. For us, sovereign equity is as much about the global skills and experience that are invested in Malta and that create significant value. The capital raised through sovereign equity allows us to make strategic investments that will enhance the lives of Maltese citizens for many years to come.”

Redressing imbalances by connecting global citizens with sovereign states Following the discussions held in Davos last month, Dr Kälin says that he looks forward to engaging with governments and international institutions about the extraordinary potential for sovereign equity to assist countries in achieving real fiscal autonomy and growth: “While essential for smaller countries, sovereign equity is also a means for larger economies to fund growth and employment creation in economically underdeveloped regions, and we have no doubt that we will see much more of this in the coming years. Sovereign equity is the future, not further sovereign debt.”

Dr Christian H Kälin, Group Chairman, Henley & Partners

28 February 2019

RICHARD RATTUE Managing Director, Compli-Serve SA

NEWS & OPINION

9

Getting it right in ‘RegTech’

T

he financial services industry may wonder about the way forward for compliance and risk functions as Regulatory Technology, or RegTech, becomes undeniably a factor for all.

In the past, compliance programs were largely unprepared for the risks associated with a shift to technology and were rather geared towards the tick-box approach. The lack of data analysis went hand in hand with firms and regulators being typically under-resourced across the board, highlighting the glaring deficiencies in compliance and risk areas.

Global speed As we move into a time of increasingly frequent and intricate rules and as the digital age further shapes financial services, when looking at the global picture, the shift towards sustainable compliance is evident – and necessary. There have been 50 000 new regulations across the G20 since 2014, while the Markets in Financial Instruments Directive (MifID2) comes in at 30 000 pages (or 1.5m paragraphs, depending on how you prefer your word count), while surveys reveal positive results in favour of an improved compliance function.

Positive statistics further reveal the hiring of 9 000 people dedicated to compliance and control functions in the industry, according to @ Citi for 2014-2018, while according to Nasdaq, compliance spend in firms saw a 56% increase between 2014 and 2017. Banks, according to the TR Cost of Compliance Survey, reported a 67% increase in compliance spend in 2017. These trends point towards the growing awareness of ‘RegTech’ as cryptocurrencies become the norm for many, even though their regulation is still developing.

A big launch Compliance and risk functions are of course not immune to disruption and for those who ‘fail to launch’, the consequences could be dire.

Regulators are increasing their demands for more detailed data reporting, accompanied by a $2.3bn spend by banks on compliance functions. The disruptive age is here, whether you are ready or not.

Big Data and its interpretation are massive and increasingly becoming a real aid for compliance officers to try and spot smoke before we have fires.

They sometimes can’t spot the smoke because they are under-resourced, and

their field of view is just too great.

RegTech helps to solve compliance challenges in a smarter and faster environment, assisting in meeting enhanced regulatory reporting standards, reducing barriers to entry, automating routine compliance tasks where possible, and thus augmenting the human resource.

Watch this space indeed.

There are, however, roadblocks and challenges for RegTech, and regulatory acceptance is key among them. The outdated market rules, stakeholder resistance and legacy infrastructure already in place point towards slow adoption to change by the top level, as well as skills or system shortages.

It will be interesting to see how the Regulator takes it on locally.

Heating up As is often the case with change, there can be heat, and RegTech Consumer-driven times is no exception. Hot elements I If other parts of the world are anticipate coming to the fore include anything to go by, technology is verification of identity, data capture changing the game and empowering aggregation, regulatory risk analysis consumers. Smart regulations will and accuracy of reporting. indeed pioneer a new way forward in Machine Learning and Artificial delivering financial services. While Intelligence are becoming for many this threatens the status increasingly prevalent, Big Data is quo, failing to adapt in the end could already on our mean fading away minds and RegTech altogether.

THE DISRUPTIVE could shape the RegTech comes way we analyse with a number of AGE IS HERE, trader behaviour WHETHER YOU ARE advantages from a and manage quicker turnaround READY OR NOT verifying identity. of service to increased transparency as it The Regulator rules comes with enhanced fraud and Supervisory Technology, aka SupTech behaviour detection. It is adaptable (another term you best get familiar and scalable and the evolution of with) is enabling regulators, on the the RegTech eco-system will see other hand, to use technology to spot the continued integration of smart smoke as well. It allows for analytics solutions. on market participants, it provides a proactive and intelligent analysis of Challenge accepted data and trends in the marketplace While posing some challenges, and makes way for the growing RegTech will enable smoother and interest in handbooks that are readable faster processes and makes way by machines, as well as enables the for upskilling of staff, including development of Supervision Bots. compliance officers, as well as putting

‘digital first’ friendly regulation firmly on the map, which further changes the game with regulation designed to primarily suit the digital space.

Machine readable handbooks and rules are being introduced, which will improve processes and the Regulatory Sandbox framework we find ourselves in facilitates the rapid growth of the FinTech industry overall, but in a calculated way where businesses are able to test various innovations before adopting them.

An increasing utilisation of the Blockchain backbone for secure straight-through processing to industry partners and regulators will become the norm, and firms are likely to appoint ‘digital transformation’ teams to ease the process.

The role of the Compliance Officer in 2025 Looking ahead to how things will change in the coming years, the role of the compliance officer will look quite different. He or she will utilise RegTech support as a matter of course, with strong digital support available whereby machines can review entire data sets, negating the need for sampling and improving the risk of human error.

Financial services, I believe, are transitioning into a ‘digital first’ era and we all need to board the train and navigate as best we can. The most sophisticated technology, however, is largely useless if the culture of evading the rules remains rooted in a firm. If you can get the culture right, the rest will follow.

10

NEWS & OPINION

28 February 2019

IRFA announces winners of Best Practices Industry Awards

T

he Institute of Retirement Funds Africa (IRFA) industry awards and recognition programme has evolved considerably since its initial inception as a ‘Communication Challenge’ some 31 years ago, into a robust and respected programme that seeks to identify and promote best practices and standards in retirement fund governance, transformation, investment practices, stakeholder engagement, trustee development and financial management and reporting.

Awards were handed out at a well-attended gala banquet held at the Wanderers Club in Johannesburg last month.

IRFA President Wayne Hiller van Rensburg notes that the Best Practice Industry Awards (BPIA) were set

up by the institute to encourage the boards of retirement funds to continuously strive to improve the performance of those funds and to celebrate excellence in the performance of funds in relation to particular categories of their conduct of fund business.

“There are various ways in which participation in the BPIA programme may be beneficial to funds and their members. In particular, participation requires a fund to subject its performance to self-assessment and stimulates learning and creativity in engaging in the conduct on which the fund’s performance will be assessed for the purposes of the programme.

“It should also enhance member confidence in the board of a fund because it demonstrates the board’s

willingness to subject aspects of the fund’s conduct of business to independent evaluation.”

The programme attracts entrants from a wide range of retirement funds and is benchmarked extensively against local, regional and international programmes of this nature.

One of the core objectives of the programme is to identify those practices that should set the standard for the sector. The IRFA believes that by bringing these into the public domain, it is promoting good practices and the body of knowledge for the ultimate benefit of the members of the retirement funds.

The objective of the programme has never been commercial and IRFA says the judges and moderators volunteer their time and expertise at no cost.

Category

Entry

Organisation

The Gold Standard

* Moving towards a better future

Transport Sector Retirement Fund

Focussed on sustainable results

Natal Joint Municipal Pension/Provident Funds

Setting the benchmark in excellence in providing retirement benefits to local government employees

National Fund for Municipal Workers

University of Johanneburg Pension Fund

University of Johannesburg

* Old Mutual SuperFund Annual Integrated Report and Stakeholder Summit

Old Mutual Corporate Consulting

Enhancing Stakeholder Value through tested financial management

Natal Joint Municipal Pension/Provident Funds

Dedicated to transparent disclosure and accountable management

National Fund for Municipal Workers

* Focussed on sustainable results and sustaining an ethical culture through good governanance

Natal Joint Municipal Pension/Provident Funds

Promoting good governance through reliability, predictability and accountability

National Fund for Municipal Workers

*Moving towards financial freedom

Transport Sector Retirement Fund

Maintaining correct and sound investment processes, practices and policies

National Fund for Municipal Workers

We are family in pursuit of certainty

SABC Pension Fund

Improving outcomes through investments

Natal Joint Municipal Pension/Provident Funds

Good investment returns

Mineworkers Provident Fund

* Improving stakeholder outcomes

Natal Joint Municipal Pension/Provident Funds

Moving towards greater transformation

Transport Sector Retirement Fund

* Research Project: Financial Literacy and Perception Review

Natal Joint Municipal Pension/Provident Funds

Pencil me in as well stakeholder engagement process

SABC Pension Fund

Old Mutual SuperFund Member Journey

Old Mutual Corporate Consulting

Understanding is Key

Mineworkers Provident Fund

Pencil me in, using integrated stakeholder perceptions research as a barometer for targetted stakeholder engagement and education

SABC Pension Fund

Fairheads Guardian Roadshow

Fairheads Benefits Services

Ask Pule

Contract Cleaners National Provident Fund

A re kwaneng – towards better Fund engagement

MKT Media on behalf of Amplats Group Provident Fund

Learning, Planning, Living

ISASA Pension Scheme and Provident Fund

Benefit Counsellor Solution

ZAQFIN

Financial Management and Reporting

Governance

Investment Practices

Transformation Stakeholder Engagement & Education

*: Best in class (ranked 1)

PATRICK BRACHER Director, Norton Rose Fulbright

Why you should read the Draft Expropriation Bill On 21 December 2018, the government published its Draft Expropriation Bill 2019 for comment by 21 February 2019. As the laws will affect all of us, you should read it and consider commenting: https://bit. ly/2FTqIb5.

The Bill only relates to registered rights and will therefore mainly affect land rights and mineral rights.

The government has said that the law will not be enacted until after the constitutional amendment process is completed. The Bill is intended to give an indication of the government’s intentions in the meantime.

Expropriation will not be done arbitrarily but only for a public purpose or in the public interest.

These are, of course, wide concepts and include the commitment to land reform and equitable access to national resources to redress past discrimination. The government’s stated commitment to economic stability and food security is not mentioned in the Bill.

Expropriation will not take place until the government and the property owner have attempted to agree on the compensation on reasonable terms, after the expropriation and its purpose is notified to the owner. The compensation must be fair, having regard for the history of the acquisition and use of the property, the market value, direct state investment in the property, and the purpose of the expropriation.

Unless mortgage rights are expropriated, the mortgage will have to be dealt with by agreement between the owner and the mortgagee.

Expropriation without compensation will be possible for land occupied or used by a labour tenant, land held purely for speculative purposes, land owned by a state-owned entity, abandoned land, and where the market value of the land is less than the state’s investment in the land or improvements.

Land reform is essential. How it takes place is a matter for public comment and debate.

28 February 2019

JOHN KENNEDY Director and Regional Head: Cape Town, Citadel

P

NEWS & OPINION

11

Preserving wealth across generations

eople hate losing money. In fact, this aversion to the loss of money is so significant that it has become the subject of a substantial number of studies. The ‘pain’ that is felt when people lose money is stronger than the ‘joy’ of a gain. And it is even more pronounced when a person has worked hard to build their capital base, often through diligent behaviour and determination, over many years – possibly even a lifetime.

However, it is in families where a parent has built a legacy for his or her children that the potential for loss particularly comes to the fore – many wealthy families seldom see the transition of their wealth beyond the second and third generations. As a result, the successful transfer of wealth should entail more than just tax planning and careful investing.

One of the most effective ways to preserve such assets is to have governance structures in place to protect them, and there are three elements to this: 1. A succession plan Once the capital has been established it needs to be managed, and a plan must be put in place to ensure that this continues. A set of people need to be mandated to continue with managing the assets, for an indefinite period of time.

These need not be the family members, as there can often be issues among siblings regarding its future management while some family members may also be reluctant, unprepared, or even unable to take this role. But, more importantly, future generations will not even be known, so it would be impossible to predict their level of interest in or aptitude for managing the assets. It might also be easier for non-family members to act impartially in all circumstances.

2. A suitable investment policy Once the capital has been built, it needs to be

managed appropriately and if an investment policy is laid out in advance, its supervision and control will be better organised. An investment policy establishes the goals and boundaries within which decisions will be made, leading to clearer and more rational decisions. This means that investment decisions will be more objective even during periods of market disruption when an emotional response might MANY WEALTHY be more likely.

FAMILIES In this way, a family can aim to SELDOM SEE protect its wealth THE TRANSITION and ensure that it is attended to OF THEIR WEALTH BEYOND prudently.

An investment THE SECOND policy also establishes AND THIRD accountability GENERATIONS and serves as an overarching strategic guide for planning and implementing the investment programme. It allows for aspects such as asset allocation, risk monitoring and management, as well as reporting.

3. A suitable distribution policy A key element of preserving wealth is determining when and how proceeds are distributed. It is important to stipulate upfront how the proceeds generated by and the future sale of the assets will be distributed, to whom and when this will take place. Not only will this manage the expectations of future generations, but it will also guide and control the ongoing preservation of the assets.

You can decide how much discretion should be afforded the decision makers and under what

circumstances such discretion is allowed. Payouts are often linked to certain ages for future generations, with 25, 30 and 35 years having been quite common, although experts caution that 25 is almost certainly too young to properly manage large sums of money. Sometimes pay-outs are provided on an as-needed basis, and sometimes they can be stipulated.

Ultimately, the key is that this should be the culmination of a carefully thought-through process with deliberate decisions having been taken and nothing left to chance.

By putting a governance structure in place, families will be able to protect their assets and overcome the potential risk of future generations not being good stewards of the wealth.

It is equally important that the plans to preserve wealth are communicated to family members to manage their expectations, as well as providing them with the opportunity to discuss their investment values and precepts. It also affords families the occasion to educate and provide tools to prepare each generation to successfully handle the wealth.

Body formed to prove viability of extending S12J incentive

T

here are now more than 100 registered Section 12J (S12J) companies in South Africa and it is estimated that the market has raised more than R3.6bn in investments. S12J was instituted in 2009 with a 12-year sunset clause set to end in June 2021.

Westbrooke Alternative Asset Management – SA’s largest S12J asset manager, which looks over half of the capital invested in S12J funds today – has spearheaded the formation of an industry body to prove the viability of extending the incentive past June 2021. The body, named The Section 12J Association of South Africa (S12J Association), aims to compile the relevant information that National Treasury can use to assist in understanding the success of the incentive and

motivating to extend the legislation post the sunset clause.

The S12J Association will investigate the number of Section 12J investments made, how many jobs have been created and sustained, how much S12J capital has been deployed, what sectors of the economy and geographic areas are benefiting, and economic activity around S12J, among others. The body will track successes as well as areas that can be improved for the benefit of the industry and investors.

Westbrooke’s Dino Zuccollo, a founder member of the Section 12J Association of South Africa explains, “S12J had a much delayed start. It took from 2009 to 2015 for the tax legislation to be amended to be more attractive to investors. For this reason, we will only have seven

years of data to assess whether S12J has met its objectives. It’s important that we can prove the impact that S12J has had in South Africa to justify its extension beyond the sunset clause.”

Section 12J was introduced by the South African Revenue Services under Section 12J of the Income Tax Act in 2009 as an investment tax incentive. The intention was to boost the South African economy by encouraging investment into a range of private companies that meet defined criteria.

The Section 12J tax incentive gives investors the ability to write off 100% of their investment against their taxable income in the year they invest. Therefore investors can benefit from up to 45% immediate tax relief. This reduces the cost of

the investment, which provides downside protection and enhances overall returns.

“All industry participants are invited to become part of the S12J Association,” adds Zuccollo. “Since it was introduced, it is clear that S12J has had a positive impact on South Africa and the economy. The S12J Association will prove it.”

Dino Zuccollo, Fund Manager, Westbrooke Alternative Asset Management

INVESTING

12

INVESTING

28 February 2019

Jack Bogle, index fund pioneer, dies at 89

O

n January 16, 2019, Pennsylvania-based investment manager Vanguard announced the death of John Clifton Bogle, the founder of The Vanguard Group. He was 89.

Vanguard says Bogle had legendary status in the American investment community, largely because of two towering achievements: He introduced the first index mutual fund for investors and, in the face of sceptics, stood behind the concept until it gained widespread acceptance; and he drove down costs across the mutual fund industry by ceaselessly campaigning in the interests of investors. Vanguard, the company he founded to embody his philosophy, is now one of the largest investment management firms in the world.

“Jack Bogle made an impact on not only the entire investment industry, but more importantly, on the lives of countless individuals saving for their futures or their children’s futures,” Vanguard CEO Tim Buckley said. “He was a tremendously intelligent, driven and talented visionary whose ideas completely changed the way we invest.”

Wellington Fund Bogle began his career in 1951 after graduating magna cum laude in economics from Princeton University. His senior thesis on mutual funds caught the eye of fellow Princeton alumnus Walter L. Morgan, who had founded Wellington Fund, America’s oldest balanced fund, in 1929 and was one of the deans of the mutual fund industry. Morgan hired the ambitious 22-year-old for his Philadelphia-based investment management firm, Wellington Management Company.

Bogle worked in several departments before becoming assistant to the president in 1955, the first in a series of executive positions he would hold at Wellington: 1962, administrative vice president; 1965, executive vice president; and 1967, president.

Bogle became the driving force behind Wellington’s growth into a mutual fund family after he persuaded Morgan, in the late 1950s, to start an equity fund that would complement Wellington Fund. Windsor Fund, a valueoriented equity fund, debuted in 1958.

In 1967, Bogle led the merger of Wellington Management Company

with the Boston investment firm Thorndike, Doran, Paine & Lewis (TDPL). Seven years later, a management dispute with the principals of TDPL led him to form Vanguard in September 1974 to handle the administrative functions of Wellington’s funds, while TDPL/ Wellington Management would retain the investment management and distribution duties. The Vanguard Group of Investment Companies commenced operations on May 1, 1975.

‘The Vanguard Experiment’ To describe his new venture, Bogle coined the term ‘The Vanguard Experiment’. It was an experiment in which mutual would operate at cost and independently, with their own directors, officers and staff – a radical change from the traditional mutual fund corporate structure, whereby an external management company ran a fund’s affairs on a for-profit basis.

“Our challenge at the time,” Bogle recalled a decade later, “was to build, out of the ashes of major corporate conflict, a new and better way of running a mutual fund complex. The Vanguard Experiment was designed to prove that mutual funds could operate independently, and do so in a manner that would directly benefit their shareholders.”

In 1976, Vanguard introduced the first index mutual fund – First Index Investment Trust – for individual investors. Ridiculed by others in the industry as ‘un-American’ and ‘a sure path to mediocrity’, the fund collected a mere $11m during its initial underwriting. Now known as Vanguard 500 Index Fund, it has grown to be one of the industry’s largest, with more than $441bn in assets (the sister fund, Vanguard Institutional Index Fund, has $221.5bn in assets). Today, index funds account for more than 70% of Vanguard’s $4.9tn in assets under management; they are offered by many other fund companies as well and they make up most exchangetraded funds (ETFs). For his pioneering of the index concept for individual investors, Bogle was often called the “father of indexing”.

Bogle and Vanguard again broke from industry tradition in 1977, when Vanguard ceased to market its funds through brokers and instead offered them directly to investors.

The company eliminated sales charges and became a pure no-load mutual fund complex – a move that would save shareholders hundreds of millions of dollars in sales

commissions. This was a theme for Bogle and his successors: Vanguard is known today for maintaining investment costs among the lowest in the industry.

A champion of the individual investor, Bogle is widely credited with helping to bring increased disclosure about mutual fund costs and performance to the public. His commitment to safeguarding investors’ interests often prompted him to speak out against practices that were common among his peers in other mutual fund organisations. “We are more than a mere industry,” he insisted in a 1987 speech before the National Investment Company Services Association. “We must hold ourselves to higher standards, standards of trust and fiduciary duty. Change we must – in our communications, our pricing structure, our product and our promotional techniques.”

Bogle spoke frequently before industry professionals and the public. He liked to write his own speeches. He also responded personally to many of the letters written to him by Vanguard shareholders, and he wrote many reports, sometimes as long as 25 pages, to Vanguard employees – whom he called ‘crew members’ in light of Vanguard’s nautical theme.

(He named the company after Admiral Horatio Nelson’s flagship at the Battle of the Nile in 1798; he thought the name ‘Vanguard’ resonated with the themes of leadership and progress.)

In January 1996, Bogle passed the reins of Vanguard to his handpicked successor, John J Brennan, who joined the company in 1982 as Bogle’s assistant. The following month, Bogle underwent heart transplant surgery. A few months later, he was back in the office, writing and speaking about issues of importance to mutual fund investors.

Bogle Financial Markets Resource Centre In December 1999, he stepped down from the Vanguard board of directors and created the Bogle Financial Markets Resource Centre, a Vanguard-supported venture. He worked as the centre’s president – analysing issues affecting the financial markets, mutual funds and investors through books, articles and public speeches – until his death. Bogle wrote 12 books, selling over 1.1 million copies worldwide.

John Clifton Bogle, founder, The Vanguard Group

Awards In 2004, Time magazine named Bogle one of “the world’s 100 most powerful and influential people” and Institutional Investor magazine presented him with its Lifetime Achievement Award. In 2010, Forbes magazine described him as the person who “has done more good for investors than any other financier of the past century”. Fortune magazine designated him one of the investment industry’s four “Giants of the 20th Century” in 1999. In January 2012, some of the nation’s most respected financial leaders celebrated his career at the John C Bogle Legacy Forum.

Among his numerous other awards and honours were: • Pennsylvania Society Gold Medal for Distinguished Achievement, 2016 • EY Entrepreneur of the Year Lifetime Achievement Award, 2016 • FUSE Research Network Award for Lifetime Impact and Commitment to Investors and Investment Management Consultants Association • Richard J Davis Ethics Award, 2010 • National Council on Economic Education Visionary Award, 2007 • Centre for Corporate Excellence Exemplary Leader Award, 2006 • Yale School of Management, Legends of Leadership, 2003 • Barron’s Investment Hall of Fame, 1999 • Woodrow Wilson Award from Princeton University for “distinguished achievement in the nation’s service”, 1999 • Fixed Income Analysts Society’ Hall of Fame, 1999 • Award for Professional Excellence from the Association for Investment Management and Research, 1998 • No-Load Mutual Fund Association’s first Outstanding Achievement Award, 1986.

INVESTING 13

28 February 2019

BRIAN THOMAS Analyst and Portfolio Manager, Laurium Capital

I

A focus on equities

nvestors in the South African equity market as history has proven, those invested in equity have been long suffering over the course of the markets are usually rewarded. last four and a half years with the broad-based 2019 will be an interesting year for South African JSE All Share Index basically flat over that time, and global markets, with elections in South Africa, eking out an equivalent return of just under 1% per ongoing noise around Brexit, the trade wars annum before dividends and 4% after dividends, between the US, China and others, and a whole which is below the average inflation rate. host of events that no doubt will present themselves It is cold comfort that the same South African over the course of the year. These largely political equity market over the last 50 years has been one of events are set against a backdrop of a global the best performing markets in the economy that is predicted to grow world, delivering a return of 15.4%1 at around 3.6% in 2019, which is GLOBAL EQUITY healthy. Global equity markets per annum in nominal ZAR terms.

When inflation is considered, the MARKETS LOOK look relatively attractive following market has returned a real 5.9%. By the correction in late 2018. A RELATIVELY comparison, a 50-year investment combination of these two factors in the South African bond market provides some comfort for the ATTRACTIVE would have yielded a nominal return FOLLOWING THE potential for double-digit returns of 12% per annum and a real return out of both South African and major CORRECTION IN international markets in 2019. of 2.8% over the period. The excess return generated by the equity One of the consequences of a LATE 2018 market of 5.9% versus 2.8% over this market that has not moved upwards time is the reward that equity investors receive for and trended sideways as the JSE has, is that the the increased risk (relative to bonds) of investing in market becomes more attractively valued. This is equities, known as the ‘equity risk premium’. Part the case if the companies listed on that exchange of the reason that this reward has been garnered by grow their earnings – which, albeit relatively equity investors is the risk that markets go down slowly, the aggregate of the JSE-listed companies or trend sideways as they have done for the last have done. When we look at the value of the four and a half years. However, in the long term, market, we tend to focus on the price to earnings

DOUG ABBOTT Country Head: South Africa, Schroders

I

nvestors expect annual returns of 9.9% over the next five years, according to a major new global study.

Regionally, returns expectations were highest in Asia, at 11.8%. In the Americas, investors expected 10.2% and the figure was lowest in Europe at 8.6%.

The returns, based on the average expectation of more than 22 000 investors, include growth in their money as well as any income paid out in the form of dividends and interest from a variety of investments, including cash, bonds, property funds and equities. The expectations were tempered slightly from the 2017 study when the forecast was for 10.2% a year.

The findings were part of the Schroders Global Investor Study (GIS) 2018, which measured the views of investors in 30 countries.

Investors’ expectations follow a particularly strong spell for equities and echo returns achieved by global stock markets in the past five years.

The MSCI World Index, for instance, has returned 12.2% a year since 2013. The historic performance of markets does not offer a guide to future returns.

(P/E) ratio of that market. It stands to reason that if the price of the market remains constant while the earnings of the market (which is the aggregate of the shares listed on that market) grow, the P/E ratio declines, pointing to a cheaper and more attractive market.

The sell-off in the South African equity market over the latter part of 2018, and the fact that it has flatlined since June of 2014, means that the market itself is cheaper than it has been for some time.

Not only is the market cheaper in general, but we are increasingly able to find value in individual equities, both in stocks that are exposed directly to ‘South Africa Inc’ and in those that are not directly exposed to South Africa.

The temptation in volatile markets is to try and time them, by switching into less risky assets.

This has proven over time to be a destroyer of value. Time in the market is key – the longer you stay invested, the greater your chance of earning positive inflation-beating returns.

1

Deutsche Bank – Long-term Asset Return Study, September 2018

Investors forecast returns of 9.9% – millennials expect more At a country level, investors in Indonesia on average expect the highest returns, at 16.8% a year.

Expectations in other emerging countries were also high, with investors in Brazil, China, Thailand and India all looking for average annual returns in excess of 13% between now and 2023. South Africa was not far behind with expectations of 12.8%.

US investors expect annual returns of 8.5% over the next five years. In Europe, Russian investors expect the most at 13%. However, the region as a whole expects a much lower return, with an expectation of 7% in Belgium being the lowest – regionally and worldwide.

(A full list of countries and their average expected annual investment returns over the next five years, compared to returns just for stock markets over the last five years, can be found at schroders.co.za).

We have focused on equities because of the higher risk and potentially higher returns. Doing so underlines the level of optimism among investors, given their expectations are based on a portfolio

of mixed investments and savings, which may deliver lower returns.

The average investor holds 33% in equities, 18% in bonds, 25% in cash, 12% in property funds and 11% in alternative investments.

Investors’ overall return expectations easily exceed even the buoyant stock market returns achieved in most countries over the past five years.

The expectations stepped down with each generation: Generation X (age 37 to 50) expected 10%; Baby Boomers (age 51 to 70) expected 8.8%; those aged 71 and over were expecting annual returns of 7.1%.

‘Expert’ investors expect even higher returns Investors who judged their level of investment knowledge to be ‘advanced/ expert’ expect returns of 10.9% a year, over the next five years.

Investors who consider their level of investment knowledge to be ‘beginner/rudimentary’ expect a more modest 8.8%. ‘Intermediate’ investors expect 9.7%.

What do analysts predict for future returns?

Returns are notoriously difficult to predict but Schroders Multi-Asset investment team forecasts suggest a 5.6% return for global equites over the next 10 years. Forecasts, of course, should not be relied on for financial planning. In fact, the high return expectations may raise concerns among financial planners. The study also showed that the top reason for saving was to have a comfortable life during retirement. Those plans could unravel if returns are lower than expected.

How age affects expectations Younger generations had bolder expectations for their investments.

Millennials, defined in this study as those aged between 18 and 36, believed they would get an annual return of 11.0% over the next five years.

Important Information: For professional investors and advisers only. The material is not suitable for retail clients. We define ‘professional investors’ as those who have the appropriate expertise and knowledge e.g. asset managers, distributors and financial intermediaries. Schroders Investment Management Ltd is an authorised financial services provider FSP No: 48998, registration number: 01893220

14

INVESTING

28 February 2019

JACO VAN TONDER Adviser Services Director, Investec Asset Management

How active management deals with volatility

One of the biggest risks pensioners face is running out of money. A lack of retirement savings and depressed

PART 2/5 investment markets have left many pensioners and financial advisers anxious about the future. How should

pensioners invest their capital and what level of income can they afford to draw? What exposure to offshore equities should be considered and what is the significance of volatility on ensuring a comfortable retirement? Investec Asset Management discusses some new ways to approach this age-old problem in part two of this five-part series.

I

n part one of this series of articles (MoneyMarketing January 2019, Page 20), we discussed why volatility matters for living annuity investors. We now turn our attention to another important question: Can active asset managers sustainably achieve market-related real returns at lowerthan-market levels of portfolio volatility?

Over the past ten years we have seen a growing body of research that examines the relative risks and returns of various recognised portfolio management styles. This research indicates that an investment style such as Quality (relative to say Value, Growth or Momentum-biased styles) appears to produce portfolios with lower long-term volatility without sacrificing the potential for longterm real returns.

Investec Asset Management has two funds in the Multi-Asset High Equity sector, each with a distinct investment philosophy and style.

The Investec Opportunity Fund follows a Quality investment style, while the Investec Managed Fund’s Earnings Revision style focuses on capturing trends in earnings growth expectations. Both these funds have a 20-year track record.

We therefore set out to analyse how the Investec Opportunity Fund and the Investec Managed Fund would have fared over the past 20 years in solving the living annuity problem. The graph plots the portfolio values for five different living annuities invested in the Investec Opportunity Fund, the Investec Managed Fund as well as five popular industry (ASISA CIS) sector averages as follows: • R1 000 000 is initially invested, and the initial income selected is 4.5% of the portfolio; • The income is increased every year at inflation; and • Modelling is done in real terms (i.e. in today’s money terms) and covers the 20-year period from 31 December 1997 to 31 December 2017, using the respective fund fee classes available at the inception date.

REAL VALUE OF ACCUMULATED ASSETS WITH 4.5% INCOME

The graph shows that the Investec Opportunity Fund fared substantially better than the three ASISA sector averages. This result is not entirely surprising as the Investec Opportunity Fund outperformed the ASISA MultiAsset High Equity sector average by 4.4% p.a. over the period highlighted in the graph (31 December 1997 to 31 December 2017).

IT MAKES SENSE TO CONSIDER INVESTMENT STRATEGIES WITH AN INHERENT LOWER VOLATILITY FOR INCOME-PRODUCING PORTFOLIOS What is interesting though is that, when we compare the portfolio end values for the living annuities invested in the Investec Opportunity Fund and the ASISA Multi-Asset High Equity sector average, the Investec Opportunity Fund living annuity portfolio beat the sector average living annuity portfolio by 5.5% p.a.

Why did the Opportunity Fund living annuity portfolio outperform

its ASISA sector average by 5.5% p.a. when the fund itself (based on an initial lump sum investment) only outperformed the sector average by 4.4% p.a.? The answer lies in the fund’s lower volatility signature. Over the measured 20-year period, the Investec Opportunity Fund had an annual volatility of approximately 1% p.a. less than the Multi-Asset High Equity sector average.

The Investec Managed Fund, on the other hand, outperformed the ASISA Multi-Asset High Equity sector by 0.2% p.a. over the 20-year period (based on an initial lump sum investment). Yet in the graph, the Investec Managed Fund living annuity had a lower end value than the sector average annuity. The reason is that the Investec Managed Fund had an annualised volatility that was approximately 1.2% p.a. higher than the sector average over the 20-year period. The experience with the Investec Managed Fund is a good example of how a fund with a higher volatility signature fares in a living annuity.

Conclusion A lack of retirement savings remains a serious problem in South Africa.

No living annuity is going to be the solution for an investor who hasn’t saved enough

for their retirement. Furthermore, unpredictable markets require careful attention due to the challenges they pose to pensioners. Our research has shown that portfolio volatility, often treated as substantially less important than investment returns, matters a lot for living annuity investors.

In fact, higher portfolio volatility in an income-producing portfolio acts as a drain on portfolio performance.

Conversely, lower volatility seems to ‘create’ additional returns for an income-producing portfolio because it helps the portfolio manage sequenceof-return risk more effectively.

We believe that it therefore makes sense for investors and advisers to consider investment strategies with an inherent lower volatility for incomeproducing portfolios such as living annuities. Investment strategies that can deliver both strong long-term real returns together with lower volatility can have a big positive impact on these portfolios.

LIVING ANNUITIES

Is your retirement inflation-proof?

One of the biggest risks pensioners face, is running out of money.

To address this age-old problem, our in-house research has created a few important guidelines. They range from how you should invest your capital to what level of income you can afford to draw, what

INVESTEC

exposure to offshore equities you should consider and the

significance of volatility on ensuring a comfortable retirement.

To make the most of your retirement, visit www.investecassetmanagement.com/livingannuities

Asset Management

Unit Trusts

Retirement Funds

Offshore Investments

Investec Asset Management and Investec Investment Management Services are authorised financial services providers.

IAM_MM_E_89870

16

INVESTING

PETER ARMITAGE CEO, Anchor Capital

2

018 was the S&P 500’s worst year (-6.2% YoY) since 2008, while the MSCI World Equity Index dropped 10.4% YoY. For the first time in years, all major global asset classes produced negative real returns.

Emerging markets (EMs) bore the brunt of the risk-off environment, with the JSE All Share Index closing 2018 with a 11.5% negative total return (over four years it has yielded a paltry 4.6% annualised total return).

Numerous factors conspired to create negative global sentiment, especially in Q4 2018. Global growth prospects, and the related central banks’ policy responses, are typically the biggest market drivers. While growth should slow this year (we see a circa 3.5% 2019 global growth rate as enough to drive reasonable earnings growth), market behaviour suggests a far worse outcome, probably due to a lack of confidence in US President Donald Trump’s antics. After being a positive market catalyst in 2017, 2018 was the opposite and the US stock market is now at levels below those when dramatic tax cuts were implemented.

Below, we outline what we think will dictate 2019 equity market returns: • Markets valuations are cheaper than this time last year with US markets’ ratings dropping around 30%. 2019 expectations are still for positive US earnings growth of around 8-9%, implying a 12-month forward P/E of 14.6x – the cheapest in six years and below a 10-year mean. Excluding tech shares, the multiple falls to circa 13x. The All Share Index’s derating has been less pronounced over longer, but it

28 February 2019

Global equity markets: What’s in store for 2019 trades at a forward multiple of 11.9x – below the 10-year mean (12.9x).

• US economic growth should slow this year but it is highly unlikely 2019 will see the economy moving into a recession. Evidence points to an economy that is in very good shape – the longer that continues, the more supportive for equity market valuations.

• In this US rate-hiking cycle, the Fed hiked gradually and responsibly in line with growth conditions and we don’t see a reason for this to eurozone countries. Italy joined change. We expect the Fed to hike the fray in mid-2018 but, unlike rates once or twice (by 25bps each Greece in 2017, its economy is the time) in 2019 but, based on slowing fourth-largest in the zone so any US growth, it should then pause stress to its balance sheet could and wait for further signs from send shockwaves across the region. the economy. Historically, this has Brexit is an ongoing saga and 30 led to a weakening dollar, which months on we are no closer to has been positive for risk assets, knowing the outcome. particularly EMs (which could lead • SA politics & economic growth: the charge in 2019).

SA is in a stronger position than a • Trade war escalation year ago, albeit off a low in 2018 weighed on base. 2018 saw negative risk appetite and for 1H GDP growth, with a INVESTORS good reason – recent rebound above 2% in 3Q. WHO KEEP China data has shown Political rhetoric should COOL HEADS dominate headlines a marked growth slowdown largely due leading up to the election, AND STAY to uncertainty around but our base-case is for INVESTED trade. China is crucial the ANC to win with to the global growth enough of a margin to WILL BE outlook and we think empower President Cyril REWARDED sanity will prevail, Ramaphosa to continue WITH which should be a reforms. Inflation is major boost to global MEANINGFUL unlikely to force the equity markets with SARB’s hand and, given RETURNS EMs likely to benefit the global context, the most. rates may have peaked/ • Signs of positive eurozone growth come close to peaking. Structural have been overshadowed by problems remain, but 2019 should populist rhetoric from certain be better for local firms.

While 2018 saw high anxiety levels, history is on our side in 2019 – since the 1950s, every year the S&P 500 derated by more than 1x, the following year’s average return was 16% and on only two occasions was the return negative the next year. Global markets are circa 30% cheaper YoY and many current headwinds can be addressed by political leaders. It would be in their interest to act in a manner positive for reasonable economic growth and we think markets are acting with extreme risk aversion and deducing an outcome worse than what will materialise. The S&P 500’s annual compound return over the past four years is 4.4% – less than half the long-term average, thus dispelling the myth we are at the end of a rampant bull run, with the market becoming progressively cheaper in recent years.

Prospects of a positive 2019 have improved given the Q4 2018 selloff. EMs could outperform in this scenario (SA-positive). Current conditions are conducive to volatility, but investors who keep cool heads and stay invested will be rewarded with meaningful returns.

INVESTING 17

28 February 2019

LUIGI MARINUS Portfolio Manager, PPS Investments

F

or many, 2018 was a tumultuous year laden with events that shook the market to such an extent that it yielded negative double-digit returns.

Over the last 58 years, it has only happened on the JSE All Share Index during seven calendar years, including 1969/70 and 1975/76, where this occurred in consecutive years.

Should we brace for another negative year, or are we faced with an opportunity to buy at lower prices? While there is no way of predicting the outcome of the market for 2019, we can highlight some of the important events that may influence stock market returns either negatively or positively.

An election year that may be a turning point for South Africa One could naively argue that elections are political and not financial events, but the reality is that the lead up to and the outcome of the South African national elections in May this year will carry economic significance. Raging issues, such as the land expropriation debate and effective financial budgeting on the part of National Treasury, will need to be addressed during this time. Both global and local investors will be encouraged by a perceived

E

veryone should certainly take the utmost advantage of the tax breaks available from tax-free investments – even if you can’t invest the maximum amount every year. However, your choice of funds should not be based solely on maximising the tax saving, but rather on maximising your total returns after tax over your selected time horizon. That will then influence which funds are most appropriate for you.

It’s worthwhile considering listed property as part of a taxfree investment because it offers both the prospect of attractive inflation-beating returns over time and typically the most tax savings.

This is because there is effectively no corporate or individual tax on the investment returns. Listed property companies (REITs) do not pay corporate taxes as long as they distribute all their rental income, which is then taxed in the hands of the investor as interest income at

business-friendly outcome and equally discouraged by any uncertainty in the outcome of the elections.

SA GDP growth may impact markets indirectly In 2018, South Africa experienced its first technical recession since the global financial crisis at a time when global GDP grew at 3.7% and developing economies’ GDP grew at 4.7%, according to the International Monetary Fund’s annual real GDP growth data.

The technical recession was announced following two consecutive quarters of negative GDP growth in quarter one at -2.6% and -0.4% in the second quarter of 2018.

Fortunately, SA recovered quickly from the recession with positive third quarter GDP growth at 2.2%. What is of increasing concern for 2019 is the view that world GDP has plateaued and will no longer serve as a tailwind to local GDP growth.

The relationship between annual GDP growth and calendar year market returns in SA has an almost zero correlation (since 1960 to 2017 the correlation has been -0.08) when looking at statistics.

While this could imply that the shortterm effect of GDP growth on stock

market returns may be spurious, the effect on the consumer base in SA is likely to result in insufficient job creation to ease unemployment rates.

2018 global trends that will permeate into 2019 Two major global uncertainties that are set to continue in 2019 are the trade wars (primarily between the US and China), and the Brexit negotiations between Britain and the European Union. At least a few things are certain: Brexit must be concluded by the end of the first quarter of this year, whether a deal has been struck or not. Neither of these situations are positive for globalisation.

There is little doubt that the world has benefitted from the ease in which the factors of production have shifted due to globalisation and any moves away from this is almost certain to be inflationary.

Will investors only be interested in equity returns?

Even though views on stock market return expectations are most debated, especially after a disappointing 2018, the yield offered by local fixed-interest assets should not be ignored. The SA 10-year nominal government bond continues to offer yields in excess

of 300 basis points above inflation, which could serve as a strong anchor to performance if short-term volatility can be tolerated. In addition, the SA Reserve Bank has consistently alluded to the goal of keeping inflation near the mid-point of the 3% to 6% target band, which tempered the market’s surprise when interest rates were hiked in the last quarter of 2018. This certainly proves the Monetary Policy Committee’s objective of keeping inflation subdued.

Globally, yields have been edging higher as well with the yield on the US 10-year reaching above the 3% level in the second half of 2018, although it has declined somewhat since.

What does this mean for investors?

Regardless of global trends and market uncertainties, the most popular question is: Will the market, both locally and globally, offer a buying opportunity; or will it be more of the same for 2019?

Some investors are adamant about the outcome and are prepared to take a binary view; some will get it right and some will get it wrong. The prudent approach will be to continue to gather as much information as possible to tilt the balance of probabilities in your favour.

Choosing between tax-free unit trusts your marginal income tax rate. So there is no corporate tax, and you pay no income tax (at a maximum marginal rate of 45%), or capital gains tax (CGT) at 18%.

For equities apart from listed property, investing tax-free means not having to pay either the 20% dividend withholding tax (DWT) or CGT. DWT is normally withheld from your dividends before they are paid to you, and the company will already have paid 28% corporate tax on its net profits before paying shareholders.

This is why holding equities in a tax-free unit trust is somewhat less tax-advantageous than listed property. However, both offer excellent diversification and the highest prospective returns, thereby maximising the potential of compounding your tax-free returns over the longer term.

On face value, bank deposits or other cash-type holdings offer relatively high tax savings. The

interest you earn on cash and bonds is subject to income tax (at a maximum marginal rate of 45%). However, don’t forget that you already get a tax exemption on interest income every year – R23 800 if you’re under 65 and R34 500 if you’re older. And cash investments typically earn returns of only 1-2% p.a. above inflation, so re-investing and compounding these returns over time is much less powerful than equities or listed property, which generally return 6-8% p.a. above inflation.

Tax-free offshore funds are suitable options for investors with relatively high offshore exposure requirements. Under the taxfree regulations, although you will have to pay all taxes (CGT, DWT and tax on any interest and other investment income) to the appropriate foreign tax authorities where necessary, you then won’t be liable for any of these taxes due to SARS over and above this. In

non-tax free offshore vehicles you would still have to pay SARS. This makes tax-free offshore funds an excellent way to raise your foreign exposure, especially if you have already taken advantage of the tax benefits under your full retirement annuity allocation (subject to the 30% offshore limit). Or, for example, if you are a member of a company retirement fund that has no offshore holdings, this is a tax-efficient way to diversify your total portfolio.

Prudential has recently added three of our rand-denominated global feeder funds as tax-free options for investors: the Prudential Global Equity Feeder Fund, the Prudential Global Balanced Feeder Fund and the Prudential Global Inflation Plus Feeder Fund. These funds are managed by a large and experienced team at Prudential’s London-based parent, M&G Investments, part of the global Prudential plc group.

TAX FREE INVESTING FEATURE

PIETER HUGO MD, Prudential Unit Trusts

2019’s potentially market-moving events

23488

THE POWER OF CONSISTENCY: OFF$HORE INTRODUCING OUR NEW RANGE OF GLOBAL DOLLAR FUNDS: Prudential Global Balanced Fund Prudential Global Inflation Plus Fund Prudential Global Equity Fund Prudential Global Bond Fund

Speak to your Financial Adviser for more information or visit prudential.co.za

CONSISTENCY IS THE ONLY CURRENCY THAT MATTERS.™

The Prudential Global Funds ICAV is an approved investment vehicle in terms of CISCA. The distributor is Prudential Portfolio Managers Unit Trusts Ltd (Registration number: 1999/0524/06), an approved CISCA management company (#29). Fund’s supplement is available free of charge from the ICAV or at www.prudential.co.za. Collective Investment Schemes Portfolios are generally medium-to long-term investments. Past performance is not necessarily a guide to future investment performance. The Fund’s prices are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any deductible expenses and is traded at the ruling forward price of the day. The Fund may borrow up to 10% of the Fund’s value, and it may also lend up to 50% of the scrip (proof of ownership of an investment instrument) that it holds to earn additional income. Fund prices are published daily on the distributors website. These are also available upon request. The performance is calculated for the portfolio. Individual investor performance may differ as a result of initial fees, the actual investment date, the date of reinvestment and withholding tax.

TAX-FREE INVESTING FEATURE

28 February 2019

MEYER COETZEE Executive Director & Head of Retail, Prescient Investment Management

I

n one’s quest to save cash for retirement, two vital factors need to be considered. The first factor relates to the savings vehicle and utilising any tax incentives available, like tax-free savings accounts and the legislation surrounding these investments. The second is as vital a consideration and relates to which type of investment to choose to give oneself the best chance of reaching one’s financial goals.

According to the South African Revenue Services (SARS), investors may contribute a maximum on R33 000 a year to a tax-free savings account, with a life time limit of R500 000 per person. It is important to ensure the maximum permitted contribution is made annually as this does not carry over to the following year and can make a considerable difference over time. On current limits it will take just over 15 years to reach the life time limit of R500 000. Once invested in a tax-free investment, no tax bill is incurred no matter how long the investment is held or how the investment performs.

This brings us to the second factor.

A suitable investment for someone with a long-term time horizon is one that has a healthy allocation to growth assets like equities and property shares that can provide inflation protection throughout. Moreover, using a balanced fund that invests into a number of underlying asset classes is imperative as this not only reduces risk through diversification, it also delegates the responsibility to try and capitalise on the divergence in asset class pricing through the market cycle to the investment manager.

Selecting the right asset manager can

M

Y

Sculpture by Beth Diane Armstrong

C

Making the most of tax-free investing

also introduce challenges as managers employ different investment styles that perform differently during different market cycles. To understand and manage this can be an unnecessary burden to the average tax-free savings account investor who might not want this responsibility. Finally, investment management fees erode the cash left over for retirement and the fee structure of any investment should therefore be carefully considered.

By way of an example, over a 20year period a 1% savings on annual investment management fees on a typical balanced fund could add the equivalent to seven years’ worth on R33 000 annual contributions to the final fund value, just on fee savings alone!

Prescient Investment Management has a solution that ticks all the boxes, especially if invested in via a taxfree savings account. The Prescient Balanced Fund invests in a diversified asset mix and geographic exposure.

Accordingly, 45% of the Fund is exposed to local and 20% to global equities. Likewise, 25% is invested in local interest-bearing assets while 5% is exposed to global interest-bearing instruments. The remaining 5% is invested in local property. The Fund targets returns of inflation plus 5% to 6% per annum over the long term.

It has been a star performer since launch nearly five years ago and the bare bones approach to investing has meant its strategy is transparent and easy to follow. In the meanwhile, it is one of the cheapest funds amongst its peers (roughly 1% lower fees than the average fund in its category). The chart shows its stellar track record thus far.

Prescient Money Mktg 1-4 Goose Ad_r3.pdf

19

7/19/17

CUMULATIVE RETURNS - PRESCIENT BALANCED FUND VS THE PEER GROUP AVERAGE AND BENCHMARK*

Source: Morningstar since inception performance to 31 Dec 2018. Inception of fund: 31 May 2014 *Benchmark: SWIX 40 Capped (TR) 45.00%, All Bond Index (TR) 12.00%, STeFI 13.00%, SAPY (TR) – 5.00%, MSCI World (TR) 20.00%, US 1 Month TB 5.00%.

SINCE INCEPTION PERFORMANCE TO 31 DEC 2018. INCEPTION OF FUND: 31 MAY 2014

Average Annual Return

Highest Rolling 1 year

Lowest Rolling 1 year

Prescient Balanced Fund

6.5%

19.8%

-5.4%

Benchmark

6.6%

19.6%

-4.0%

Peer group average

4.2%

12.8%

-5.8%

The Prescient Balanced Fund offers the general tax-free savings account investor an appropriate and efficient long-term savings option, and by that, peace of mind.

Disclaimer i.t.o BN 92: Prescient Investment Management (Pty) Ltd (Prescient Investment Management), is an authorised financial services provider (FSP 612). Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. CIS’s are traded at the ruling price and can engage in scrip lending and borrowing. Performance has been calculated using net NAV to NAV numbers with income reinvested. There is no guarantee in respect of capital or returns in a portfolio. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). For any additional information such as fund prices, fees, brochures, minimum disclosure documents and application forms please go to www.prescient.co.za

10:27:12 AM

WHILE OTHERS ZIG AND ZAG, WE STAY IN FORMATION.

CM

Yo u r m o n e y i s s a f e a t P r e s c i e n t . T h a t ’s b e c a u s e o u r f u n d m a n a g e r s

MY

c o n s i s t e n t l y f o l l o w a r e l i a b l e p r o c e s s c a l l e d Q u a n t P l u s ® . I t ’s t h e

CY

proven way to reduce investment risk, and increase wealth.

CMY

K

To k n o w m o re a b ou t a n y o f our

p ro d u c t s

and

services,

v i s i t w w w. p r e s c i e n t . c o . z a .

INVESTMENT MANAGEment

PRESCIENT GROUP OFFERING: LOCAL AND OFFSHORE INVESTMENT MANAGEMENT / UNIT TRUSTS STOCKBROKING / RETIREMENT PRODUCTS / UMBRELLA FUNDS / ADMINISTRATION / PLATFORM SERVICES AUTHORISED FINANCIAL SERVICES PROVIDER (FSP 612)

INVESTING ESG FEATURE

20

INVESTING ESG FEATURE

28 February 2019

JON DUNCAN Head of Responsible Investment, Old Mutual Investment Group

The biggest responsible investing myth debunked Contrary to popular belief, investors are not giving up upside performance when prioritising companies with a better environmental, social and governance (ESG) record.

R

esponsible investing is rooted in an understanding that how we invest today determines the quality of our future. Simply put, if we continue to invest in unsustainable companies that erode public trust, pollute the environment and drive inequality, we should accept that this is the kind of future we will bestow on our children.

Responsible investing continues to gain attention from the investment community because companies with better Environment, Social and Governance (ESG) practices can, and do, drive better investment performance. At its heart, this latter dimension is a focus on the understanding that sustainability is a macro-thematic trend that is fundamentally reshaping the competitive landscape across all sectors. Research from Harvard Business School in 2014 evidences that companies with good sustainability practices – versus their industry peers with poor sustainability practices – produce both market and accounting-based outperformance. The core myth associated with responsible investment is that companies that focus on ESG issues reduce returns on capital and long-run shareholder value.

The reality as evidenced by both academic and industry research is to the contrary: companies committed to sound ESG practises show specific measurable attributes such as lower cost of capital, better resource efficiency, stronger innovation, lower staff turn, stronger social licence to operate and better access to markets. All these attributes can and do influence competitive advantage and longer-term performance.

Responsible investing in listed equities Both the ‘ethical’ and the ‘maximising risk-adjusted returns’ dimensions of responsible investing have resonated with the investing community. In line with global trends, there is a growing number of local retail investors, as well as financial advisers, who are realising that the outperformance of companies with higher ESG scores speaks for itself.

There are three broad approaches in the listed equity environment for an investor to consider:

1

Traditional equity products that incorporate ESG issues This means the fund manager makes a commitment to factor in and integrate ESG issues in their investment strategies. This includes taking their role as custodians of clients’ capital seriously by engaging with investee companies through a

‘Responsible Investment’ lens and ensuring their proxy voting aligns with the commitment to a sustainable approach to investment. The fund manager should also be able to indicate how they have considered and championed ESG issues in their investment process through transparent communication, i.e. reporting. This approach should be a minimum consideration for all investments and investors can apply this equally to local and international investment funds, assessed through fund fact sheets.

2

Thematic-styled equity products that build portfolios of companies that are part of the sustainable economy (i.e. low-carbon, resource efficient and socially inclusive) Funds using this approach can be single-themed funds focused on renewable energy, sustainable mobility or water. They can also cover a broad range of themes across the ‘green economy’ with specific exclusions around key issues, for example coal or tobacco. This approach is currently difficult to apply in the local market as there are not many listed companies with revenue directly linked to core sustainability growth themes. It can, however, be successfully applied at an emerging or developed market level, and there are several investment firms that offer compelling products in this category. This is a viable option for investors who believe in the long-term growth theme of a sustainable economy.

3

Index or active quant funds that systematically capitalise on ESG data asymmetry This approach relies on the growing body of company level ESG data that is available through a range of service providers, for example the MSCI. This ESG data is leveraged to create ESG indices (indices that give exposure to companies with a strong ESG stance) or used in innovative active quant investment strategies. There are already several ESG index products available, both locally and globally, that can offer retail investors marketlike returns by holding a basket of companies that are measurably better when considered on an ESG basis. Coupled with low costs, these passive investment products can offer investors an attractive starting point.

For domestic equity, investors that have an interest in responsible investing, two viable options exist – either select a traditional fund that has integrated ESG into its investment and ownership decisions, or look into ESG-led indextracking products.

Not covered in this article are approaches that involve negative screening based on ethical or faithbased values. Such approaches can be employed, but may conflict with maximising risk-adjusted returns (which is, of course, a perfectly reasonable outcome if values alignment is the primary goal).

PRI reports increase in signatories The organisation, Principals for Responsible Investment (PRI), is reporting a 21% increase in signatories when compared to the previous calendar year. In a statement last month, it said that despite concerns over loss of momentum around issues such as climate change – as noted in the recent Global Risks Report by the Word Economic Forum – investors are becoming aware of the risks and the opportunities around ESG factors.

“Continued growth in demand from global investors, their clients and beneficiaries for investment products and solutions that consider ESG issues, as well as stronger regulatory guidance on responsible investment in many countries, especially within the EU, is also fuelling signatory momentum,” the PRI added.

Growth in the PRI’s signatory base was especially strong across North America (US and Canada), as well as in the UK and Ireland.

Southern Europe, France, DACH (Germany, Austria and Switzerland) and Asia also saw solid increases in signatory numbers.

New PRI signatories included corporate pension funds Novartis (Switzerland); National Grid (UK); the Minnesota State Board of Investment, Office of the Illinois State Treasurer, the City of Chicago Treasurer’s office, the Employees’ Retirement System of the State of Hawaii, the University of New Hampshire Foundation (US); the Government Pension Fund of Thailand; and insurance groups AG2R (France) and Swiss Life (Switzerland).

“Investors worldwide are increasingly concerned about issues such as climate change, modern slavery and tax avoidance,” said PRI CEO Fiona Reynolds.

“They also see the benefits of collaborating under the PRI umbrella and using their collective voices to effect change relating to ESG issues.

However, while it is very gratifying to see this growth, the PRI is not just focused on numbers.

We are keenly aware that there is a great deal of work to be done to make more investors aware of the importance of looking at ESG considerations, especially in both developed and emerging markets.”

119455L

R116.3 BILLION INVESTED IN SUSTAINABLE INVESTMENTS ON BEHALF OF OUR CLIENTS

INVEST IN A FUTURE THAT MATTERS Your investment has the power to make an impact on the world.

That is why we incorporate environmental, social and governance factors into all our investment and ownership decisions. And why we have committed over R116.3bn of our clients’ capital to sustainable investments that generate long-term returns while solving the biggest challenges facing society and the environment.

Choose to make a positive impact today, for tomorrow.

READ MORE at oldmutualinvest.com

INVESTMENT GROUP DO GREAT THINGS EVERY DAY

The following entities are licensed Financial Services Providers (FSPs) within Old Mutual Investment Group Holdings (Pty) Ltd approved by the Financial Sector Conduct Authority (www. fsca.co.za) to provide advisory and/or intermediary services in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. These entities are wholly owned subsidiaries of Old Mutual Investment Group Holdings (Pty) Ltd and are members of the Old Mutual Investment Group. • Old Mutual Investment Group (Pty) Ltd (Reg No 1993/003023/07), FSP No: 604. • Old Mutual Customised Solutions (Pty) Ltd (Reg No 2000/028675/07), FSP No: 721. • Old Mutual Alternative Investments (Pty) Ltd (Reg No 2013/113833/07), FSP No: 45255. • African Infrastructure Investment Managers (Pty) Ltd (Reg No 2005/028675/07), FSP No: 4307. • Futuregrowth Asset Management (Pty) Ltd (Futuregrowth) (Reg No 1996/18222/07), FSP No: 520. • Marriott Asset Management (Pty) Ltd (Reg No 1987/03316/07), FSP No: 592. Figures as at 31 December 2017 unless otherwise stated. Sources: Old Mutual Alternative Investments; African Infrastructure Investment Managers (AIIM); Old Mutual Specialised Finance; Futuregrowth Asset Management; UFF African Agri Investments; Old Mutual Investment Group.

22

INVESTING ESG FEATURE

MARK HAEFELE Chief Investment Officer, UBS Global Wealth Management

I

28 February 2019

Investors keen on putting more money into ESG causes

nvestors are keen to put more money to work in that the bank is taking steps to widen its lead in support of environmental, social and governance sustainable investing.

(ESG) causes but only if financial firms promote “Clients clearly care about the social and highly personalised choices that allow clients to environmental impact of their investments, and leave their mark, Swiss multinational investment they shouldn’t have to compromise in their pursuit bank UBS says. In a major step toward personalising of financial returns to achieve their objectives. sustainable investing, UBS has announced the Now we’re making it easier for them to choose the launch of a pilot program in the first quarter of this investments that best support their priorities.” year that matches what clients care most about with The UBS paper is the third in-depth analysis investments that perform best against their values. to be unveiled at Davos, offering policymakers, Specifically, the pilot will allow investors to rate investors and the financial sector detailed solutions how much they care about individual ESG factors, for meeting the SDGs. These include simplifying such as climate change or water, express their and standardising definitions and measurements, preference in a personalised sustainability score, and and customising investments to appeal to people’s compare their score against more than 20 000 ESGpersonal passions. They also include ramping up rated stocks and bonds to find the best match. public awareness that individual investors can “This marks a further departure from a onemake a difference by putting their savings to work size-fits-all approach to sustainable investing by profitably in support of good causes. scoring each security against seven ESG criteria, “While there has been progress, it’s become clear which allows for a more granular view of how that the traditional approach to environmental and investment instruments are performing against social investment isn’t sufficient,” says Mark Haefele, the sustainability criteria their Chief Investment Officer at UBS Global potential buyers hold dear.”

Wealth Management. “People care The United Nations has less about generic topics than specific PEOPLE CARE called for an increase in private causes they hold dear. They want the LESS ABOUT sector funding in support of its chance to leave their mark on issues GENERIC TOPICS they are passionate about, whether Sustainable Development Goals (SDGs), designed to address that’s eradicating poverty, achieving THAN SPECIFIC humanity’s and the environment’s gender equality, or any of the other CAUSES THEY biggest problems by 2030.

SDGs that are close to their hearts. This HOLD DEAR However, the world is likely is why we’re proposing new solutions to to fall short of the estimated specific problems.” additional $2-7tn needed annually to solve these The UBS white paper has won broad support issues, UBS says in a white paper entitled Awareness, from leading figures in finance, philanthropy and simplification, and contribution, that simultaneously business, including Robert Kapito, President and calls for more concerted efforts among financial co-founder of BlackRock, Paul Polman, former institutions toward mobilising private wealth for the CEO of Unilever, and Sunny Varkey, founder of public good.

GEMS Education and the $1m per annum Global The paper was presented at last month’s World Teacher Prize.

Economic Forum Annual Meeting in Davos by Axel “We need to provide our clients with the clearest Weber, Chairman of UBS. possible picture of the impact of sustainable “At UBS, we believe that only by offering investing. That is why we believe we need increased solutions that raise awareness and channel personal disclosures to help investors make more informed preferences for investing sustainably can the global decisions and why we are focused on enhancing community achieve the UN SDGs,” Weber states. data for investors to better understand how and why Sergio P Ermotti, Group CEO of UBS, adds sustainability factors effect returns,” Kapito says.

Following its commitment made in 2017 to raise $5bn in impact investments over five years, UBS points out that it has pioneered examples of new sustainable and impact investment solutions, such as working with Solactive to develop fixed-income benchmarks that define financial return, risk and sustainability parameters; the launch of Align172, an innovative digital platform that efficiently connects private wealth investors to impact investment opportunities; multiple mainstream private-market impact fundraisers that have already contributed several millions of US dollars to good causes, including academic research; and the world’s first 100% sustainable investment cross-asset solution.

Launched for the bank’s private clients in 2018, this solution has already attracted CHF3.9bn in investments, despite a difficult environment for financial assets over the past year.

“When someone tries to find an investment that helps solve some of the issues they care most about, they are often presented with a confusing and conflicting array of data, definitions and terms,” says Simon Smiles, Chief Investment Officer UHNW at UBS Global Wealth Management.

“We need to make it easier by simplifying and standardising sustainability criteria on a global level.”

The key solutions outlined in the paper presented at Davos last month are: • To align investments with personal sustainability interests, helping investors who seek to achieve their financial goals and to tackle the particular social and environmental causes they care most about.

• To simplify and standardise corporate sustainability data reporting. The paper endorses the World Economic Forum’s initiative to Build an Effective Ecosystem for ESG as a first step toward common, minimal disclosure levels to increase the transparency of sustainability reporting.

• To define impact investment and measurement coherently and consistently. UBS believes the International Finance Corporation’s work on common impact management standards is bestplaced to fulfil this role. UBS calls on the World Bank Group to officially endorse these criteria as their own and name them accordingly.

• To name sustainable investing strategies in a clear, consistent manner so they can be universally understood and adopted.

• To use publicly traded strategies in traditional portfolios, focusing on market-rate performance and having an actual positive social and environmental impact.

• To adopt a truly 100% sustainable investing asset allocation that seeks to deliver attractive returns and have verifiable positive impact. A 100% sustainable cross-asset portfolio lays the groundwork that may enable foundations not currently invested sustainably to align their activities to their values.

• To make philanthropy more collective and collaborative rather than competitive, an objective strongly supported and promoted by the UBS Optimus Foundation.

• To use awareness campaigns to increase public knowledge of the UN SDGs.

28 February 2019

When it comes to the technical details around the benefits employees have through their employer’s group scheme arrangement, it can be a complex environment.

Financial advisers are often tasked with explaining these aspects to their clients and their employees, which places an enormous responsibility on them.

Momentum Corporate’s research shows that although most members speak English (the predominant language used in member communication and policy documents) at home and at work, their understanding of industry terms and benefits are lacking.

Members’ understanding of ‘underwriting’ and ‘free cover limit (FCL)’

Sixty-five percent of members who indicated that although they are familiar with the term ‘underwriting’, they cannot explain its definition

Understanding underwriting and free cover limits in a group scheme arrangement

or purpose. Only 21% are familiar with the term FCL, despite it being widely used in the group insurance environment.

is not provided, the extra cover may not be granted and the benefit will be capped at the free cover limit.

What is the FCL?

It is important that employees are truthful when submitting medical evidence for extra cover above the FCL If the extra cover was granted and it becomes evident that the employee was not truthful in providing the evidence, the claim for the extra cover may be declined in the event of death or disability and only the cover up to the FCL will be paid.

However, if an employee was granted extra cover and was not aware of a medical condition at the time the extra cover was granted, it is not non-disclosure and he will be covered up to the amount of extra cover granted. Similarly, if an employee contracts a condition after being granted the extra cover, it is not non-disclosure and he will still be covered up to the amount of extra cover granted.

Unlike with individual insurance policies, when an employer provides lump sum death, income disability and lump sum disability insurance to his employees under a group scheme arrangement, an FCL for each group scheme is determined by the insurer. The FCL is the amount of cover that each employee belonging to the scheme qualifies for without providing medical evidence.

If an employee covered under a group scheme needs more cover exceeding the FCL, he must submit certain medical evidence, based on the policy terms and conditions. The extra cover above the FCL may be granted by the insurer at standard or escalated rates or the extra cover may be declined based on the medical evidence provided. If the evidence

BAREND LE GRANGE Head: Individual Member Support, Sanlam Employee Benefits

An ecosystem of advice, counselling and annuity strategies

T

he debate over whether the institutional sector will start to encroach on the retail sector is over. Only one question remains: To what extent will it do so?

This transformation has been driven by client behaviour, legislative requirements and the need for financial inclusion. Furthermore, the merging of the institutional and retail sectors is going to be accelerated when the ‘Default Regulations’ become effective on 1 March 2019.

These regulations stipulate that, among other requirements, all retirement funds must create a trustee-endorsed annuity strategy, along with providing access to retirement benefits counselling services at least three months before members retire.

Each fund’s annuity strategy would have to be appropriate to most of the members in their funds. Trustees

23

will have to rethink not only what products are available to members at these critical junctures, but also how members are serviced and advised.

In short, funds will have to consider the following three aspects for their retiring members: Annuity products, retirement benefits counselling and financial advice.

Annuity products There is an array of options for trustees to consider: The product can be a living annuity or life annuity, provided in-fund or out-of-fund. The risks that trustees have to consider for members in retirement are vastly different than while members are still in the accumulation phase, for example longevity risk and sequencing risk.

Annuity product providers have had to develop innovative solutions, such as institutional living annuities,

Full disclosure

some of which use Smoothed Bonus portfolios for protecting against market downturns in the early years of retirement. However, the biggest impact would arguably be that funds are able to use their purchasing power to negotiate institutionally priced annuities that deliver meaningful improvements in the monthly income received by pensioners.

Retirement benefits counselling The form that counselling will take has to be determined per fund. Funds have to ensure they actively implement a capability that provides members with accurate and understandable information that enables them to make better financial decisions, which is the intended purpose of the legislation.

A response from some providers has been the introduction of Retirement Benefit Counsellors to the market.

These counsellors will be able to have a human conversation in explaining the fund’s annuity strategy.

Counsellors would not be able to assist members with all financial queries, in particular relating to providing financial advice.

Counsellors should be trained to be cognisant of this distinction and refer members to financial advisers where necessary. Financial advisers could

In a complex group scheme environment, it is important that financial advisers and employers ensure they are fully aware of the scheme’s policy terms and conditions and that employees understand the details of their benefits. To assist financial advisers and employers with member benefit education, insurers should offer a smart benefit counselling service that members can contact to receive all the information they need about their retirement and insurance benefits.

leverage off the services provided by counsellors, both by serving a segment of the members traditionally not served, as well as collaborating with them for advice referrals. This enables financial inclusion as more members of retirement funds would have access to both retirement benefits counselling and professional financial advice.

Financial advice Financial advisers will have to familiarise themselves with the unique annuity strategy approved by the respective retirement fund to which the specific member belongs.

Institutional annuity products negotiated by the fund would generally be cheaper than their retail counterparts. However, institutional annuities may not be as flexible as retail annuities and the holistic financial needs of the individual need to be addressed. As such, advisers will need to have deep insight into each member’s available institutional annuity strategy in order to provide appropriate advice at retirement that may ultimately combine the best of both worlds. This provides an opportunity for value to be added in the advice process and we anticipate that high-quality advisers will leverage this opportunity to provide meaningful advice at and through retirement.

EMPLOYEE BENEFITS

ELNA VAN WYK Head: Underwriting and Disability Management, Momentum Corporate

EMPLOYEE BENEFITS

24

EMPLOYEE BENEFITS

28 February 2019

HAPPY NGALE Operations Manager for Financial Wellbeing, Alexander Forbes Retail

RBC to promote better retirement outcomes for members

S

tatistics indicate that only about 6% of South Africans are able to meet their retirement income objectives and retire comfortably. Compounding this issue is that 97% of South Africans elect to withdraw their retirement fund savings in cash when they resign or are retrenched.

According to Happy Ngale, Operations Manager for Financial Wellbeing at Alexander Forbes Retail, a big reason for poor decision-making when it comes to retirement funds is that members don’t have access to financial advice where the implications of each option and decision on their future retirement income are fully explained.

The Pensions Fund Act (PFA) has been amended to include Retirement Benefit Counselling (RBC), which is a compulsory requirement for every retirement fund to fulfil, effective 1 March 2019. The PFA requires that RBC be made available to members when joining a fund, at resignation and at least three months before retirement. “This means at any of these stages the members have to be provided with information on their options, fees and costs in simple and clear language. Members can use that information for better decision-making. Many members have made the poor decision of withdrawing their funds because they didn’t appreciate the IT IS STILL impact on their retirement income or understand the negative tax IMPORTANT implication,” Ngale says.

TO OBTAIN RBC also includes an explanation of investment portfolios, the fund’s FINANCIAL ADVICE EVEN annuity strategy, rules about preserving withdrawal benefits, and other fund AFTER RBC options. “This not only ensures access to information for members but also assists HAS BEEN members to understand the impact OFFERED TO of their decision on their retirement THE MEMBER outcomes.”

RBC will potentially usher in an increase in the preservation of funds, which would lead to improved prospects of a comfortable retirement.

Ngale adds that members should use RBC to their advantage, especially if they cannot afford financial advice. “However, it is still important to obtain financial advice even after RBC has been offered to the member. RBC is there to provide factual information and not advice.”

Once members are fully informed of the various options and their implications, a financial adviser is needed to assist in providing tailor-made advice, specific to the needs and circumstances of the individual. With RBC, members will be better empowered to use the information provided to their advantage.

Different funds and administrators will roll out RBC differently, with the minimum requirement being to provide members with written information.

“We may see some funds offering face-to-face engagements.

This option has the potential to yield better outcomes because it provides an opportunity for better understanding and a chance to ask questions where further clarity is required.”

Ngale says that with the introduction of RBC, the trustees of retirement funds have an increased responsibility to their members.

“The intention of RBC is to promote better retirement outcomes for members. Whether or not RBC will help funds achieve this will be seen in time.”

BRIDGET MOKWENA-HALALA CEO, Assupol Life

South Africans are living longer: Can their retirement savings keep up?

A

round the world, people are living longer. According to the World Health Organisation, between 2000 and 2016, life expectancy increased by an average of more than five years globally. This is true in South Africa, where, according to Statistics SA, South Africans’ life expectancy has risen to 64 years over the last decade, up from 53 years in 2006. This is generally attributed to a wide range of factors, including continuing advances in medicine, better nutrition and lifestyle choices.

This presents a challenge to retirement planning: extended life expectancy means that one must have a greater sum saved in preparation for retirement. As no-one can be sure of how long they will live, it is important to plan for the possibility that retirement may last a long time.

One response to this development is to delay retirement and avoid drawing from one’s pension for as long as possible, in order to save more and give money already invested additional time to grow.

However, this is complicated by a further

consideration; you can only keep on working if health and circumstances allow.

The Annual Global Burden of Disease study, published in The Lancet in 2017, found that while South Africans are living longer, the number of years spent in good health have actually declined. So, for some, this may not be an option.

It is therefore more important than ever to plan and save for retirement, and to start as early as possible. Starting later may, however, mean that one will need to make a bigger adjustment when retirement comes. With less saved to live on, it will be necessary to cut spending more drastically to ensure that there is enough to last. Making this adjustment can be challenging.

Clients’ difficulty in adapting to a retirement income has led Assupol to formulate their Rewired for retirement™ feature, offered as part of their Ultimate Retirement Income 4Life (URI 4Life) product. It gives the client a period of time over which to gradually EXTENDED LIFE adjust their lifestyle and EXPECTANCY spending to MEANS THAT match their ONE MUST HAVE retirement income – A GREATER rather than SUM SAVED IN being forced to do so PREPARATION suddenly on FOR RETIREMENT retiring.

Previously, one could choose between a level income (in which retirement income starts relatively higher but fails to keep up with inflation) or increasing income (where the income starts off lower, meaning a greater adjustment at outset, but then rises yearly to keep up with inflation). The Assupol ‘Rewirement’ feature combines the benefits of these by taking a middle ground, and starting with a higher income, which will begin to increase after a few years to better keep up with inflation. This provides clients time to adjust spending to a level that they can afford on their guaranteed retirement income.

With sufficient planning and a little bit of luck, living longer in retirement can be a great opportunity. Freedom from the old routine can mean a chance to try new ventures – start a business, try a new job or volunteering; spend more time with one’s grandchildren; or do the many things that workaday life doesn’t allow enough time for.

From frustration to delight…

The faces of your clients’ employees will tell the story.

Momentum Corporate has reimagined and reinvented the underwriting process for group insurance clients. Now it’s a quick and efficient digital process for employees who increase their cover and need underwriting. It is a first for group insurance in South Africa and won a Silver Loerie in 2018 in the service design category.

Smart Underwriting is changing the story.

Let’s talk.

Contact your Momentum Corporate Specialist. momentum.co.za

HERE FOR YOUR JOURNEY TO SUCCESS

2 0 1 8 AWA R D W I N N E R

Momentum is part of MMI Group Limited, an authorised financial services (FSP6406) and registered credit provider (NCRCP173)

corporate

RISK

26

RISK

28 February 2019

The role played by trade credit insurers

A

midst a persistently tough economy, companies continue to battle cashflow conundrums. This is exacerbated by ‘bad debtors’ – in fact, late payments and insolvency are two of the most commonly cited causes of long-term damage to business growth. The result can be irreversible damage to a company that’s unable to recover its uninsured losses. While larger businesses partner with trade credit insurance solution providers to assist in managing trade-related debts, SMEs tend to self-manage the risk and miss out on the numerous benefits credit insurance cover can provide.

Trade credit insurance assists the growing number of companies hoping to expand their businesses locally, across Africa and beyond.

There are multiple risks to opening credit to overseas markets – especially when it comes to collecting defaulting debtor payments.

Additionally, businesses find it tougher to source information on their foreign clients’ solvency.

The lack of transparency around in-country legal systems and proceedings in foreign courts provide further challenges when faced with default. That is where trade credit insurers play a big role – both in taking on the risk and providing the intel that potentially warns of it.

In a recent panel discussion hosted by Santam, Pieter Dingemans, National Practice Leader: Trade Credit Marsh; Steve Smith, Head of Credit Insurance Division: Santam Structured Insurance; and Jansen Harper, Managing Director: Credit Innovations, discussed why credit insurance is key for both larger and smaller businesses and how it helps with companies’ expansion plans. Here are some of their points: What trade credit insurance covers: In a nutshell, trade credit insurance traditionally covers business-to-business transactions done on credit terms – and just for trade. This incorporates payment defaults, business rescue and liquidation. The insurer will assess the risk of the client’s whole book or individual debtors and will only take on ‘good risk’ companies/buyers.

Why small businesses should consider That way the policyholder can use the insurer as trade credit insurance as well: While large an ‘alarm’ for ‘bad’ prospective trading partners. corporations with strong balance sheets can There’s a black swan effect in business. Some better withstand big losses, smaller businesses companies fail fast and unexpectedly. As will find it harder to recover. That’s why small insurers conduct continuous risk assessment businesses, especially, need credit insurance. on buyers, they can see when other companies There are several credit insurance products are reducing their exposure to these buyers. designed specifically for SMEs that need less That gives a signal to the insurer that the administrative-intensive solutions. These are buyers’ risk is deteriorating – which allows tailor-made for companies that don’t have a full the insurer to advise its policyholders to lower credit management team. their exposures to – and potentially stop Another benefit of credit insurance for small trading with these buyers. businesses is the fact that the insurer does the risk assessment and passes on this information Why trade credit insurance is essential for to the client – so the insurer acts as an alarm companies expanding across Africa and warning of prospective bad debtors, which is overseas: Often, companies underestimate the often based on information an SME simply cost of collecting debts in overseas countries. wouldn’t be privy to.

They tend to know less about the debtors Finally, having the support of credit insurance they’re dealing with, and they don’t necessarily covering one of its biggest assets – its debtors understand the legal systems of the countries – improves a company’s risk rating, which can they’re expanding into. Across the board, potentially get the business dealing with foreign debtors better banking rates and is simply more expensive. For SMEs TEND TO higher liquidity. insurers, it’s a longer process as they have less readily accessible SELF-MANAGE What happens if there are information to assess risk, and THE RISK AND late payments? If someone there’s a more intensive and does not meet trading terms, complex mitigation process MISS OUT ON THE then the insurer will embark BENEFITS CREDIT to salvage debt. Foreign credit on mitigation to try to get insurance coverage also tends to INSURANCE COVER be more extensive than domestic the debtor to pay. If that proves unsuccessful within a coverage because it includes CAN PROVIDE set period, then the insurer things like political risk when will pay out the insured, in line with his or her goods are rejected, etc. policy. The insurer will then continue to try and It’s important for policyholders to note what mitigate the loss. kind of business risks they need to cover in the countries they’re expanding into. It’s also How expensive is trade credit insurance? At important they’re aware that some foreign the end of the day, the risk depends on the credit markets are ‘riskier’ than others, so they come quality of buyers a policyholder is dealing with. with higher premiums. In line with insurers’ The level of risk determines the premium rate. annual ‘political risk map’, there are certain countries where it’s very difficult or impossible Warning bells: Policyholders would usually alert to get any cover at all. an insurer when considering a new trade partner.

The insurer would then do a risk assessment Credit insurance and factoring: Factoring is based on its financial information about the the process of selling off a debtor book to an potential trade partner’s trading history. The institution for immediate access to cash. There is insurer would then tell the policyholder whether an argument that factoring and credit insurance it’s happy with the risk. If the insurer refuses to are complementary – factoring is finance cover the risk, then the policyholder while trade credit insurance is a risk mitigator. is alerted to the fact that Together, the two can benefit a business that’s it’s a potentially risky struggling with working capital. Another thing trade partner. to consider is that many of the entities that offer factoring seek credit insurance for themselves on their debtors.

Big or small, companies need to be responsible for their own risk management, so should be extremely circumspect about who they’re doing business with on credit terms.

Insurance should form part of a greater risk mitigation strategy – with the insurer taking on the risk the insured can’t afford to keep.

RISK 27

28 February 2019

Global insured losses led by tropical cyclone and wildfire events

A

on, the global professional services firm that provides a broad range of risk, retirement and health solutions, has released its Weather, Climate & Catastrophe Insight: 2018 Annual Report.

The report evaluates the impact of global natural disaster events to identify trends, manage volatility and enhance resilience.

It reveals that 389 natural catastrophe events in 2018 generated economic losses of US$224bn. Of that total, private sector and governmentsponsored insurance programs covered US$90bn of the total – the fourth-highest year on record. This means the protection gap, which is the portion of economic losses not covered by insurance, was 40% and at its lowest level since 2005.

The biggest driver of catastrophes in 2018 was the tropical cyclone peril following several significant landfall storms. This included Hurricane Michael and Hurricane Florence (United States), Typhoon Jebi and Typhoon Trami (Japan), Typhoon Mangkhut (Philippines, Hong Kong, China), and Typhoon Rumbia (China). As a result, 2017 and 2018 resulted in the costliest back-to-back years on record for both economic losses (US$653bn) solely due to weather-related events, and for insured losses across all perils (US$238bn).

“2018 was another active year for global natural disasters,” says Andy Marcell, CEO of Aon’s Reinsurance Solutions business “While there was not a singular ‘mega’ catastrophe event, there were 43 billion-dollar events which aggregated to a slightly aboveaverage year. The re-insurance industry continues to withstand the payouts backed up with US$605bn of capital but focuses on managing the cost of changing climate and weather events by helping to close the protection gap.”

Additional major events during the year included a series of major wildfires in Northern and Southern California. The costliest insured loss event of 2018 was the Camp Fire at US$12bn, which also became California’s deadliest and most destructive fire on record.

“Among the takeaways from the events of 2018 was the recognition that catastrophe risk continues to evolve,” says Steve Bowen, Director and Meteorologist at Aon’s Impact Forecasting.

“The complex combination of socioeconomics, shifts in population

and exposure into vulnerable locations, plus a changing climate contributing to more volatile weather patterns, is forcing new conversations to sufficiently handle the need for mitigation and resilience measures.

Natural disasters are always going to occur. How well we prepare can and will play a key role in future event losses.”

Other significant regional events during the year included: • Notable drought in 2018 was observed in South Africa, costing the Cape agricultural sector R5.9bn.

• October’s Camp Fire in the US destroyed 18 804 structures, including most of the city of Paradise. Total economic costs were estimated to approach US$15bn.

This is the second year in a row that California set a new record for wildfire losses.

• In Japan, torrential rains during the month of July led to catastrophic flooding across much of the country with total damage nearing US$10bn.

• A multi-billion-dollar flood occurred in India’s state of Kerala during the seasonal summer monsoon months.

• Much of Northern and Central Europe endured prolonged summer drought conditions as aggregate costs, mostly to agriculture, which tallied to near US$9bn. Multibillion-dollar drought events also impacted the United States, Argentina, China, and India.

• A significant stretch of severe weather and flooding impacted Italy and elsewhere in Southern Europe during October and November, as the economic toll topped US$5bn.

• Reaching US$2.1bn of insured losses, Windstorm Friederike was the fifth-costliest European windstorm of the 21st century.

PERIL FOCUS: DROUGHT

According to Aon’s Weather, Climate & Catastrophe Insight: 2018 Annual Report, among the costliest perils around the world in 2018 was drought .

With a combined damage cost of more than US$27bn, it marked the most expensive year for the peril since 2013 . Among the hardest-hit areas were Central and Northern Europe, Central America, South America, South Africa, Asia, and the United States .

Each of these regions incurred a multibillion-dollar economic loss, with most of the losses incurred almost entirely to the agricultural sector.

The most expensive droughts were found in EMEA, notably across Central and Northern Europe. Agricultural impacts tallied roughly US$9bn during the spring and summer months, which was highlighted by record heat and a severe lack of rainfall. All-time heat records were set in parts of Germany, Belgium, The Netherlands, Finland, Norway, and Sweden. During the peak of the heatwave, temperatures exceeded 90°F (32 .2°C) as far north as the Arctic Circle and Scandinavia. The heat also coincided with one of the

driest summers on record as persistent high pressure kept moisture away from a large portion of Europe. This further led to increased wildfire risk, as seen in parts of Sweden. These conditions combined to lead to a major reduction of crop yields and harvests.

Many individual types of crops, such as wheat, grain, and vegetables, were reduced by as much as 70%. This led to the high financial toll.

In South Africa, a lack of rainfall and above average temperatures during the harvest season of 2017/2018 into 2018/2019 led to a reduction of agricultural yield by more than 20%.

Total economic losses surpassed US$1.2bn (ZAR17.6bn).

Drought conditions were additionally significant across Central America and South America . Some of the hardesthit countries included Guatemala, El Salvador, Honduras, Panama, Argentina, and Uruguay. In the United States, a lack of rainfall and well above normal temperatures resulted in major crop damage in parts of the West, Northern Rockies, and the Plains.

A shift in monsoonal patterns and timing also brought a multi-billiondollar drought cost to parts of India and China. Much of India saw a severely reduced amount of seasonal rainfall, which aided in accelerated drought losses. Extended heat and a nearrecord lack of rainfall brought major drought conditions to New South Wales, Queensland, South Australia, and Victoria in Australia.

Steve Bowen, Director and Meteorologist, Impact Forecasting, Aon

28

RISK

28 February 2019

WYNAND VAN VUUREN Head: Legal, King Price

The ongoing relevance of intermediaries

Wynand van Vuuren, the Head of Legal at King Price, believes that with the rapid increase in the number of specialised insurance products now available, and the explosion of technology, we’re seeing the re-emergence of brokers and financial advisers to assist consumers to make sense of it all – and choose the products that are right for them.

T

wenty years ago, we were still buying insurance the oldfashioned way. Brokers would come to our houses. They’d assess our assets. They’d go away. They’d come back, with a lot of paper. A LOT of paper. We’d sign in 700 places. And boom, all sorted. For a year.

Then along came the direct insurance model, and everything changed.

Insurance by phone? What a pleasure.

Sign me up. And while you’re at it, change insurers every month based on where you can get the lowest prices. It sounded revolutionary – but in reality, it was just automating an old process.

This year, we’re hearing words like ‘disruption’ and ‘transformation’ bandied around a lot. And with good reason. Consumers are tired of the old models of insurance, and they’re driving a bit of a shake-up in the short-term insurance industry. How big a shakeup? Here’s what we can look forward to.

The year of the consumer The days of simply putting insurance products into the market and hoping

people will buy them are over.

Consumer demand is increasingly dictating the products they want to see, and this trend is only going to pick up, with insurers having to deal with more niche demands and products tailored to specific risk profiles.

A prime example of this is cybersure – mainly for businesses, but increasingly for individuals as well. South Africa is a major target for hackers, and businesses are literally being brought to a halt while criminals try and extort money from them. The market demand was clear: We need money for lawyers and to keep the lights on while we sort out the issues.

And so our product has evolved.

At the same time, people are asking questions of their insurers: Why does my business need R10m liability cover, if I’m not exposed to many of the risks?

If I feel secure in my complex, why do I need to pay an extra 50% on my home contents premium for theft when all I want to cover is so-called ‘fire and fury’? Now insurers are going to have to be more flexible than ever to meet

BERTUS VISSER Chief Executive of Distribution, PSG Insure

H

the industry – which means lower-risk clients will pay less for insurance. Look out for more telematics-style products, where you exchange your driving data for an exact premium tailored to your specific risk profile, for example.

The regulation train is coming There’s little doubt that increased regulatory oversight is becoming a fact of life. A great example of this is the automotive industry, where the competition commission has proposed a new code of conduct that will give car owners the right to repair or service their cars at a provider of their own choice, without voiding their warranties.

This will obviously have a major impact on the insurance industry. In the past, insurers would insist on cars being repaired at approved suppliers, but the new code will open up the repair and service market in a big way.

This is an incredibly positive move, as more competition will drive more competitive prices, and lower costs of parts and labour – which will ultimately translate to lower premiums.

The relevance of brokers With these new trends on the horizon and with such a wide range of insurance products now on the market, consumers will increasingly turn to brokers for assistance in finding the right product at the right price.

Savvy short-term insurance cover in six steps

ave your clients been talking about reducing their cover to improve cash flow? If so, they should be reminded that a large loss without insurance cover could be detrimental to their financial future and truly deter them from managing economic knocks.

Here are six things to bring to clients' attention.

1

Don’t discover you have too little cover too late You may think that simply having insurance offers you enough protection. The reality is that your level of cover might be insufficient – and when misfortune strikes, there is little worse than submitting a claim only to find that you aren’t fully covered. Be sure to consider all relevant risks, and to allocate the necessary budget to adequately cover your possessions.

2

their clients’ specific needs in a highly competitive market.

The rise and rise of technology There’s no doubt that technology is changing the face of insurance irrevocably, both for consumers and insurers themselves. From a consumer point of view, this is going to bring with it a host of new ways to interact with their insurers. We live in a world where most people have smartphones, and they want to insure themselves through apps, the internet, and even social media. Know your car is going to be standing in a garage for three months?

Cancel accident cover using your app.

This obviously opens up entire new markets for insurers, as well. People who have internet access and a social media presence are not only more reachable, but more able to access and use insurance products. Watch out for new marketing drives into previously uninsured sectors of the population.

But the big disruptor in insurance is data-driven technologies. For consumers, technologies like AI, apps and chatbots are driving a range of digital-first, human-friendly services that are tailored to the exact needs of the client. For insurers, the ability to analyse data better provides the ability to determine risk to a point of nearperfection. This essentially results in more accurate and fair premiums to

Keep it business as usual If you own a business, consider more than the overall replacement value of your property,

buildings, equipment and average level of stock.

Factor in expenses such as escalating building costs, rising replacement costs of imported stock, peak period stock levels and the costs of rubble removal if your premises are damaged by fire or floods.

3

Keep your personal cover current Changed jobs or recently purchased something special? While your insurance cover is unlikely to be the first thing you think of, it’s critical that you inform your adviser as soon as possible on any significant changes in your circumstances, such as where your vehicle will be in the day.

4

Don’t underestimate the cost of claims Any item you bought this time last year – be it a new household appliance or professional equipment – is likely to cost more today. So, having insured it at last year’s purchase price, you

won’t be able to replace it at today’s cost if it is damaged or stolen and you are solely reliant on your insurance claim.

5

Realise the rand reality Take a look around your house, or your business. How many items are imported? At home it might be your flat-screen TV, laptop or expensive fittings. At your business it might be trading stock, specialised machinery or even cleaning equipment. Consider all items that could cost more to replace if they have to be bought using a weaker rand.

6

Remember your responsibilities You have an obligation to your adviser to provide correct information for your insurance cover. Disclose all relevant details and make sure you provide accurate estimations of value. If you are not confident to verify this information, many insurers can assist by sending appraisers to value your insurable property or goods.

28 February 2019

RISK 29

Business interruption insurance ‘largely misunderstood’

B

usiness interruption insurance is critical to keep the revenue-generating ability of a business intact, following an insured event such as a fire, flood or other catastrophic circumstance that can torpedo the financial health of an enterprise. Yet, despite its importance to business continuity and the ability to fully recover from a loss event, business interruption insurance is largely misunderstood and as a result, the sums insured are often wholly insufficient to cover a catastrophic loss and the increased costs of working during the recovery period.

“Business interruption insurance is designed to compensate the business for the financial impact of the interruption or interference as a result of the insured suffering physical damage to the insured property or other key external events, for example damage at a key customer, a supplier’s depot or own operations that prevents the normal business operations from continuing and generating revenue. The fact that we see businesses that are often underinsured on their Business Interruption sums insured is indicative of the enormous complexity that comes with calculating the correct insured sums that takes into account the knockon effects and increased costs of working following an insured event,” explains Tony Webster of insurance brokerage and risk advisers, Aon South Africa.

There are three key factors that play a major role in the compilation of a Business Interruption (BI) insurance schedule that is fit for purpose: • Sum insured – As explained above, correctly insuring your business for business interruption is crucial. The sum insured must be calculated based on the insurance gross profit, not necessarily the accounting financial gross profit. This requires a deep understanding of a client’s financial records and its operating models.

• Indemnity period – An indemnity period associated with BI insurance refers to the period of time it will take for the business to recover from a worst-case scenario. The appropriateness of the indemnity period needs to take into account factors such as the nature of the business and its assets, such as specialised machinery and equipment, seasonality of the business and competition within the market.

As a simple example, if a hotel located at the coast suffered major structural damage following a fire, the BI insurance claim would look very different during winter months than it would during their peak holiday season. The indemnity period needs to account for complete building reinstatement, possible legal ramifications/delays if investigations due to human casualties are involved, building plan approvals, site preparation and the like.

• Business continuity – While business continuity in itself is not an insurable risk, poor risk management can render a business uninsurable. Risk mitigation efforts undertaken by a business has a fundamental effect on the eligibility for insurance and the cost of insurance. Another critical aspect that is considered is the interdependency of different business units, and what impact each has on the continuity of the entire business. A catastrophic event in one business unit could impact other divisions or subsidiaries across the entire network, as well as the ripple effect on customers and suppliers, not to mention one’s own staff.

One of the most miscalculated areas of BI is how More importantly, the proliferation of cyberattacks long it will take to overcome a catastrophe and return has also added new urgency and dimension to BI. to business. Getting a large production line or mining Cyberattacks can now cause electric outages, shut concern operational can be a very lengthy process, down assembly lines, block customers from placing and more so when there are regulatory or investigative orders, and break the equipment that companies rely hurdles to leap. BI insurance should cover at the very on in order to run their business. Officials at Lloyd’s least 12 months, if not 24 months, depending on the estimate that cyber-related business interruption could business complexity and environment – and then cost businesses as much as $400bn a year. consider that this does not even begin to address the In Aon’s report Cyber – the fast-moving target issue of lost market share during the downtime. released in April 2016, participants identified BI, both “If risk managers are approaching business during a breach and post-breach, as the top cyber-risk interruption as a pure balance sheet exercise, they run concern. In addition to cyberattacks, one cannot ignore the risk of buying transactional insurance, and not those occurring on a smaller scale, such as arson, a strategically relevant insurance tailored to their needs. bomb threat, a fire or a power outage – all of which If the adequacy of sums insured and declared values could cause disruptions on a scale equal to a natural are not properly calculated, hazard or a well-coordinated act of insurance cover will run out terrorism. In 2014, a contract worker EVERYONE IN THE long before the business is back set fire to an airport control centre in in operation, with dire financial Chicago, resulting in more than 2 000 BUSINESS SHOULD and operational implications,” flights being cancelled. Incidents like BE ASKING WHAT adds Webster. this highlight business vulnerability.

THE WORST-CASE Given the complexities of The interconnectivity of the global assessing the sums insured economy has amplified the negative SCENARIO COULD BE for a major BI loss, Aon impact of a single BI event. At the South Africa engages with RSM South Africa to same time, with the emergence of cyberattacks, assist clients with independent training and analysis businesses can no longer use a litany of traditional risk of the financial consequences of various business management solutions to handle BI. New innovative interruption scenarios. RSM is the sixth largest solutions are needed. Even though disasters, both global audit, tax and consulting network and offers natural and manmade, are not always preventable, professional services that are specific to BI risks and having an innovative business continuity plan in place the quantification of related losses. can help reduce the impact of both traditional and new “By working with RSM, Aon is able to provide emerging risks related to BI. the peace of mind of knowing that when it comes to “More importantly, risk managers should take a business interruption, all the complexities such as much broader view of risks, both traditional and exchange rates, interest, increased operational costs emerging ones, and address them in a coordinated during a crisis, loss of market share, down- or upand holistic way. Being prepared enables companies stream complications, regulatory hurdles and many to keep running during natural disasters, cyber or more are adequately considered, enabling the business terrorist attacks or reputational crises. While insurance to recover from a major insured peril with their can cover some of the property and operational reputation and bottom line intact,” Webster says. losses, it cannot make up for the loss of market

share, reputational damages, decline in investor Business interruption risks confidence, or a decline in the share price caused by an underestimated interruption. Therefore, a fortified and robust business BI has been on the Top 10 list of risks-facing continuity plan will boost a company’s resilience in the businesses since Aon’s Global Risk Management event of a BI,” Webster adds. survey started in 2007.

In a world of growing complexity and the “As supply chains have become global, there is interrelated nature of risks, no company can rest on its increasing interdependency among companies. laurels in terms of its BI recovery strategy. Continuity Such an industrial environment is heavily affected plans should always be ongoing works of improvement by uncertainties that have the potential to turn into and constant risk mitigation. Everyone in the business unexpected disruptions. Moreover, the focus on should be asking what the worst-case scenario could inventory reduction and lean supply chains has also be, and as a business, how to respond to it. amplified such potential. For example, China’s city of Tianjin, the world’s third largest port, is home to offices of more than half of the Fortune 500 companies, and to factories that build cars, airplane parts and mobile phones. As one can imagine, the deadly explosions in 2015 caused supply chain disruptions for companies around the globe,” explains Webster.

Tony Webster, Business Unit Head – Corporate Division, Aon South Africa

BOOKS ETCETERA

30

EDITOR’S BOOKSHELF

BOOKS ETCETERA

BUSINESS AS USUAL AFTER MARIKANA: CORPORATE POWER AND HUMAN RIGHTS

BY MAREN GRIMM, JAKOB KRAMERITSCH AND BRITTA BECKER The history of mining in South Africa has been and continues to be characterised by the oppression and exploitation of workers under the policy of the migratory system, the authors of this book say. And the new dispensation of 1994, under the African National Congress, did not assist much in changing the conditions at the mines. In fact, the authors add, the government continues to turn a blind eye to the unjust wages and living and working conditions of miners.

“Six years after the Marikana massacre, there has been minimal change for mineworkers and mining communities. Although much has been written about the days leading up to 16 August 2012 and how little has been done, few have analysed the policies and system that make such a tragedy possible.”

The authors see Lonmin Platinum Mine and the events of 16 August as a microcosm of the mining sector and how things can go wrong when society leaves everything to government and ‘big business’.

Business as Usual after Marikana is a comprehensive analysis of mining in South Africa, looking as it does into the history, policies and business practices in the industry.

Bishop Jo Seoka, former president of the South African Council of Churches, says of the book: “This publication, which starts by examining the long-term business relations between BASF and Lonmin, goes on to drill deeper into the hard rock of the persistent structures of inequality.

By doing so we will understand that Marikana is not the tragic failure of an otherwise improving economic system but rather a calculated form of collateral damage.”

THE GREATS ON LEADERSHIP

BY JOCELYN DAVIS This book is an in-depth tour of the best leadership ideas of the past 25 centuries, drawing out the key leadership insights from classic authors and weaving them together with business examples, the best contemporary research, and tools to help put it all into practice. Among the 20 leadership topics included are:

• Leadership Traps (Shakespeare) • Change (Machiavelli) • Power (Sophocles) • Dilemmas (Madison, Hamilton) • Communication (Lincoln, Pericles)

• Personality Types (Jung) • Motivation (Frankl) • Judgment (Maupassant, Melville, Austen, Shaw)

• Character (Churchill,

Plutarch, Shelley, Joyce)

Robert Mass, Partner and Head of International Compliance at Goldman Sachs, says: “The book is a rare blend of old and new. Davis draws together leadership lessons from the Bible, Shakespeare, Mary Shelley and James Joyce, combines them with the best of modern business writters like Marshall Goldsmith and Peter Drucker, and finishes them with her own observations.”

LEADERSHIP AT SCALE: BETTER LEADERSHIP, BETTER RESULTS

BY CLAUDIO FESER, MICHAEL RENNIE & NICOLAI CHEN NIELSEN Leadership effectiveness drives organisational performance, yet almost half of all organisations face some kind of leadership gap that they are not able to fill. In Leadership at Scale, McKinsey experts Claudio Feser, Michael Rennie and Nicolai Chen Nielsen share their secrets on how to increase leadership effectiveness across an organisation.

Using extensive research, distilled insights from McKinsey’s leadership development work in practice, and lessons from a highly successful

28 February 2019

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

leadership development program, this book will focus on the leadership behaviours that matter most.

Lord Myners, former FTSE100 Chair and Treasury Minister, describes the book as “a first-class template demonstrating how to use superior leadership to drive performance in large organisations”. Mario Greco, CEO of Zurich Insurance Group, says, “Today many organisations are trying to simplify and become more dynamic. However, decentralising decision power and engaging all members of large organisations requires building more and stronger leaders. Leadership at Scale is a practical guide to do so.”

CONNECTING THE DOTS

BY JOHN CHAMBERS WITH DIANE BRADY Silicon Valley visionary John Chambers shares the lessons that transformed a dyslexic kid from West Virginia into one of the world’s best business leaders and turned a simple router company into a global tech titan.

When Chambers joined Cisco in 1991, it was a company with 400 employees, a single product, and about $70m in revenue. When he stepped down as CEO in 2015, he left a $47bn tech giant that was the backbone of the internet and a leader in areas from cybersecurity to data center convergence. Along the way, he had acquired 180 companies and turned more than 10 000 employees into millionaires. Widely recognised as an innovator, an industry leader, and one of the world’s best CEOs, Chambers has outlasted and outmaneuvered practically every rival that ever tried to take Cisco on – Nortel, Lucent, Alcatel, IBM, Dell, and Hewlett-Packard, to name a few.

Now Chambers is sharing his unique strategies for winning in a digital world.

From his early lessons and struggles with dyslexia in West Virginia to his bold bets and battles with some of the biggest names in tech, Chambers gives readers a playbook on how to act before the market shifts, tap customers for strategy, partner for growth, build teams, and disrupt themselves. He also adapted those lessons to transform government, helping global leaders like French President Emmanuel Macron and Indian Prime Minister Narendra Modi to create new models for growth.

As CEO of JC2 Ventures, he’s now investing in a new generation of gamechanging startups by helping founders become great leaders and scale their companies.

Connecting the Dots is destined to become a business classic, providing hardwon insights and critical tools to thrive during the accelerating disruption of the digital age.

13490

Like a lob wedge, your service is fit for purpose.

At PPS we focus exclusively on graduate professionals; a specialised group that needs a specialised kind of insurance.

That means we need particularly-skilled brokers to meet their needs. Brokers like you.

Your expert knowledge marries perfectly with our range of highly specialised Financial Solutions, ensuring we can realise the potential of South African professionals together.

Choose PPS for your clients.

After all, one good professional deserves another.