MoneyMarketing January 2019

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31 January 2019 | www.moneymarketing.co.za

First for the professional personal financial adviser

WHAT’S INSIDE

YOUR JANUARY ISSUE

FINANCIAL SERVICES COMPLIANCE: NINE TOP TIPS FOR 2019

WHY YOU SHOULD REMAIN INVESTED IN RISKY ASSETS

This is going to be an interesting year.

Equities are the only asset class that can grow an investor’s wealth in excess of inflation in a meaningful way.

Page 6

Page 11

WHY VOLATILITY MATTERS FOR LIVING ANNUITY INVESTORS One of the biggest risks pensioners face is running out of money.

Page 20

Consistency paves the way to success Ascor, the Pretoria-based independent wealth manager, won three out of the six awards at the 2018 International Adviser Best Practice Adviser Awards ceremony held recently in Cape Town. MoneyMarketing spoke to Ascor’s CEO Wouter Fourie about this splendid accomplishment.

F

ourie puts Ascor’s scooping planning tools and robo-advisers, of the 2018 Excellence in Fourie believes that Ascor has been Client Service, Excellence in able to stand out due to the ethos that Professional Development and the nothing can compare with or replace very coveted Best Regional Adviser the personal and trusted relationship Firm Awards down to his team’s between a professional financial sterling work. adviser and his or her clients.

“Instead of putting themselves first, “We also believe in creating unique they consistently put the wellbeing and highly personal plans for each of of our clients’ wealth, retirement, our clients, which is not something a health and financial planning at the tool or algorithm can do, especially forefront of what we do every day,” when it comes to understanding he says. each client’s hopes, aspirations and In 2017, Ascor won the Excellence personal relationship to money. in Investment Planning award “We use tools where sensible and in 2016 won no less than four and we believe that many of awards – Excellence in Social Media, Excellence in Use of Technology, Excellence in WE ALSO BELIEVE Marketing and Communication IN CREATING and the overall regional award UNIQUE AND HIGHLY as Best Adviser Firm.

In a market that is constantly PERSONAL PLANS FOR being challenged on all sides EACH OF OUR CLIENTS by easily accessible financial

the robo-advice products help to sensitise new investors to the idea of financial planning. Many of these clients end up at an independent wealth manager like Ascor after they have started their journey on their own and then realised that they need to go to the next level of advice and personalised planning.”

Fourie explains that the role of financial advisers is undoubtedly changing. “We have invested a lot of time and funds in the past year in behavioural finance and financial coaching. We want to help our clients best create, manage, protect and ultimately transition their wealth.

This requires more than just financial planning and also demands a level of sophistication from our clients. This is where coaching comes in.”

He adds that his team has also learned that a good understanding of behavioural finance helps advisers hold frank discussions about wealth building and management with their clients. “These discussions shed some light on every client’s personal fears, preferences and assumptions about money, which ultimately leads to a better personal wealth plan.”

Looking back at 2018, when markets were characterised by a sometimes volatile environment leading to anxiety for clients, Fourie says, “We always joke and say that, as a financial adviser, you did your job well when your phone doesn’t ring during turbulent times in the market.”

Continued on page 3

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31 January 2019

NEWS & OPINION

This past year, there have been more than enough opportunities for concern, both in the local market and abroad, he says.

“However, we have been in the investment business for over 21 years and have been exposed to good and bad market conditions. Over the past 21 years we have learned that in the investing world, time, trust and opportunity do not count for much unless they are underpinned by a firm bedrock of consistency, and our process and approach have stayed consistent.

“We have seen good and bad fund managers and our approach to investment planning has stood the test of time, as confirmed by a client retention rate of 98%.”

He explains that understanding the link between risk and time is the key component to his team’s investment approach.

“We invest a great deal of time in educating our clients that a well-planned, long-term and stable strategy is the only way to build wealth.

We also warn that knee-jerk reactions to sudden market movements are bound to destroy wealth.

“Where we have faced a new challenge in 2018, was to manage expectations of constant double-figure growth in clients’ portfolios. Our second challenge was to be innovative in how we communicate this to clients more effectively.

In partnership with our discretionary fund manager, we created an animation video to show clients the importance of staying in the market and to not try to time the market. This has been a great success story and we will use similar methods to educate and communicate important wealth fundamentals in future.”

Turning to the year ahead and its compliance challenges, Fourie points out that when Ascor was started, it was realised that companies in the financial sector would face an evergrowing compliance burden. “We made legislative compliance a cornerstone of our business. We try to be ahead of any compliance issue, allowing us to continue without disruption when a specific law or regulation is eventually passed,” he says.

Ascor sees new technology as an opportunity, not a threat, “because it can only enrich the personal and highly individualised service that we give our customers”.

Fourie adds that he’s concerned about the level of professionalism in the industry and that he and his team would like to actively help improve this. “We have started lobbying decision makers and industry bodies on issues of compliance, professionalism and best practice, and will accelerate this THE ROLE OF in 2019.

“At the same FINANCIAL time, we are looking ADVISERS IS at ways in which UNDOUBTEDLY we can provide mentorships and CHANGING guidance to new independent financial advisers and how we can share insights from our journey that will help them. Ultimately, a professional and highly respected independent financial advice industry will benefit all in it.”

Inaugurated in 2016, the International Adviser Best Practice Adviser Awards are managed by International Adviser, a global information and research platform for independent financial advisers, and Old Mutual International. The awards recognise and honour business practice and client service excellence in the financial planning community in Africa, Asia, Europe, Latin America, the Middle East and the United Kingdom. All categories are judged by an independent panel of judges in the industry.

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

Wouter Fourie, CEO, Ascor receives the Excellence in Client Service Award.

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H

appy New Year to you. The MoneyMarketing team wishes you good health and abundant wealth in the twelve months ahead.

At the end of last year, together with other editors, I attended an informal lunch with the SA Reserve Bank governor, Lesetja Kganyago, as well as members of the Bank’s Monetary Policy Committee. These lunches have become invaluable as they allow editors the opportunity to chat to those who formulate the country’s monetary policy in a relaxed and casual environment.

Inevitably, this year’s national election in May came up, but the governor graciously stepped around the issue by quipping that while the Bank is very good with numbers, its staff are not good at reading politics – although the issue of the Bank’s independence was highlighted several times at the lunchtime discussion.

As I’m sure you will recall, Governor Kganyago has had to fight off the public protector who proposed changing the constitution to remove the Reserve Bank’s inflation-target mandate. The Governor has also made it clear that the ANC’s move to bring the central bank under state ownership interferes with its mandate.

At the lunch, he referred to the recent attacks on the independence of the US Federal Reserve, the Bank of England as well as the European Central bank. He warned – and quite rightly, too – that should politicians get their way on central banks, they may then go up against judiciaries and other institutions.

Next month, our finance minister Tito Mboweni will present his budget – an unenviable task given that the SA election campaign is in full swing. While the minister may succeed in resisting political pressure and while the expenditure ceiling may survive, the weeks leading up to Budget 2019 will be fraught with discussions over high unemployment, inequality and low growth. I’m not expecting too much to happen until after the polls.

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NEWS & OPINION

EDITOR’S NOTE

Continued from page 1

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PROFILE

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NEWS & OPINION

31 January 2019

NONTOKOZO MANDONSELA CHIEF MARKETING OFFICER, MMI HOLDINGS

How did you get into marketing?

Was it something you always wanted to do?

When I started my studies at the University of Natal in 1995, I wanted to be a chartered accountant. I thought being a CA would open doors to a good career and a couple of my friends were going into that profession as well.

However, in my first year, I realised I was not connecting with the numbers. It was hard for me to internalise the principles and when I observed my peers talking about accounting, I could see the passion in their eyes, which I definitely did not have. That’s when I realised accounting was not for me. At the same time, we were given a marketing project I excelled in, and it sparked my passion for marketing.

You’ve been in your current position for just over a year now, with oversight over the MMI Group as a whole. Are you enjoying your role and what challenges have you encountered?

I am absolutely loving my role. It’s quite a stretch because I now have the responsibility of MMI Holdings’ portfolio of brands, which include Metropolitan, Momentum, Multiply lifestyle and rewards programme and Guardrisk. Fortunately, each of the brands in the portfolio is targeted at different market segments and offers unique propositions. Having to manoeuvre between investor brand, mother brand, specialist brands and client-facing brands is exciting. I have enjoyed the process of repositioning and transforming the Momentum and Metropolitan brands. I realised that my role of guiding, providing clarity and inspiring passion within the business, really stimulates me.

The biggest challenge has been to translate the complexity of the insurance industry to the person in the street. We constantly have to find that intersection between what is technically right and compliant, and what will connect with the hearts and minds of people. I have found that I thrive in complexity; it inspires me. It’s what makes me excited to go to work every morning, since you never know which layer you will be tapping into next and how it will be received in the South African context.

VERY BRIEFLY

What does it take to be a leading brand in SA financial services today?

People’s expectations of financial services have shifted in the last couple of years. Consumers are looking for transparency and they expect value for money and excellent service from brands. The leading brands are able to deliver, without losing the core of their DNA. Because of the complexity of the industry, our jobs as marketers are to simplify it for consumers and build relatable brands that connect to the hearts and minds of people.

What’s the title of your favourite book on marketing and why would you recommend it to others?

The marketing book that has been the biggest inspiration for me is Eating the big fish: How challenger brands can compete against brand leaders by Adam Morgan. I read it many years ago and to this day I always go back to it. It’s simple and it helps one frame the understanding of how challenger brands can stand out. My inspiration does not come from traditional marketing books alone; I’m always connecting with global trends and out-of-category conversations on social platforms. I like bringing that into our thinking to inspire fresh ideas.

UPS & DOWNS

South Africa’s economy officially exited the recession in the third quarter of 2018, according to data from Statistics SA released last month. GDP increased at an annualised rate of 2.2% in the July to

September period, the statistics agency said.

This followed annualised decreases of 0.4% and 2.6% in the second and first quarters of 2018 respectively, that lead to the first recession since 2009.

When Eskom released its interim results for the first six months of the 2018/19 financial year, it reported an 89% plunge in net profit from R6.3bn at the end of September 2017 to R671m just one year later. This, it said, was a result of higher borrowing costs, greater fuel costs and increased expenditure on staff.

Newly appointed Eskom Chief Financial Officer Calib Cassim explained that the full-year loss could be as much as R15bn, an increase from the R11.2bn budgeted for at the start of the financial year.

Private Client Holdings won two awards at the International Adviser Best Practice Adviser Awards 2018 for the South African region, held in Cape Town last month. The firm was declared the winner in categories for Excellence in Operational Efficiency and Excellence in Investment Planning.

“To be recognised as a company in South Africa that is leading the way in operational efficiency and investment planning in our sector is extremely exciting. We are really pleased to have the hard work and dedication of our exceptional team and our company recognised,” says Grant Alexander, who founded Private Client Holdings in 1990.

Cannon Asset Managers has teamed up with digitally-driven investment firm EasyEquities to launch a new range of user-friendly and cost-effective investment bundles. “One of our cornerstone principles is that investment success is driven by investing in good assets at the right price, and then giving these investments time to work and grow through the powerful force of compounding,” says Dr Adrian Saville, Chief Executive of Cannon Asset Managers. “The range that Cannon Asset Managers has launched is built on the back of these key principles, giving investors access to a diverse collection of high-quality multi-asset portfolios in four convenient investment bundles.”

The bundles are each made up of a strategic blend of different asset classes, represented by Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs) that own or mimic the performance of companies in different sectors and regions, as well as various other asset classes such as cash, bonds, property and commodities.

Last month the merger between professional services firm BDO South Africa and Grant Thornton Johannesburg was finalised. The ex-Grant Thornton Johannesburg office (including satellite offices in Nelspruit, Polokwane and Rustenburg) are consolidated under the BDO South Africa brand. The consolidation marks the last stage of the merger process in Johannesburg and will include the incorporation of Grant Thornton offices in Cape Town and Port Elizabeth into BDO. The consolidated BDO South Africa has 1 400 staff nationally, with 900 in the Johannesburg office and a total number of 131 partners and directors. “The merger adds to the BDO experience pool. By scaling up, BDO South Africa will now be in a strong position to take advantage of new opportunities in the market and to provide clients, and potential employees, with a credible alternative to our competitors,” says BDO South Africa CEO Mark Stewart.

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6

NEWS & OPINION

RICHARD RATTUE MD, Compli-Serve SA

I

welcome you all to the new year of 2019.

As some will know, I typically issue some compliance ‘tips’ at this time for the coming year and, after due deliberation, I once again lay these out below. As with the previous years, they are in no particular order of importance and I remind you that my tips come with NO implied warranties and following them will not absolve you or make you immune from client complaints and/or regulatory sanctions. However, I can say that by taking my tips to heart and acting thereupon, you should reduce the compliance risk in your business. So here goes:

1

Stay up to date with the tech Those who don’t adapt their business to take advantage of FinTech developments will likely fall behind in the future. The marketplace is evolving into a ‘digital first’ space.

Financial services is no exception and we all need to be on the train. Rapid advancements in technology promise

31 January 2019

Financial services compliance: Nine top tips for 2019 us that we will be working smarter and faster than ever before!

and are something we should all be well aware of going forward.

2

5

Stay in touch with RDR The acronym continues to cause confusion but don’t let boredom or frustration with the process of finalising the RDR get to you – complacency is not the answer. Big shifts are coming and while potential measures are up for discussion, though somewhat puzzling and still pending, it is best to be kept informed along the way.

3

Don’t make knee-jerk changes More details on some of the key RDR proposals are expected from the regulator, so don’t make any rash decisions within your business unless they really are future-proofed.

A lot more will come to light as the year progresses, but I do encourage exercising patience.

4

Are you properly fit?

The revised Fit and Proper requirements of BN 194 are complex

‘C’ is for conduct Principles- and outcomes-based practices are in as we move to a conduct-based regulatory regime, likely translating into big shifts in how we’ll report to the Regulator as Conduct of Business Reports are set to replace the current tick-box approach in 2019. Consult your compliance officer about this new approach and make sure you are ready in time.

6

MCR? Three important words: Market Conduct Risk – it’s crucial you understand how this affects your business. Any risk management plan in the new year should include this up front.

7

Count your CPDs While you might drag your heels, CPDs are essential for the betterment of the industry, and compulsory.

Collect yours where it counts and stay in touch with industry events.

8

FAIS out, COFI in We are moving to a brave new world under the Conduct of Financial Institutions Act and entering a world where Board Notices and rules will be replaced by Standards. Sector-specific legislation will disappear over time as the FSCA knocks down the current silos.

9

Don’t be among the ill-advised With the myriad of regulations in play and those to come, it can be difficult to keep up. Seek professional compliance advice to avoid unnecessary complications – it isn’t worth the risk not to. Most compliance officers are members of CISA (www.compliancesa.com) – their licences and services are verifiable on the FSCA website.

This is going to be an interesting year, particularly in terms of the RDR and the technology space.

Put your best foot forward for a fruitful and compliance-fit year ahead.

Tech made easy for financial advisers The biggest challenge for any small business is choosing the right IT solutions to be competitive in today’s high-tech business environment. This is especially true for financial advisers who have more than enough to worry about other than setting up and managing IT systems.

To take the complexity out of IT, Cloudbox has an ‘all-in-one’ solution that includes everything from email to backups, file sharing, security and communication – in one simple package.

More importantly, the company offers unlimited support packages that are uncapped and include onsite support and change requests.

“Cloudbox includes affordable installation, maintenance and support costs, payable at a fixed rate per month, giving business owners the freedom to focus on their business instead of worrying about IT issues,” says CEO Justin Trent.

He adds that financial firms require a certain level of technology and reliable IT support. ”We have many years of experience providing technology solutions to financial service organisations, both in South Africa and internationally. We understand their requirements intimately. ”As the financial services industry becomes more and more mobile, firms need to respond.

Shared calendars, secure file sharing, corporate

instant messaging and online conferencing are now a must for every financial services organisation.”

Also, the amount of data being generated each day is constantly on the rise and to remain competitive, this requires a large, full exchange mailbox, email archiving and access to additional cloud storage.

Data security is also a major concern for most firms. From multi-layered anti-virus to data encryption, Cloudbox will ensure that all company data is fully secure and backed up, and easily recoverable after a disaster.

“IT resources and applications are managed offsite in the cloud, so customers only pay for the services they actually need,” he points out.

With no unexpected costs, budgets can be projected more accurately and with only one set of licences to manage, customers have the flexibility to scale up or down as they require.

Trent says everything is taken care of under one roof by one vendor on a per-user, per-month basis for a flat monthly fee. The company’s ‘IT human’ approach is firmly centred on customer service. Unlike traditional IT businesses where the focus is to sell more support hours, quality cloud solution providers are purely service-oriented.

“Our company’s success relies entirely upon being able to keep clients up and running 24/7; from everyday support to complex network monitoring and management, the dedicated team of IT humans has you covered.”

Justin Trent, CEO, Cloudbox

INVESTING 7

31 January 2019

O

ffer your clients with large tax events the Section 12J investment tax incentive as a way to reduce liability and to make an investment generating attractive returns. Individuals, companies and trusts can benefit from up to 45% immediate tax relief, reducing the cost of the investment while providing downside protection and enhancing overall returns.

Westbrooke Alternative Asset Management offers an industry first; the ability to invest directly into diversified portfolios of Section 12J funds all with a single manager. The options include the income, balanced and growth portfolios, which will each invest into an appropriate weighting of Westbrooke’s four S12J strategies.

Westbrooke Alternative Asset Management is SA’s largest S12J manager and looks after almost half of the capital invested in S12J funds in the country (more than R3.6 bn).

Jonti Osher, fund manager at Westbrooke Alternative Asset Management explains, “Some investors may be confused about which S12J investment to select based on the funds’ underlying investment mandates and strategies. We offer

the choice of income, balanced or growth portfolios which includes a combination of investment strategies.

To educate potential investors, we have created an online investor toolbox offering interactive education with videos, infographics and more.

Investors are able to deduct the full investment against their taxable income and reduce the amount of tax payable at the end of February 2019.”

Dino Zuccollo, Westbrooke fund manager says, “The S12J asset class is particularly attractive to those tax payers who have incurred capital gains tax, as the inclusion rate for individuals allows investors to invest less than the total cash realised on a capital gains event.”

S12J allows your client to write off 100% of the investment against taxable income in the tax year they invest.

However the investor must hold the shares for at least five years for the tax benefit not to be recouped. If your client has a big tax event such as selling a business, a property, shares etc that results in taxable income in excess of the R350 000 RA limit, S12J should be considered. In addition, RA and pension fund contributions are limited by the balance of income prior to the application of that deduction, but with

HELEEN GOUSSARD Head of unlisted investment services, RisCura

The 24th Session of the Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) – known informally as COP24 – that took place in Poland last month, highlights the global need for change to improve the lifespan of our planet.

Globally, investors are ready and willing to positively impact climate change by investing in clean energy. According to the latest figures from Bloomberg New Energy Finance (BNEF) – which produces primary research on clean energy and has been tracking investment in the sector for over 10 years – $67.8bn was invested in last year’s third quarter alone.

The total amount invested in 2017 was $333.5bn and BNEF expects the final figure for last year to be similar. However, the IPCC says $2.4tn a year needs to be invested to keep global warming to a maximum of 1.5 degrees centigrade.

Often, how we define and measure things have a significant influence on how we react to them – and in the world of energy it can influence how much, and where, investors invest.

When it comes to definitions, to classify an energy project as clean and green it must also be renewable. This means that the conversion of coal to so-called clean coal does not qualify, and investors are not keen on clean coal as evidenced by the fact that in the US and Europe, finance for

S12J, contributions are deducted prior to RA and pension deductions.

2019 investment offering • Tourism and hospitality Westbrooke Host (Hospitality Strategy) provides exposure to the South African tourism and hospitality sectors. The strategy invests in a portfolio of welllocated, property-backed, incomegenerating hotel businesses across South Africa.

• Student accommodation Westbrooke Stac (Student Accommodation) invests alongside reputable operators which own and manage student accommodation operations across South Africa.

The investment aims to provide an attractive dividend stream as well as capital growth in the underlying property assets on exit.

• Moveable asset rentals The Westbrooke Aria (Alternative Rental Income Assets) offers investment in a portfolio of asset-backed rental businesses with contractual revenues. The underlying investee companies focus on providing different types of moveable assets, such as vehicles and equipment, on

medium and long term operating rentals to these customers.

• Asset-backed operating businesses Westbrooke Base (Businesses where Assets Support Earnings) offers a portfolio of moveable asset rental businesses or fixed property-backed operating businesses which generate predictable non-contractual revenue streams. Examples of pipeline investment opportunities include solar infrastructure, short-term fleet rentals, schools, day-care facilities, petrol stations etc.

The minimum investment in these S12J funds is R1m and the offers close on 26 February 2019.

Jonti Osher, Section 12 Fund Manager, Westbrooke Alternative Asset Management

Dino Zuccollo, Section 12 Fund Manager, Westbrooke Alternative Asset Management

Investors ready to positively impact climate change by investing in clean energy clean coal projects is scarce. Not only are such projects costly – approximately 40% of the cost of regular coal plants – they are also complex, and still result in carbon dioxide emissions, though about 25% to 35% less. But, carbon emission decrease is not a metric impact investors consider when investing in energy.

Measurements are a further issue as, to date, mostly outputs – such as how many gigawatts of renewable power were commissioned annually – are measured. This is not helpful to impact investors who need to understand the actual impact of their investments on their intended beneficiaries, and not only its outputs.

The Global Impact Investing Network (GINN), a global champion of impact investors worldwide, has produced a catalogue of metrics for a wide range of impact investing sectors. While there is no specific metric for the impact of green energy among its environmental metrics, it does have a few standards that could be applied to clean energy. For example, energy metrics that include numbers of new individuals and the numbers of new households receiving electricity as the result of a project, could be applied to energy generated from clean sources.

In addition, the Impact Management Project, a globally sector-wide initiative, has brought together over 2 000 enterprises, investors and practitioners

to build consensus on how impact is talked about, managed and measured. They have developed five dimensions for measuring the impact of a particular initiative. These are: • ‘What’ is about what outcomes the enterprise is contributing to and how important the outcomes are to stakeholders • ‘Who’ tells investors which stakeholders are experiencing the outcome and how underserved they were prior to the enterprise’s effect • ‘How Much’ tells investors how many stakeholders experienced the outcome, what degree of change they experienced, and how long they experienced the outcome for • ‘Contribution’ tells investors whether an enterprise’s and/or investor’s efforts resulted in outcomes that were likely better than what would have occurred otherwise • ‘Risk’ tells investors the likelihood that theimpact will be different than expected.

The International Finance Corporation, part of the World Bank Group, has also recently released a draft set of principles for impact management.

This shows that while there are impact standards and principles that could be applied to clean energy, so far there is not an agreed set of impact standards, meaning that investors still need to work through and establish their own.

INVESTING

Investing in S12J funds to reduce tax and diversify risk

8

INVESTING

31 January 2019

What global diversification really means

M Birmingham identified as investment hotspot

B

irmingham, known as Britain’s Second City, continues to grow on the back of its reputation as a startup hub and one of the most investable areas in the UK. For the fifth year in a row, Birmingham topped the list for the highest number of new start-ups, second only to London. There were 12 108 businesses set up in Birmingham in 2017 alone, almost 4 000 more than thirdplaced Manchester, according to figures from the Centre of Entrepreneurs.

London still hugely dominates the start-up scene with 187 250 new businesses set up in 2017.

Also, for the fourth year in a row, PwC’s 2018 Emerging Trends in Real Estate Report places Birmingham top in the UK for property investment prospects.

“Birmingham has changed immeasurably over the years. Britain’s Second City is the type of place that appeals to entrepreneurs, professionals and investors alike,” says George Radford, head of Africa for IP Global.

Radford explains that regeneration is making the city centre an ever-more attractive place to live, visit and do business in, while exciting new transport links are set to make Birmingham even better connected. “Alongside this (and spurred on by it) there’s a growing population and a shortage of new homes to keep up with demand.”

He adds that the main factors contributing to Birmingham’s flourishing entrepreneurial spirit include its world-class accelerator schemes, affordable office space, and access to global markets.

“Geographically, Birmingham is positioned at the centre of things; a factor that helps to explain the city’s success.”

While home to 1.1 million people, its location means that 90% of the UK’s population is within four hours’ reach.

The city’s economy is the UK’s secondlargest, at GBP25.3bn, and continues to grow at a rapid pace.

Birmingham has 70 active tech meetup groups with over 20 000 members, with the most popular meetup topics for software engineering, entrepreneurship, web development, and data science and analytics.

Eight universities and world-class research institutions produce 52 000 graduates annually, with a 49% graduate retention rate ensuring a steady stream of fresh talent.

All these factors have contributed to Birmingham’s attractiveness as an investment destination.

“House prices in Birmingham are forecast to rise 20.5% between now and 2022, compared to 14.2% in West Midlands and the UK average of 12.6%.

With a large student population and growing workforce, Birmingham’s rental demand is also growing. A lack of supply has forced aspiring home-owners to rent as well, enabling a high volume of rental activity. Rental prices in Birmingham are forecast to rise 16.5% between now and 2022,” says Radford.

“We’ve seen two important trends over the last few years: an impressive ongoing revamp of the city centre, coupled with ‘future-proofing’ of the city’s transport infrastructure. A key driver of Birmingham’s future growth is the upgrade of the UK’s national rail network.

High Speed 2 will bring London within 49 minutes and significantly cut journey times to Edinburgh, Newcastle and Manchester,” he explains.

Radford says it seems that Birmingham remains very much open for business. “There’s a commitment to regeneration, education and diverse industries, which indicates that the city’s growth is set to continue.”

George Radford, Head of Africa, IP Global

ost investors would agree that diversification is a good thing, but how many of us really understand what it means? This is a question posed by David Nathanson, Global Equity Specialist at Bellwood Capital, who believes that all too often, South African investors misperceive global diversification as fleeing risk.

“Diversification is about managing risk. It is not about avoiding or eliminating risk, which cannot be done without sacrificing investment goals. It also isn’t about trading one risk for another, presumably lesser, risk, nor should it be about taking risk indiscriminately for the sake of diversification. It is about making good investments, but spreading them across different risks,” Nathanson explains.

With this in mind, he addresses two misconceptions that many South Africans have about global diversification:

Moving your assets from South Africa to the UK is not global diversification South Africa is an emerging market country with significant political and currency risks. The local stock market represents less than 1% of the global opportunity set. This, says Nathanson, doesn’t make South Africa a bad place to invest, but it does make it a risky place to invest everything, which is what many local investors do.

“For those South Africans who have decided to invest offshore, there often seems to be a significant bias towards the UK, possibly because the UK is familiar: shared history, language overlap, similar time zones, etc.

The idea is that the UK, a more developed market, has lower political and currency risk. Global diversification done.”

Nathanson points out two problems with this thinking. “First, the UK only represents about 4% of the global opportunity set. Second, as Brexit has made it abundantly clear, the UK also has political and currency risks.

The UK can still be a great place to invest, just not too much.”

The answer also isn’t to move everything from the UK and concentrate it somewhere else, like Australia, Nathanson adds. “This doesn’t solve the problem, it just moves it. Outside of the United States, no single country represents more than 10% of the global opportunity set, and even the Americans would do well to consider the rest of the world.

“Global diversification means avoiding overconcentration to any country and taking advantage of the widest opportunity set possible: South Africa, UK, USA, Switzerland, Canada, Australia, Hong Kong, Japan, Europe, and so on,” Nathanson explains.

The argument that ‘other places have risks too’ is not a valid case against diversification A common counter-argument that Nathanson says he hears when making a case for global diversification is that other countries have their own problems, and ‘fleeing’ South Africa is just ‘swapping one devil for another’.

This argument, he says, misses the point of diversification.

“First, global diversification isn’t about fleeing one country for another, and in doing so exchanging one concentrated risk for another. This doesn’t manage risk, it just transfers it somewhere else.

“Second, global diversification as a strategy doesn’t rely on finding places without risk. As the first point of this article suggests, no such place exists.

Instead, it relies on spreading exposure between risks that are less than perfectly correlated.

“To the extent that we can find two investments with similar merit that have different risks, it is better to hold both than just the one. Our risk of loss is lower because the probability of both risks playing out is lower than the probability of any single risk playing out. Similarly, if we can find many good investments with different risks, it is better to hold many than just two,” Nathanson adds.

In a nutshell, diversification is about exposing yourself to a wider opportunity David set in order to find many good investment Nathanson, Global opportunities with uncorrelated risks. “If you Equity want to manage your risk properly, invest Specialist, globally,” he adds.

Bellwood

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2

Capital

INVESTING 9

31 January 2019

Prescient Fund Services recognised at the Africa Global Funds Awards

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he alternative administration unit of Prescient Fund Services excelled at the recent 2018 Africa Global Funds Awards, winning Best Hedge Fund Administrator in Africa, and Best Fund Administrator: Private Equity Funds under $20bn.

Last year, Prescient Fund Services was awarded Best Hedge Fund Administrator in Africa at the awards.

Part of the diversified Prescient group, Prescient Fund Services offers independent, outsourced administration services to asset managers, multimanagers and other institutional investment providers. The offering includes portfolio administration, unitisation and investor services administration, across traditional funds, hedge funds and private equity funds.

Hayden Reinders, Head of Alternative Administration at Prescient Fund Services, and chairperson of the Hedge Fund Standing Committee of the Association for Savings and Investment South Africa (ASISA), comments: “Prescient offers best-of-industry hedge fund administration with customisable reporting based on industry standards and regulatory requirements, tailored to exact needs. We also provide boutique private equity administration, focusing on userfriendly monthly management accounting, bespoke investor reporting and integrated systems.

“We’ve worked hard on developing these capabilities to meet growing demand for outsourced and increasingly complex administration services. This, together with the group’s investment in our business, makes the team’s performance at 2018 Africa Global Funds Awards particularly gratifying.”

Prescient Fund Services was established in 2010 as demand for outsourced administration services by third-party clients grew. A registered Financial Services Provider and a licensed administrator, Prescient Fund Services administers over R350bn/$25bn (as at 31 March 2018) in South African assets across all major asset classes HE EXPECTS for Prescient and third-party clients.

DEMAND FOR ADMINISTRATION Via its Dublinbased fund services SERVICES TO company, Prescient CONTINUE RISING is approved to administer Irish AS REGULATORY regulated funds AND COMPLIANCE as well as those in other jurisdictions, PRESSURES ON including the FUND MANAGERS Cayman Islands.

INCREASE Prescient Fund

Services (Ireland) Limited is also authorised by the Central Bank of Ireland as a UCITS (Undertakings for Collective Investment in Transferable Securities) Management Company and AIFM (Alternative Investment Fund Manager), providing third-party management company services via four fund platforms.

Reinders added that he expects demand for administration services to continue rising as regulatory and compliance pressures on fund managers increase, along with stronger investor demand for alternative assets in the wake of the recent performance of the Johannesburg Stock Exchange (JSE).

Hayden Reinders, Head: Alternative Administration, Prescient Fund Services

Is there a place for hedge funds in your portfolio?

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here has been a great deal of negative press surrounding hedge funds in South Africa. A key aspect that has been overlooked is that despite a sharp selloff in the FSTE JSE All Share Index (ALSI) in 2018, a number of hedge funds have provided significant downside protection, reduced volatility and are positive year to date.

In early August last year, a prominent hedge fund allocator condemned the SA hedge fund space and stated that they were abandoning all hedge funds. Since then, the South African equity market and that particular investment house’s exchange traded fund (ETF) have fallen by close to 9%, while the Hedgenews Africa Single Manager Composite is positive over the same period – indicating that sometimes you get what you pay for!

From 1900 to the end of 2016, the South African market was the best-performing market in the world, delivering an average annual return of inflation plus 7.2%, according to the 2017 edition of the Credit Suisse Global Investment Returns Yearbook. This yearbook compared the returns of various asset classes over 117 years in 21 countries with a

continuous investment history. This ongoing overall upward trend has understandably made many South African investors complacent.

September and October 2018 saw the market sell off sharply, giving back not only August gains but extending the year-to-date loss to 10%.

It’s therefore understandable that South African investors who became accustomed to an upward trending market would after three years of sideways movement begin to question the status quo. This has resulted in major shifts in asset allocations from aggressive and multi-asset funds to income-producing, cash-like products.

However, one could argue that the timing of retail investors is wrong, considering the value offered by South African equities currently. History suggests that buying stocks at these low levels has yielded positive longterm returns for investors.

The South African small and mid-cap sector, for instance, has not just moved sideways but has suffered significant losses over the last few years, so much so that this segment appears deeply discounted.

While the rest of the world has been getting more expensive, small and

mid-cap South African stocks have been getting progressively cheaper.

Impatience and volatility of returns can be investors’ worst enemies, causing them to deviate from their long-term investment plans that invariably include a large allocation to risk assets like domestic equities.

Although the last three years have been tricky to navigate for all managers in South Africa, the Alpha Prime Equity Hedge QIHF (Qualified Investor Hedge Fund) has managed to outperform the market since its inception in 2006 (net of all fees) and is positive to the end of October 2018.

Even more impressive is that this has been done with 60% less volatility, which equates to fewer negative months and smaller losses.

The net effect is that investors who made regular use of hedge funds have not only been able to allocate a larger portion of their assets to growth investments without taking on additional risk; they have also been more likely to remain invested due to the lower volatility experienced. This will ultimately improve the probability of them achieving their investment goals.

Instead of moving away entirely from risk/growth assets to cash-like

products, a more prudent option would be to include a select number of quality hedge funds that can still capture the upside in a very discounted market, while protecting against the kind of sharp drawdowns witnessed recently.

The hedge asset class includes strategies that are completely uncorrelated to equity market performance by trading commodities and fixed income, thereby offering true diversification in one’s overall portfolio.

The key is to understand what you are buying. Instead of excluding hedge funds altogether, rather engage the assistance of a professional fund or fund house that has evaluated and combined these various strategies in an effective way. This will allow you to become more familiar with the asset class and create a more diversified portfolio without sacrificing returns.

John Haslett, Portfolio Manager, Alpha Asset Management

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31 January 2019

Protecting wealth and managing family succession MoneyMarketing attended the launch of Stonehage Fleming’s recent review, Four Pillars of Capital: Practical Wisdom and Leadership for Changing Times at its Johannesburg office where the presentation by Matthew Fleming, Partner and Head of Family Governance and Succession in Stonehage Fleming’s London office, was presented via television link-up.

T

he report – based on consultation with some 150 multigenerational members of different families and advisers – outlines the challenges in the transfer of wealth across generations, and analyses how the rapid pace of change is affecting the way families prepare for the future.

Stonehage Fleming identified that a changing and uncertain environment has caused families to focus on preparing the next generation to respond to future challenges and opportunities.

This means a more sophisticated, better structured and increasingly democratic approach to family leadership, greater emphasis on training and development of young people, better THERE IS A communication and renewed emphasis on GROWING long-term planning.

PREFERENCE The risks of failing to prepare the next FOR WIDER CONSULTATION generation are now seen as greater than IN THE FAMILY the management of investments or even of FOR THE held business SELECTION OF directly enterprises.

NEW LEADERS “Given the rate of technological, social and political change, intergenerational relationships are also transforming. Nearly all respondents agree that the impact of societal change on a family and family wealth must be reflected in the way they prepare for the future.

Traditional, informal approaches are thus being

challenged as families look to more sophisticated governance and communication,” Fleming said.

“One of the leading concerns emerging from the survey results is ensuring the right leadership is in place, by and for the next generation,” he added. “Our experience tells us that having a clear leadership structure will provide the best chance of managing unforeseen risks, both internal and external, pursuing opportunities and ensuring that the family prospers.”

Key findings • The report identified a shift in the primary concern by ultra-high net worth individuals (UHNWIs) from capital preservation to succession planning. The 2018 research found that 69% of respondents identified succession planning as one of their top three concerns for future financial planning, followed by capital preservation (62%) and tax planning (48%).

• Primogeniture (the right of succession belonging to the first-born child) was the number one way that leaders of the family or of the family business were selected (28%). When asked about their intentions for the future, however, the figure is around a third of that at 10%.

• There is a growing preference for wider consultation in the family for the selection of new leaders, possibly including a formal process.

Currently 13% use a committee to select the family leader; however, at least a third (33%) expect leadership to be selected this way in future.

• Respondents identified that the top risks to long-term family wealth relate to family

disputes (68%) and lack of planning (67%) as opposed to purely financial or investment risks. Further risks were failure to appropriately engage or train the next generation, and leadership issues.

Socially responsible investing not yet fully adopted Over 75% of respondents acknowledge a preference for responsible investment, but only 21% are actively incorporating a values-based approach in investment portfolios. “This indicates to us that though there is clearly an appetite for socially responsible investing, there is some confusion over definitions and how best to achieve it in portfolios,” Guy Hudson, Partner and Head of Marketing at Stonehage Fleming, said.

“At Stonehage Fleming we talk about ‘practical wisdom’ – sharing the knowledge we have acquired by working with a diverse group of families over several generations and using this to address the many and varied challenges and opportunities that families may encounter,” he added. “Our rapidly changing society has increased the awareness of a need for a more structured and transparent approach to managing intergenerational risk.”

Matthew Fleming, Partner and Head of Family Governance and Succession, Stonehage Fleming

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31 January 2019

Why you should remain invested in risky assets MoneyMarketing spoke to Eugene Visagie, portfolio specialist at Morningstar Investment Management, about the SA equity market and the prospects of it improving.

Q: Our equity market hasn’t provided good returns for the last few years.

What we see at MoneyMarketing is advisers saying over and over to clients: Be patient. But how patient do they have to be?

A: Despite the recent positive developments on the political front in South Africa, there is a global risk of trade that is affecting all emerging markets, including South Africa. The main driver of this risk of trade is the trade wars between the US and China. Unfortunately for us, we do not know how long these trade wars might last, since President Donald Trump can be volatile. That said, it is important that investors remain invested in more risky assets and not move their assets to cash-like instruments. Equities are the only asset class that can grow an investor’s wealth in excess of inflation in a meaningful way; and when the risk on trade starts, investors cannot afford to miss out – as set out in the graph below.

Q: There is a temptation for local investors to go into cash. Is this wise?

A: Definitely not, as illustrated in the graph below. Cash does not give a meaningful return above inflation, and investors will erode value if they try and time the market by remaining in cash for a prolonged period of time. The graph has three different scenarios for an investor that invested R100 000 in December 2006. The first investor (green) moves into cash at the bottom of the crash in 2008, the second investor (dark blue) moves from equities to cash at the bottom of the crash and remains in cash for one year, after which he returns to the equity market. The third investor (light blue) remains invested in the equity market throughout. The graph illustrates what one year of not participating in the equity market can do to a portfolio over a longer timeframe.

RISK OF MISSING THE BEST DAYS IN THE MARKET 1995-2018

Q: MoneyMarketing doesn’t expect to see the local equity market improving anytime soon. What’s your view?

A: South African companies are well diversified with strong income streams and, despite the negative sentiment towards equities affecting the price, the earnings of these companies are still extremely strong. At the current valuation levels, there are very good investment opportunities, but this will only be unlocked by a global risk on trade.

ASSET CLASS RETURNS – 88 YEARS TO 31 DECEMBER 2017

THERE IS A GLOBAL RISK OF TRADE THAT IS AFFECTING ALL EMERGING MARKETS, INCLUDING SA

Eugene Visagie, Portfolio Specialist, Morningstar Investment Management

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INVESTING

31 January 2019

KIM HUBNER Business Development and Marketing, Laurium Capital

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welve-month ASISA stats as at the end of September 2018 show that 61% of net inflows in the industry went into income funds and other interest-bearing funds (R66.8bn). Low-equity multi-asset (MA) and medium-equity MA funds had net outflows, while high-equity MA funds took 22% of the net inflows (R24.2bn).

Given the popularity of high-equity funds, one must ask how they have performed year-to-date, and whether they protected capital in an incredibly difficult market, where the JSE ALSI TR is down -9.4% and Capped SWIX TR is down -11.7% as at end of October 2018.

Of course, within this highequity MA category, there is a wide dispersion of returns, with the worst performing fund down -8.2%, and the best performing up +4.1% year-to-date end October 2018. The peer group median return was -1.5%, which is much better than the equity market, so investors have protected their capital to a large extent, depending on which funds they are invested in. However,

Laurium Balanced Prescient Fund reaches its three-year milestone

they have not generated returns to grow their capital this year.

Many advisers have done well to select good balanced funds for their clients, but often fall short when it comes to considering the correlation of the funds they have chosen. It is very common to see the balanced funds from the larger houses being combined in portfolios for clients, where due to their significant size and the limited investment universe in South Africa, they are highly correlated. Advisers should consider mixing funds from boutique managers, to enhance the diversification and hence the riskadjusted return profile for their clients.

The perception that funds from boutique managers are riskier is a broad misconception. Graph 1 shows the drawdown of the Laurium Balanced Prescient Fund versus the largest highequity funds in the SA high-equity MA category. Clients invested in balanced funds are as concerned about protecting capital on the downside, as they are about growing their wealth in real terms.

The Laurium Balanced Prescient

GRAPH1: DRAWDOWN VS. LARGEST BALANCED FUNDS (SINCE INCEPTION 9 DECEMBER TO 31 OCTOBER 2018)

DAVID KNEE Chief Investment Officer, Prudential Investment Managers

Fund, which successfully reached its three-year track record as at 9 December, has delivered excellent risk-adjusted returns versus its peer group, ranking 7/136 funds since inception (9 December 2015), with an annualised return of 7.7% and year-todate performance of 1.2% as at the end of October 2018.

Although selecting a boutique asset management firm doesn't guarantee better performance, research indicates that these firms offer the potential for superior performance. One reason for the performance advantage of boutique firms may be related to their structure.

Typically, boutiques are owned by their principals, who often are responsible for the asset management. Consequently, these managers have a vested interest in the success of the firms' offerings. In fact, many have a significant portion of their personal assets invested in the portfolios they manage. Managers at larger firms typically have greater liquidity issues in managing their large funds, limiting their investable universe in the already narrow South

African equity market. They may be forced to navigate bureaucratic work environments that don't support crisp decision-making.

As you search for investment managers who have the potential to deliver real returns and alpha above their benchmarks, be sure to consider boutiques in your portfolio.

Disclaimer: Annualised performance shows longer term performance rescaled to a one-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 as well as down as past performance is not necessarily a guide to future performance. CISs 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 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 capital or returns in a portfolio. A CIS may be closed to new investors in order for it to be managed more GRAPH 2: RISK-REWARD SCATTERPLOT VS. COMPETITORS efficiently in accordance with its mandate. Prescient Management (SINCE INCEPTION 9 DECEMBER TO 31 OCTOBER 2018) Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). Laurium Capital (Pty) Limited, Registration number: 2007/026029/07 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, brochures and application forms please go to www.lauriumcapital.com

Valuations point to improved returns Investors have been experiencing low returns over the last several years, and 2018 has again been disappointing. As a consequence, we’ve seen how retirees who require a steady income are struggling to cope. Yet we would urge patience rather than moving to cash: Prudential’s valuation-based analysis indicates that returns are likely to be much improved over

the next three to five years. Patient investors should be rewarded.

At current valuation levels, we believe a large buffer against bad news has already been deeply embedded into our equity market.

If current proposed reforms can even modestly lift our GDP growth from its current very low base, then the potential is genuinely there for equities to produce very healthy returns over time.

The market’s price-to-book value ratio (P/B) relative to history is Continued next page

INVESTING 13

31 January 2019

SA’s leading investment management event for financial advisers open for registration

Continued from page 12 currently cheap at 1.7x. Historically, the budget deficit and further when the equity market P/B has downgrades, among other been 1.7x, it has subsequently issues. We believe current yields produced a five-year nominal (especially on longer-dated bonds) return of 19.4% p.a. Clearly inflation are offering ample compensation was higher in the past – so we don’t for the risks involved. According expect returns at this level – but to our fair value analysis, they are low double-digits are definitely priced to deliver an attractive real achievable if growth picks up. And return of around 3.3% p.a. over Prudential’s current valuation of the the next five years.

SA equity market points to a real The real returns from inflationreturn from equity of 7.6% p.a. over linked bonds (ILBs) have been the next five years. very disappointing, mainly due At the same time, investors to the negative impact of lowerhave indiscriminately de-rated than-expected inflation. Now the listed property these assets are offering sector: approximately their highest real yields PATIENT 80% of companies are in the past 10 years. now trading below INVESTORS Combined with the the book value of that inflation SHOULD BE evidence the properties they has troughed, and that REWARDED the consensus inflation own. And with 40% of sector earnings forecast is 5.0%-5.5% coming from offshore, it offers a over the next two years, we well-diversified income stream. would only need a modest fall in According to our analysis, listed real yields for ILBs to post good property is priced to deliver a returns going forward. Currently real return of 8.1% p.a. over the they are valued to deliver a real next five years. Such a decent return of around 2.9% p.a. over real return is unlikely to be the next five years. forthcoming from either cash Cash is the only local asset or bonds. However, we are very whose real returns are likely to mindful of the headwinds the deteriorate going forward. Having sector faces given the slow growth delivered relatively high real environment. returns through the downturn, Meanwhile, SA government we believe they will fall to less bonds have been exceptionally attractive levels relative to other volatile, hit by global risk-averse assets – to around 2.1% p.a. – over sentiment and concerns over the next five years.

N

ow in its ninth year of existence, The Investment Forum will be held on the following dates: • Cape Town (Century City Convention Centre) – 9/10 April 2019 • Sandton (Sandton Convention Centre) – 11/12 April 2019 Arguably SA’s premier event for investment managers, financial advisers, multi-managers, DFMs (Discretionary Fund Managers) and wealth managers, the event continues to be an important date in the industry calendar for advisers who want to ensure they keep appraised of the latest industry developments.

The past five years have been particularly trying for financial markets as global trade wars, geopolitics, deteriorating fiscal and monetary policy and benign economic growth in South Africa weighed heavily on market sentiment and company earnings prospects. This has made opportunities to provide investors with real capital and income growth particularly difficult and confidence in the financial market system is being tested. History has shown that this is generally the time when investors disinvest. However, markets have a habit of rebounding quickly and positive market returns can be concentrated in a few days’ trade!

To address this, The Investment Forum has invited 21 of SA’s leading domestic and international investment managers to provide insights into the current and future state of financial markets.

Investment managers from Allan Gray, Ashburton, BlackRock, Bridge, Coronation, Coreshares, Foord, Goldman Sachs, Investec, Kagiso, Laurium, Old Mutual, Momentum, Nedgroup Investments, PSG, Prudential, REZCO, Orbis, Sanlam, Schroders and STANLIB will be addressing the event.

By registering for this event, financial advisers will enjoy the following benefits: • Gain a diverse range of insights into geopolitics, trade wars, macroeconomics, market valuations, SA politics etc. from SA’s leading investment managers • Obtain a ‘shareable’ newsletter that will summarise the conference’s key insights that they can share with their clients • Obtain nine CPD points (subject to FPI confirmation) • The opportunity to network with like-minded financial advisory professionals.

For further details on the conference and to register, please visit www.theinvestmentforum.co.za.

If you require assistance, please email Robb@theinvestmentforum. co.za or call him on +27 87 898 THE PAST FIVE 5490/+27 72 494 9018. The conference has been completely sold out in YEARS HAVE BEEN previous years and you would be PARTICULARLY TRYING advised to register early in order to FOR FINANCIAL MARKETS secure your seat.

Gain leading industry insights from 21 local and international investment managers.

CAPE TOWN

April 8 - 9 20l9 | Century City Conference Centre

JOHANNESBURG

April 10 - 11 20l9 | Sandton Convention Centre

Brought to you by

Book now: www.theinvestmentforum.co.za robb@theinvestmentforum.co.za/+27 87 898 5490/+27 72 494 9018

14

INVESTING

31 January 2019

GERRIT SMIT Head of Equity Management, Stonehage Fleming Investment Management

A

long with the global success of electronic gaming, the profile of eSports in itself is rising rapidly.

In the recent 2018 Asian Games, eSports featured for the first time as a demonstration sport, with indications of being a medal event at the 2022 Games. Similarly, Paris 2024 Olympic organisers are currently considering including eSports as a demonstration sport at their Games. This illustrates the progress that the gaming industry has made in showcasing itself, says Gerrit Smit of international family office Stonehage Fleming. eSports (also known as competitive gaming or ‘pro-gaming’) have teambased elements and regular competitions that are held on specific multiplayer, online video games. This has developed already into huge stadium events, especially in the US and China. eSports revenues for 2018 are estimated at $906m, still representing a mere morsel of the global games market worth approximately $130bn. However, what cannot be underestimated is the huge growth of the segment globally, which translates to an increase of 38% year-onyear, according to market intelligence solutions company Newzoo.

Half of eSports are already played on mobile devices and an equal portion are played in the Asia-Pacific area alone.

Further organic growth in the order of double digits is expected. Against this, the eSports industry has come to life through live tournaments in sports venues – originally in China, but today filling places like Madison Square Garden in New York and Key Arena in Seattle – to watch professional teams competing for significant prize money.

Strikingly, the ‘League of Legends’ 2017

The rapid rise of eSports as an investment

World Finals happened at the same time as the NBA finals, yet drew 12 million more online spectators.

Virtual appeal eSports is a timing-free, 24/7 activity and one of the most truly global industries with almost anyone, anywhere with online access as a potential audience member.

The global eSports audience is estimated to be close to 400 million members, which is more than the total population of the USA, the world’s largest economy. Over 40% are estimated to be core enthusiasts, with over half residing in the AsiaPacific area. The growth in audience numbers is expected to stay in middouble digits for some time.

The implications of eSports are far reaching as it is increasingly becoming interwoven into the fabric of sports organisations in terms of sponsorships, advertising, media rights, publisher fees, event attendance tickets and merchandise. The eSports revenue per audience member is currently less than one tenth the comparable amount per NFL member, but with clear, positive growth expected. Combining this with the anticipated growth in audience numbers, general predictions are for eSports revenue to keep compounding for another few years.

The leading game publishers are also advancing to take the lead in eSports. There are various investment opportunities in the wider industry, from game publishers, to online network distributors and equipment manufacturers (e.g. graphic cards, conductors, consoles, mobile devices, etc.) to sponsorships, media rights, etc.

Source: Bloomberg

Industry challenges In an exclusively technical environment, a crucial consideration for success is access to particular development expertise in electronic engineering for a game to stay fresh and ahead of the growing competition. Keeping an audience interested requires continuous improvement and technological invention to attract astute gamers, which puts a spotlight on the importance of employing ‘best of breed’ software engineers. This in itself has become a huge new employment industry worldwide.

Regulation is also an evolving challenge. While industry laws are still relatively loose, it is apparent that regulation surrounding eSports is tightening, specifically in China, where draft legislation was introduced in early 2018 to potentially ban minors from playing online games between midnight and 8am. eGaming giant, Tencent Holdings, has since implemented age-related time limits across its range of popular smartphone games. We have also recently seen the Chinese government further restricting total daily playing hours for minors and reconsidering their own processes for approving the launching of new games.

Furthermore, with eSports moving into the physical arena, it is increasingly critical for companies to be able to wear many hats. Firms that will most benefit financially from the growth of the industry are those with the capabilities to rapidly develop and manage a game online to continue attracting a growing online audience, as well as being able to stage major events and fill stadiums.

Bull points • Truly global reach on a 24/7 basis • High organic growth potential • Profitable and cash generative.

Bear points • Regulatory risks • Intense competition/access to engineering expertise • Some anti-social tendencies. eSport companies to watch out for When investing in electronic games and eSports, a broad-brush investment approach with a balanced exposure is best followed by considering three primary categories: game producers, distributors and hardware (which also includes graphics and devices).

Hardware firms include companies such as Microsoft (X-Box), Sony (PlayStation), Nintendo and NVidia.

Companies operating within game production are: Electronic Arts, NetEase, Activision Blizzard, Ubisoft and Tencent. The latter has taken a broad approach by also investing in other game manufacturers and producers such as Riot, Supercell and Epic Games.

The companies upon whose platforms people will be watching or participating in the online games are classed as games distributors. These businesses are looking to capture online gaming audiences and convert them into customers. Google represents one of the largest distributors, with a separate business called YouTubeGaming that features both live and on-demand video game content.

Other distributors are Amazon, Facebook and Russia’s Mail.Ru. Tencent’s multi-messaging and social media mobile app WeChat has over 1 billion monthly active users with many making use of the tool to watch and participate in eSports.

We can also include sponsors, event organisers and media groups getting more involved, especially in the eSport aspect of the industry.

INVESTING 15

31 January 2019

PETER ARMITAGE CEO, Anchor Capital

Surviving the digital giants

F

ew would deny the benefits of the industrial revolution – increased productivity brought with it rising household income and innovationenhanced quality of life. But the disruption, displacement and dispossession it entailed meant that, at the time, many would have struggled to recognise its good. So too with the digital revolution.

If SA has an advantage in not being the first frontier of the digital revolution, it is that it can be better prepared for negative disruption and offset it. While SA has tried to facilitate e-commerce by passing legislation, it hasn’t seriously grappled with the reality of South Africans being customers of online behemoths such as Facebook, Amazon, Netflix and Google.

Netflix, for example, is making significant inroads locally, disrupting pay-TV giant MultiChoice by providing a cheaper, convenient way of watching content and drawing increasing numbers of viewers away from the incumbent. While this is not the place to debate MultiChoice’s monopoly in subscription TV, it is

LOCAL BUSINESSES SHOULD START LOBBYING FOR FAIRER REGULATIONS FOR ONLINE AND TRADITIONAL FIRMS

not wrong to question the appropriateness of regulating subscription TV, while having no regulation for online businesses such as Netflix. A licensed TV service pays VAT, company taxes, PAYE, the skills development levy, must invest in local content, contribute to selfregulatory bodies, be 30% black owned, etc. Now think about what Netflix pays. VAT. Just VAT. How can SA manage disruption and what should local firms do to survive against these digital giants?

The first task is to understand what you are up against.

Research suggests industries are increasingly described as ‘winner take most’, where a few small firms take a very large market share. Network effects – large positive spill-overs from having many customers using the same product – propelled firms like Facebook towards achieving global dominance in an extraordinarily short period. Historically, dominant manufacturing firms relied on large capital to gradually achieve scale and become low-cost producers. Today’s giant platform tech companies need very little capital. A combination of weak anti-trust enforcement and a rapid rise of capital-light digital firms means traditional companies have an intense period ahead as they adopt digital processes to raise productivity.

The second task is to appreciate that old and new firms do not operate under the same rules – Facebook’s data leak impacting 87 million users

resulted in no financial penalties, while BP’s Deepwater Horizon oil spill cost it around $65bn in fines and redress. In reality, digital industries operate in a regulatory no man’s land and authorities haven’t established a way to regulate them – old companies need to highlight the unequal playing fields. Sadly, the disruptors are often only a handful of US and Chinese firms, and how their predominance will square with a world of rising nationalism is hard to fathom.

E-commerce has become a reality for local shoppers, and what would a major switch to online shopping with Amazon mean for retailers and for taxes, skills development levies and BEE commitments? We have already seen how the switch to online impacted print media with advertising decimated and the newspaper industry reliant on digital subscriptions. This only makes space for national titles, while local press fades away, with implications for local accountability and a healthy democracy. Local businesses should start lobbying for fairer regulations for online and traditional firms or our weak economy will be subject to a period of disruption that may be too tough to absorb.

All companies doing business in SA by offering goods and services locally ought to contribute to the social good through taxes and upskilling local workers.

Only then will the digital revolution possibly bear the fruits of rising household income for everyone.

16

INVESTING

31 January 2019

2019: Gradual property correction expected to continue

MoneyMarketing asked John Loos, Property Sector Strategist at FNB Commercial Property Finance, about the outlook for both the local residential and commercial property sectors over the next 12 months. Is it more of the same? Or could there be a potential upside surprise?

2

019 is expected to be another year of gradual ‘real’ price correction in the property market, following the trend of recent years.

By ‘real’ price correction we mean where actual property prices rise at low single-digit rates, but below economy-wide inflation as measured by either CPI (Consumer Price Index) or GDP (Gross Domestic Product) inflation, translating into a property price decline in ‘real’ terms.

In the housing market, such a real price decline has been taking place gradually since early 2016. Most recently, the FNB House Price Index grew year-on-year at around 3.5%, below CPI inflation which moves between 4 and 5%, translating into a real decline. The IPD Index half-yearly data puts half-on-half commercial property capital growth at +0.7%, which adjusted for GDP inflation, comes to a real capital decline of -3.5%. This was the third consecutive semester of real decline for the commercial sector.

GDP growth performance Looking into 2019, we would expect more of the same for both the residential and commercial property markets. FNB forecasts 1.4% real GDP growth in 2019. While this would represent a mildly improved growth rate from the projected 0.7% for 2018, we believe it would be insufficient to drive demand for property up to a level where it can eat into the level of supply on the market.

We deduce this based on recent years’ GDP growth performance. In 2017, real GDP growth was 1.3%, a similar rate to 2019’s forecast, and this did not stop

real commercial property capital value decline, nor did it prevent further real house price decline.

In the residential market, the average time of homes on the market prior to sales has been increasing, recently rising to just short of 18 weeks, according to the FNB Estate Agent Survey. We regard around 11 to 12 weeks as market equilibrium, so at near 18 weeks we would see this as downward pressure on real values as the market looks to shift back toward demand-supply equilibrium. In the commercial property sector, recent economic growth rates have been sufficiently low for the All Property Vacancy Rate of the IPD to show a noticeable increase, which should be expected to exert downward pressure on rental growth rates.

Interest rate hike In addition, we project a further 25 basis point interest rate hike from the Reserve Bank this year to follow on November 2018’s 25 basis point hike. With the government debt-toGDP ratio continuing to increase, along with gradually rising shortterm interest rates, exerting upward pressure on bond yields, it would be realistic to expect some upward pressure on capitalisation rates in a rising vacancy rate environment, and resultant downward pressure on property capital values.

On the residential side, the differential in the performance of price segments is expected to narrow.

The market slowdown of recent years was led by the higher priced area end of the market. This is often the case, merely because the high-priced end of

the market can run into affordability challenges first in an upswing – such as that mild upswing prior to 2013 – and then a portion of housing demand looks towards the more affordable areas, sustaining their strength for longer than the higher priced end.

More recently, however, we have seen signs that financial pressure, induced by economic weakness, may have started to increase more towards the lower income/priced end of the market, and we expect this to lead to the fizzling out of superior market strength in the lower priced segments.

Prime nodes/areas are expected to ‘hold their value’ better than more ‘marginal’ nodes/areas in 2019. Lengthy periods of economic weakness can lead to more pressure on the ‘marginal’ areas, perhaps because the financial strength of households, or businesses in the commercial nodes, may be less than in prime areas/nodes.

This can not only lead to greater levels of financial pressure among tenants and owners alike in such areas during times of economic weakness, raising vacancy rates, but also to area deterioration in terms of building maintenance in certain instances.

Search for lifestyle The search for lifestyle is expected to continue for the more affluent, driving demand for new upmarket estates, such as those emerging to the north of Joburg and the north of Durban.

This drive stems from urban factors such as high crime rates, congestion, environmental pollution and infrastructure being under pressure.

The search for lifestyle is also expected to sustain a significant migration to the Western Cape from the other eight provinces, as well as to the coastal regions in general from inland regions. A move to upmarket estate living and working for a portion of the affluent is seen, creating some further growth in the size of this market.

In short, our outlook for the 2019 property market is therefore one of mediocrity, with gradual further real price correction.

Electricity costs A key issue watched closely in 2019 will be electricity costs, which could increase significantly in order to alleviate the financial pressures on Eskom, the country’s power utility.

Steadily rising Eskom debt, at a time when overall government debt is also rising, can exert upward pressure on long bond yields and thus property cap rates. In addition, however, the possibility of 15% per annum electricity tariff hikes, for which Eskom has applied to the regulator, can exert major upward pressure on property operating costs, notably in the area of retail property where electricity consumption is a major part of operating costs.

Potential upside Is there any potential upside surprise awaiting the property market in 2019?

Possibly, in the form of an election towards the middle of the year. Both business and consumer confidence are currently in the doldrums, and some of it arguably has to do with major economic policy uncertainty.

The election outcome, and whether or not it provides the country’s rulers with a strong mandate for economic structural reform, can be key in influencing sentiment either stronger or weaker, which in turn can impact significantly on the economy and the property market. This is a key potential 2019 wildcard.

John Loos, Property Sector Strategist, FNB Commercial Property Finance

INVESTING 17

31 January 2019

ESG investing: A win-win for investors and the planet In its recent Living Planet Report 2018, the World Wildlife Fund made it clear that unless collective action is taken today, society will not be able to halt or reverse the damage being done to the environment. This report came out shortly before Old Mutual launched its first environmental, social and governance (ESG) unit trust – an index tracker fund that replicates the performance of top international companies who show the highest commitment to protecting people and the planet – to South African retail investors.

According to the report, green finance – investment flows that specifically target and protect environmental resources – will play an important role in the transition to a net carbon-neutral society.

Elize Botha, Managing Director of Old Mutual Unit Trusts, says, “Thanks to innovation in asset management, which relies on the use of both financial and non-financial indicators such as ESG scores to inform investment decisions, it is

A

year period. By contrast, companies with lower ESG records averaged 92% volatility.

“In a separate piece of research in 2012, a review by Deutsche Bank Group found that 89% of studies on ESG show global companies with high ESG ratings show market-based outperformance, while 85% of the studies show accountingbased outperformance.”

It should therefore come as no surprise that companies with high ESG scores outperform in the local landscape, says Duncan. “Businesses that respond to the ESG challenge earlier than their peers show stronger resource efficiency, lower cost of capital, better staff Elize Botha, retention, a more Managing robust social license Director of to operate, and better Old Mutual labour relations.”

Unit Trusts

Can you afford to retire at 65?

round the globe, governments and financial industries have been wrestling with the challenges of providing a suitable retirement system for citizens. There have been renewed efforts to resolve problems such as longevity risks and the massive administrative burden of managing retirement systems.

In South Africa, Treasury has been focussed on increasing the savings of individuals, either through preservation or by additional non-retirement savings. Retirement vehicles and post-retirement annuity type products are being reviewed in terms of costs, as this has an impact on savings, especially when retirees start withdrawing from their savings.

It is clear that Treasury is trying to mitigate longevity risk by focussing on the variables that are in their – and to some extent the individual’s – control, i.e. increasing savings and preservation rates. A key question is whether one can mitigate longevity risk by improving savings and preservation alone.

Is it realistic to assume that an individual can retire after 30 to 40 years of employment and have a sufficient amount saved up to last for 20 to 30 years of retirement? Is it economically viable for such a large portion of society not to contribute to the economy for such long periods?

Challenges facing SA retirees and possible solutions Globally, retirement ages have been increasing due to demographic changes and aging populations. In many developed countries, the retirement age has been increased to 67 and it is expected to increase to 70 in the foreseeable future.

In South Africa, however, corporate retirement ages have decreased to between 60 and 63 over the past 20 years. This has largely been due to South Africa’s demographics, high unemployment and historical legacies.

As retirement age policies are set by employers in labour contracts, and not prescribed by the Pension Funds Act, it is unlikely that corporate retirement ages will increase in South Africa in the foreseeable future.

Treasury’s proposals are therefore not able to address the challenge for South African employees of retiring too early.

When can I retire?

The table below shows at what age you will be able to comfortably retire (assuming you need 75% of your final salary to cover expenses) and prudently assuming below average market returns. The fact is clearly illustrated that a retirement age of 60 presents a challenge. There is simply not enough time to build a nest egg to support increasing life expectancies.

Source: Daniel R Wessels, When should I retire, 2012

So what can South Africans do to increase the probability of retiring comfortably? The chart below shows the key variables in retirement planning, ranging from those within the individual’s control to those that are not within his/her control.

Source: Daniel R Wessels, Make-or-break retirement planning, 2011

There are a number of possible solutions that fall within an individual’s control: • Start saving sooner. Your contribution term has a significant impact on your eventual retirement savings outcome.

• Increase your monthly pension fund contributions.

• Increase non-retirement savings.

• Make sure your retirement savings are preserved in a preservation fund when changing jobs.

• During retirement, reduce expenses to decrease withdrawal rate from savings.

• Consider a post-retirement career in a company that doesn’t have stringent retirement age policies.

Retiring at the age of 65 is clearly a challenge and in the South African context, retiring at 60 is even more so. As a general rule of thumb, an individual needs to work for an additional four years for every 10 years of additional life expectancy. This means you need to consider and carefully manage the aspects of building a nest egg that are in your control to maximise your probability of retiring comfortably.

RETIREMENT PLANNING FEATURE

JANNIE LEACH Head of Core investments, Nedgroup Investments

now possible for investors to align their personal philosophy with their financial goals”.

She adds that responsible investing has evolved as a response to the megatrend towards sustainability.

“By allocating capital to companies with higher ESG scores, investors can be assured that they are not only investing in companies that have a larger positive impact on the world over the long term, but that these companies are more likely to generate superior investment performance.”

Jon Duncan, Head of Responsible Investment at Old Mutual, says that one of the leading misconceptions held by investors in relation to responsible investment is that investing with an ESG lens comes at the cost of lower returns.

He says nothing could be further from the truth.

“According to a Merrill Lynch report, the top 20% of companies rated highest on ESG ratings between 2005 and 2010 experienced the lowest volatility (32%) in earnings per share in the subsequent five-

18

RETIREMENT PLANNING FEATURE

31 January 2019

Plan your current investments today to ensure your desired lifestyle tomorrow

A

ccording to Lourens Coetzee of Marriott Asset Management, maintaining your lifestyle in later years should be the core objective of your investment plan. However, to achieve this objective, you are often required to adjust your lifestyle today so that you are not forced to do so in the future.

Employees generally contribute to compulsory pension or provident funds through their employers. More often than not employees know only their market value and have no idea how much income their savings will give them when they retire. Coetzee says that it is critical to know what income will be generated from your accumulated savings when you are no longer working.

“Further to this, income must be converted into a present-day equivalent, as the purchasing power of income is affected by inflation over time. By considering the future level of income in today’s terms, you can gauge whether it will be sufficient to sustain your desired lifestyle.

“Should this not be the case, you will need to make additional voluntary contributions into either a retirement annuity or discretionary product such as a unit trust.”

IT IS CRITICAL TO KNOW WHAT INCOME WILL BE GENERATED FROM YOUR ACCUMULATED SAVINGS WHEN YOU ARE NO LONGER WORKING

He adds that one of the most tax-efficient means of saving outside of an employer pension fund is through a retirement annuity. Not only is the income earned exempt from all forms of tax, but the contributions made are tax deductible, subject to certain limits.

“While the income earned from these savings is fully taxable when being drawn in later years, the benefits of taxfree capital accumulation from the re-investment of income, coupled with a likely lower marginal tax rate on retirement, makes this a highly tax-efficient savings vehicle.”

Contributions to a retirement annuity are flexible, and it is therefore possible to contribute monthly or to invest an annual lump sum before the tax year end in February. Consequently, it is well suited to self-employed individuals or commission earners who do not belong to a company pension or provident fund or have a variable monthly income.

“It is vital to understand that when you are investing in retirement annuities and pension funds, you are investing for income,” says Coetzee. “The income you earn from these investments will fund your lifestyle in the future. This income, therefore, should be reliable and predictable, which will help you to plan with more certainty.”

But how does an investor ensure their investments produce this dependable income?

According to Coetzee, there are local and international companies that will continue to produce both reliable and growing income regardless of global slowdowns, exchange rate volatility and varying interest rates. “By including these companies in your retirement annuity, you can determine how much income you will earn from those investments in the future. Informed decisions can then be made as to whether you are saving enough,” he says.

He also stresses that chasing the best performing unit trust and superior returns do not necessarily help you to achieve your objectives as this brings more volatility and less reliability to your outcome.

“This could not only leave you with an income gap in the future, but can also cause much financial anxiety along the way.”

To assist investors in this planning process, Marriott has developed a unique online investment planning tool. When transferring an investment into, or making a new investment in the Marriott Retirement Annuity, this

tool will be able to demonstrate not only the income currently generated by that investment, but will also reflect a reasonable expectation of the monthly income generated and the capital value at the investor’s chosen future retirement date.

“This is based on the principle that Marriott only invests in reliable income streams,” says Coetzee. “By knowing this information and being able to rely on it with more certainty, you will be able to adjust your lifestyle today so that your future lifestyle is not left to the whims of the stock markets or the hope of phenomenal future returns.”

Lourens Coetzee, Investment Professional, Marriott

Marriott’s Retirement Annuity Creating certainty in Retirement Planning.

Solutions for Retirement Contact our Communication Centre on 0800 336 555 or visit www.marriott.co.za

20

RETIREMENT PLANNING FEATURE

JACO VAN TONDER Adviser Services Director, Investec Asset Management

31 January 2019

Why volatility matters for living annuity investors

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

PART 1/5 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 this five-part series.

L

iving annuities have a long and colourful history in the South African financial services industry. After initially being touted in the late 90s as the solution for pensioners facing an environment of falling bond yields and increasingly expensive guaranteed life annuities, living annuities attracted media and regulator attention again around the time of the 2008 financial crisis.

This was not surprising because living annuities increasingly reflected the sad reality that many South Africans don’t contribute nearly enough to their retirement savings throughout their lives.

Pensioners with inadequate retirement savings typically draw too much income from their living annuity, setting them on a course to run out of income later on in retirement.

More recently, living annuities were again in the spotlight as three years of depressed South African investment markets meant that most living annuity pensioners were drawing income in excess of the investment return they had achieved, thereby temporarily eating into their annuities’ capital.

This unfortunate situation, while not unexpected at all, has further increased many pensioners’ and financial advisers’ anxiety about the future.

It is against this background that Investec Asset Management commissioned in-house research on some of the key talking points regarding living annuities. The research focused on various portfolio construction, asset allocation and income revision strategies that were tested with an in-house model using index asset class returns over the past 118 years.

Some key research findings The results from this research will be shared over the course of the next few months. For now, here are some of the key takeaways: 1 The annual income review of a living annuity is crucial to the longevity of the annuity. Allowing the annual income increases to fluctuate in accordance with the annuity’s investment returns dramatically improves the annuity’s longevity.

And conversely, increasing a living annuity’s income payment every year with inflation, irrespective of the investment performance achieved over that year, is a poor income strategy.

2 Living annuities need a strong equity growth The graph highlights how – even if we keep engine that includes solid exposures to investment returns and income drawdowns exactly domestic and offshore equities. For incomes the same – increasing the portfolio volatility from around 4% or higher, a living annuity requires 9% to 15% raises the risk of a living annuity failing at least 60% invested in such a growth engine. over a 30-year period almost threefold.

This outcome challenges the commonly held belief that a 40% equity exposure is optimal for most INCOME DRAWDOWN OF 4.5% living annuity portfolios.

3 Volatility is a critical tool in deciphering the living annuity investment puzzle – not just real returns.

4 Active management can impact investor outcomes significantly. While active managers have been considered for their outperformance levels, i.e. returns above the index, their Source: Investec Asset Management ability to achieve better risk characteristics is typically not taken into account.

Quantifying the relationship between volatility and sustainable income This article focuses on the third point: The We then examined the relationship between real importance of volatility for income-generating return, volatility and sustainable income levels using portfolios. (We will expand on the other three our in-house living annuity modelling tool. The points in future articles). conclusions were somewhat surprising. For most common living annuity income levels (2.5% to 6% The role of volatility p.a.) the following relationships appeared to hold: for income portfolios 1 For every 1% additional real return produced by Modern portfolio theory and the efficient frontier the investment portfolio, the pensioner received have for many years defined how we construct around 0.9% p.a. of additional sustainable optimised portfolios for clients. The theory has been income2. widely used, together with the now familiar risk/ 2 For every 1% reduction in the level of volatility return scatterplots, to evaluate various portfolio of the investment portfolio’s real returns, the investment options against one another. pensioner could receive an additional 0.3% p.a. of The challenge with evaluating a portfolio based sustainable income. on a risk/return scatterplot, is that this analysis assumes a very specific set of investment cashflows: The second point highlights a key fact – volatility is • A lump sum investment upfront very important to income investors, and can now • No further investments or withdrawals for the be quantified in terms of its impact on sustainable duration of the investment incomes. Determining the impact of volatility • All income and dividends reinvested. also enables us to quantify the value added by an active manager who is able to produce lower risk While this analysis is a useful proxy for most portfolios without sacrificing real return potential. clients’ investment requirements, it can be inappropriate for pensioners drawing a regular income from the investment. Because of sequence of return risk, income-producing portfolios are much more sensitive to portfolio volatility than conventional capital growth portfolios1. This 1 challenge is illustrated in the graph, extracted This describes a phenomenon whereby an income-producing portfolio is much more sensitive to poor investment returns from our in-house statistical research model. The at the inception of the investment, than to poor investment graph summarises the probability of failure (i.e. returns towards the end of the investment term. not meeting your income objective over a 30-year 2 This is to be expected. Every 1% portfolio return should period while in retirement) for a 4.5% initial income produce approximately 1% of additional income – around living annuity. The living annuity is invested in a 0.1% of sustainable income seems to get lost through time portfolio that produces returns of CPI+5% but at value of money and the fact that incomes are reviewed only once a year. various levels of volatility:

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 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

22

RETIREMENT PLANNING FEATURE

31 January 2019

JENNY GORDON Head: Retail Legal, Alexander Forbes

What happens to your retirement funds when you emigrate?

Expected changes to the income tax laws in March 2019 will allow members who emigrate before they reach retirement date more flexibility to withdraw their retirement funds when they leave the country.

There are a number of ways people leave South Africa to live in another country.

• Citizens of South Africa and permanent residents qualify to officially emigrate. Certain emigration allowances are allowed to be taken out the country. On emigration, one ceases to be a ‘country resident’ of South Africa.

• If a citizen or permanent resident merely leaves South Africa to live in another country but does not officially emigrate, pending approval by the South African Reserve Bank, that person is still considered a ‘country resident’ and does not qualify for the emigration allowances. That person will continue to qualify for the investment allowances afforded to ‘country residents’.

• Temporary residents who have temporary visas to live in South Africa do not qualify to emigrate because they were never citizens or permanent residents. However, they are usually allowed to take their funds out when they leave South Africa.

A member who emigrates is entitled to have a pension paid to him or her in the country of emigration.

However, a fund member, before electing to draw a pension, might prefer to take the pension benefit in cash.

If a person was a member of an employer pension or provident fund before normal retirement age and decides to emigrate, the member may withdraw his or her benefit. There is no restriction.

A member of a retirement annuity fund (RAF) is not usually allowed to withdraw from an RAF before age 55, and on retirement is only permitted one third of the benefit in cash.

The rest must be used to buy a pension. An exception applies if a member officially emigrates or the member relocates on the expiry of a temporary resident visa. In this case, the member may withdraw the full capital amount.

Currently, a member of a pension preservation fund is allowed one right of withdrawal before retirement. However, with effect from 1 March 2019, the emigration benefit which applies to RAF members will be extended to members of pension preservation funds. (Provident preservation fund members are allowed to withdraw the full amount in cash).

If a citizen or permanent resident relocates without emigrating, a withdrawal benefit of the full lump is not permitted and the member may only retire from age 55.

Advice from the exchange control department of your bank as well as a financial adviser should be obtained before a decision to withdraw is made. There are tax implications and the tax payable might differ depending on the timing of the withdrawal and where you are tax resident at the time of withdrawal.

It is important to note that this does not apply to pensioners who are already drawing a pension or annuity income. Pensioners may have their retirement income paid to them in the country of residence but may not access the underlying capital.

KATHERINE BARKER Momentum FundsAtWork

FAs can help retirement fund members beat longevity risk Five ways to ensure members don’t outlive their retirement savings.

New research shows that by 2040 the average South African can expect an increased lifespan, from approximately 62 to 69 years. If health trends continue, that age could increase by as much as 12.9 years1. While the upside of an increased lifespan may be appealing to some, there is a real risk of pensioners outliving their retirement savings. Katherine Barker, Head of Momentum FundsAtWork, identifies five key levers that financial advisers can focus on to help members maximise their retirement savings while they are still actively working to safeguard them against longevity risk.

1

Members should contribute as much as possible to their retirement fund

27.5% of the greater of a member’s remuneration or taxable income is tax deductible up to a maximum of R350 000 per year. Fund members can boost their current retirement savings by taking advantage of this tax deductibility. Their contribution amount is deducted from their salary before tax is calculated, so in effect they are paying less tax and saving more at the same time. Members should attempt to contribute at the maximum contribution rate. They should also consider making annual voluntary contributions to their fund to take full advantage of the 27.5% limit. Leading umbrella funds offer the functionality for members to automatically increase their contribution rate annually or make additional voluntary contributions towards retirement savings.

2

Make sure members are appropriately invested

Barker also believes in the benefits of outcomes-based investing, which puts members’ goals at the centre of an investment process designed to achieve the highest possible returns for the lowest possible risk.

Always mindful of managing risk, this approach has the potential to improve replacement ratios by enabling funds to invest more aggressively for the long term. Outcomesbased investing also results in a smoother investment ride, mitigating the risk that a sudden market fall at retirement will severely reduce savings for annuitisation. For the most vulnerable members, financial advisers should seek an investment portfolio that follows the outcomes-based philosophy and, where appropriate, a portfolio that offers a 100% capital guarantee at the lowest capital charge.

3

Motivate members to stick to their long-term investment strategy

Saving for retirement is a long-term investment, so members should not react to short-term fluctuations in the market, no matter how scary they are at the time.

It’s more important for members to be appropriately invested and to stick to their plans. It’s also important for members to regularly review their strategy, especially as they approach retirement. Professional financial advice is critical in helping members understand the implications of moving their assets between portfolios when disappointed by short-term returns.

4

Strongly encourage members to preserve their retirement benefit when changing jobs

Approximately 90% of fund members in South Africa elect to take their full withdrawal benefit in cash when changing jobs. The probability of these members’ savings being intact by the time they retire is very slim. Members should be strongly encouraged to get advice on their exit options and to preserve their retirement benefits. Leading umbrella funds can offer tools to facilitate preservation via a ‘smart exit’ process, which connects the member to the financial adviser and assists informed decision-making. Stats from Momentum’s Umbrella Funds show that a tool like this can significantly increase the preservation rate when members change jobs.

5

Rewards programmes that boost retirement savings

Rewards are a ‘not-so-obvious’ way to help members boost their retirement savings.

The real power of a rewards programme is unlocked when the reward structure is cleverly integrated with the umbrella fund’s benefits. For example, members who engage actively with the fund’s rewards programme can receive a significant percentage of their insurance premiums back each month, based on their health and rewards programme status. This money can be allocated to their retirement savings or to savings to cover medical expenses. Valueadded benefits and services offered by progressive retirement funds create value and facilitate behaviour that enhances a member’s ability to save.

1. Lancet Study: How healthy will people in SA be in 2040?

You’d recommend it to your mother.

5981/BROKER

Introducing a game changer. The Momentum Smooth-Edge Fund is the only smooth bonus fund to offer up to 33% less in capital charges and a 100% capital guarantee on benefit payments.

Though mom doesn’t require this fund, you can rest assured that if it’s good enough for her, it’s the logical solution to give your clients’ employees the momentum they need for retirement.

Terms and conditions apply. Contact a Momentum Corporate Specialist for more information.

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

THAT’S WHY WE’RE HERE FOR YOU

RISK

RISK

24

31 January 2019

A brighter insurance industry outlook for 2019

E

nhanced protection for policy holders, increased access to insurance and a greater focus on transformation are some of the significant changes the insurance industry has seen throughout 2018. The big question going forward, however, in an industry that exists to predict and secure the future, is: What lies in store for 2019?

Unfortunately, it’s also playing out in other areas, with consumers cutting what they deem non-critical expenditure, including cutting spend on insurance policies, or leaving their jobs to access their pensions.

In general, South Africans do not have a culture of saving, which means they do not have residual amounts should an emergency arise.

They therefore suffer great financial fallout, even losing their vehicles, homes or suffering bad credit ratings.

Where possible, they need to create a savings buffer, which will see them through tough economic times.

A snapshot of the industry as it is today As a result of regulations such as the Twin Peaks model of the Financial Sector as well as the New Insurance Act and Regulation and Policy Holder Protection rules, 2018 has seen the insurance industry go through a number of changes that influence how insurers are regulated, but that Overall trends for 2019 also impact the public, says Johan Ferreira, Legal According to Bronwyn Williams, Trend and Compliance Officer at African Unity Life.

Translator and Future Finance Specialist for These regulations, he explains, have played Flux Trends, there are a number of trends that a role in contributing to the overall stability of will impact the financial sector. Blockchain is South Africa’s financial system. gaining traction at national and Reserve Bank “For the first time, the level, which will provide central Insurance Act has introduced banks with more control over microinsurance into the country, CONSUMERS CAN monetary policy and make tax and this is a space where there avoidance harder, she explains.

EXPECT MORE is a great deal of scope for new The establishment of Bank PUNITIVE AND innovation and client-focused Zero – a digital-only bank products. It provides access REWARDS BASED backed by former FNB CEO for consumers who have not Michael Jordaan, which ‘BEHAVIOUR previously been able to manage promises to provide most MODIFICATION’ their risks due to the high cost services free of charge – will see of insurance. The regulatory 2019 as the year that shook up PRODUCTS environment has become less the SA banking environment stringent, as have capital requirements; which and put pressure on bank profit margins. This is means microinsurance can offer more affordable good news for consumers, she believes. products to the public,” he says.

Big data will, as usual, play a role. Williams Ferreira cautions, however, that there are predicts that consumers can expect more a number of unscrupulous organisations punitive and rewards-based ‘behaviour providing financial services. “Ensure the entities modification’ products from insurers and you are dealing with are registered with the banks. As such, consumers should be aware of relevant authorities, and that their products the trade-offs related to perks or convenience have met all the credentials required in terms of versus data privacy and control, she cautions. legislation. Ultimately all new microinsurance products need to be filed with the regulator, who A glimpse into 2019 ensures that the products sold match what the • The Economy: Stanlib Chief Economist consumer is paying for. When in doubt, check Kevin Lings believes that while the first with the FCSA for validation,” he advises. half of 2019 will remain challenging for consumers, they will start to feel some 2018 in a nutshell relief in the second half of the year. He With various unavoidable increases in the is optimistic that inflation will start to VAT and petrol prices, water inflation and moderate, and that economic growth will rising medical costs, there is more pressure on pick up. While government is unlikely to the consumer. provide tax relief, there should be less tax As a result, with less discretionary income hikes. He also anticipates less downward available, consumers are having to make pressure on employment and more jobs different choices around what they spend on offer as a result of government’s recent their money on, with the retail sector taking initiatives to promote private sector and particular strain as consumers are increasingly domestic investment. Confidence, adds driven by discounts and specials.

Lings, should also increase post the elections.

Ultimately, while consumers may not be flush, the deterioration in the economy should abate. He warns consumers to avoid making risky decisions if they are able to hold off for the next few months. This includes maintaining insurance policies and medical aid payments.

• Protection: The year ahead will be characterised by greater protection for policy holders, Ferreira says. The introduction of the Conduct of Financial Institutions Act will provide further protection for policy holders by regulating the market conduct of all financial institutions in SA to ensure that consumers are treated fairly, he adds.

• Innovation: Innovation will become the hallmark of new microinsurance entrants, offering a range of fresh new products to the lower-income end of the market, making life easier for a host of South Africans, whom until now have really only been able to access funeral cover.

• Technology: Many expect that the industry will be focusing on building improved online service channels for brokers and policy holders in 2019. Machine learning, artificial intelligence, robotics, telematics and big data analytics are increasingly being deployed to create greater efficiency in business processes, which will ultimately reduce the overall cost to serve and improve overall service.

The personal lines market is already largely driven by technology, although this is still less prevalent in the commercial market.

A word of caution The experts, however, are warning consumers not to overextend themselves with regards to debt in the coming year.

“It’s crucial to understand what you are buying when it comes to financial products and to allocate some spend in the budget towards insurance and saving. Moreover, don’t cancel short-term insurance policies, even if the first few months of the year are tight,” Ferreira says.

Living within one’s means and saving every month towards retirement will be key for financial stability in the year ahead, he adds.

Johan Ferreira, Legal and Compliance Officer, African Unity Life

RISK 25

31 January 2019

NATASHA NAIDOO Associate, Norton Rose Fulbright

Personalised medicine: Implications for insurance industry, consumers

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he introduction of personalised medicine will revolutionise the manner in which patients are diagnosed and treated, but what are the implications for the insurance industry and for consumers?

Personalised medicine involves genetic testing and a consideration of an individual’s health risk factors and genetic information, and tailoring the individual’s medical treatment accordingly. In short, it means a quicker diagnosis and targeted treatment of different chronic and dread diseases.

The cost of such therapy, which involves screening of patients and producing medicines that target an individual or a particular group of individuals, does not come cheaply. It is unclear whether private medical aid schemes and state-funded healthcare systems will cover the costs, and if so, to what extent. Patients might be faced with paying exorbitant out-of-pocket medical expenses.

Medical aid schemes stand to benefit from paying for such treatment. Pairing the right patient with the right treatment will result in reduced hospital admissions and eliminate unnecessary future costs. Genetic testing on suspected breast cancer patients can reduce or eliminate chemotherapy and related costs – but to see such benefits, money must first be spent.

Gap cover covers the shortfall when medical aid schemes pay only a certain percentage of a claim. Last year, the final demarcation regulations governing gap cover were published under the Long-term and Short-term Insurance Acts. A maximum gap cover of R150 000 per insured per year was introduced. Insurance companies were provided two years within which to phase out gap cover policies that provided otherwise.

What this means is that gap cover might not provide the funding to those individuals seeking therapies such as personalised medicine that are not covered by their medical aid.

Generic drugs have the same healing effect but come at a lower cost. Some medical aid schemes do not pay for original brand-name drugs if there is a generic form available. The generic form of the drug is not necessarily identical to the brand-name drug. Individuals with certain genetic profiles might not be suitable candidates for generic medicine.

Small changes in the composition of medication might have a big impact on how a person’s body might respond and how well the drug works for that person. This could affect the supply and sale of generic medicine.

Insurers use specific rating systems to

calculate premiums payable by individuals taking up life insurance cover. Premiums are recalculated when the policy comes up for renewal or when new cover is taken out, at which stage the risk factors are re-evaluated.

Access to individuals’ genetic information can result in individuals who have high risk factors paying higher premiums or being unsuitable for cover. The duty of disclosure will oblige the potential insured to revoke the information.

There is the probability of individuals realising that they are at higher risk of contracting a disease and seeking additional life insurance without disclosing this information to the insurance company. There is a further risk of individuals seeking to increase life insurance cover upon learning of susceptibility to a dread disease.

There is presently no insurance regulation on this issue in South Africa.

The laws and regulations will have to be developed to provide protection against unfair discrimination and will most likely restrict how such information may be used commercially.

There will have to be transparency by insurers of the reasons for refusing or limiting cover. If insurers only accept the good risk and undermine the principle of pooling good and bad risks, regulation may follow. Insurers may be obliged, for instance, to behave like medical schemes with community rating, cross-subsidisation and non-discrimination provisions.

Some insurance companies have teamed up with US firm, Human Longevity, whose goal is to build the world’s most comprehensive database of DNA. These insurance companies have the benefit of realising that a healthy individual has a predisposition to developing a specific disease.

Insurance companies need to consider how they will address refusing or limiting cover or raising premiums of those individuals who are at higher risk of developing certain diseases.

Healthcare in South Africa varies from the most basic offered by the state to more specialised healthcare that is available privately. The public sector is under immense strain and delivers service to about 80% of the population. If private medical aid schemes do not cover personalised medicine costs, advanced healthcare therapies will not be accessible to most South Africans.

Every decision is a risk and time will tell whether it was a risk worth taking. It is therefore vital for the insurance industry, the healthcare market and for individuals to prepare for the changes that are yet to come.

Wildfire now major catastrophe risk in US Wildfire is now a major catastrophe risk in the US that must be rigorously managed with the best data and model science. This is according to Mohsen Rahnama, Chief Risk Modeling Officer at global risk modeling and analytics firm RMS. “With increasing exposure due to properties near wildland areas and ongoing climate variability, insurers, policymakers and homeowners must adapt to the prospect of more frequent and severe wildfires,” he adds.

RMS has estimated that the insured loss for the recent Camp and Woolsey wildfires in California will be between $9bn and $13bn.

“The estimate includes property and auto damage, including burn and smoke damage, business interruption, additional living expenses and contents loss,” Rahnama says.

The loss estimate utilised RMS’s forthcoming North America Wildfire High Definition Model to simulate the ignition, fire spread, ember accumulations and smoke dispersion of the fires. The model’s findings were supported by damage reports from the California Department of Forestry and Fire Protection, observations from displaced residents and information from firefighting personnel.

The Camp and Woolsey events were among 15 fires that broke out in early November 2018.

“The Camp and Woolsey fires have currently burned a combined total of 245 000 acres, destroyed more than 12 000 homes and businesses and killed 80 people. The Camp fire, named for the road of its point of origin, is the most destructive fire in California history, with more than 11 000 structures burned and currently 77 fatalities. Notably, this fire season represents the second consecutive year with more than $10bn in insured wildfire loss.”

While the fuel landscape between the two fires differs significantly, with heavy forestry characterising the Camp fire (Northern California) and shrubland in the Woolsey fire (Southern California), both developed under dangerous conditions that favoured quick fire spread: low moisture, abnormally high temperatures, dry vegetation and intense seasonal winds. Both travelled quickly through steep, hilly, vegetated terrain.

The town of Paradise, CA, which suffered the worst losses of the Camp fire, has narrowly avoided catastrophic wildfires many times over the past 20 years. Thirteen large fires since 1999 have burned inside the current footprint of the Camp fire.

The Woolsey fire, igniting in Ventura County and jumping the Highway 101 before spreading to Malibu, resulted in over 250 000 evacuations and burned more than 1 450 high-value properties.

“The area around the Woolsey fire shares a similar, if less stark, history of frequent fires. Six large fires since 1999 intersect the Woolsey footprint. Going back to 1993, the Old Topanga wildfire, which cost almost $1bn in today’s dollars, occurred immediately next to where the Woolsey fire is currently burning,” Rahnama points out.

“In the wake of consecutive record-breaking wildfire seasons, we are hopeful that more focus will be placed on fire mitigation, safe construction practices and community resilience,” he says.

“The forthcoming RMS HD Wildfire model – developed in partnership with leading insurers and fire experts – represents a step change in measuring wildfire risk, with a 50 000-year climate simulation, explicit ember and smoke simulations, and a vulnerability module calibrated on hundreds of millions of dollars of claims data.

We are confident the model will contribute to the creation of safer communities that promote fire safety and awareness.”

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RISK

31 January 2019

Cyber Risk 101: What every business needs to know

I

n our internet-connected society, cybercrime is a very real threat to any business or institution – regardless of size or nature of business – that has a network, an internet connection and holds sensitive or personally identifiable data.

This is according to Kerry Curtin, Manager: Financial Institutions & Professional Risks at Aon South Africa.

The 2018 Cost of a Data Breach Study, sponsored by IBM Security and conducted by Ponemon Institute LLC, shows that the average global probability of a material breach in the next 24 months is 27.9%, an increase over last year’s 27.7%. Of all the countries surveyed, South Africa has the highest probability of experiencing a data breach, at 43%.

The study pins the average total cost of a data breach at $3.86m.

“The reality is that any entity that conducts any aspect of its business online and holds any sensitive data – employee or client records, banking and payment details of staff, customers or own, market strategies or financials, payroll information, medical or academic records or any other sensitive data – is a potential target. And organisations of all sizes, from small businesses to large multinationals, are at risk.

The study further reveals that 48% of all breaches in this year’s study were caused by malicious or criminal attacks by hackers and criminal insiders who are indiscriminate in who they choose as targets. The average cost per record to resolve such an attack was $157. In contrast, system glitches cost $131 per record and human error or negligence is $128 per record,” says Curtin.

A data breach is defined as an event in which an individual’s name and a medical record, financial record or debit card is potentially put at risk either in electronic or paper format.

ONLY SPECIALIST CYBER INSURANCE POLICIES PROVIDE EXTENSIVE COVER

In the IBM Ponemon study, the three main causes of a data breach are: a malicious or criminal attack, system glitch or human error. The costs of data breach vary according to the cause and the safeguards in place at the time of the data breach.

A compromised record is information that identifies the natural person (individual) whose information has been lost or stolen in a data breach. In the 2018 Cost of a Data Breach Study the average cost to the organisation per compromised record was $148.

Data breach vs financial loss – can it be insured?

While existing forms of insurance sometimes carry a level of coverage, they were not intended to cover the many risks associated with an increasingly digital world. Standard policies are inadequate to cover the likely costs of even a more standard security breach, let alone cyberattack or ‘hacktivism’. Only specialist cyber insurance policies provide extensive cover.

The good news is that business leaders are waking up to the very real threats of cyber risk to their business, evident in the fact that Aon has seen standalone cyber insurance policy sales grow in excess of 25% per year, according to the Aon 2018 Cyber Predictions Reality Check report. Factors driving this is the realisation that cyber attacks have very real implications for huge financial losses and business continuity risk.

“In particular, ensuring your business is appropriately insured in terms of the type of losses it can suffer as a result of a hack is paramount. These incidents highlight the importance of risk management coupled with properly scoped insurance covers, with many assuming that a direct financial loss would be covered under a cyber insurance policy.

“There is still a sense of mystery as to what cyber risk policies actually cover and there is the assumption that direct financial losses would be covered under a cyber policy.

However, this is not the case as cyber policies cover loss of data and security protection specifically. A data breach would be covered under a cyber risk policy, but a direct financial loss would be catered for under either a Blended Financial Lines Policy, which includes computer crime cover as well as fraudulent internet transactions, or a Commercial Crime Policy, which also provides Computer Crime cover,” explains Curtin.

Most cyber policies cover first party costs and any resultant liability (third party) arising from a loss of data or a breach of network security – with data being defined as personally identifiable data and corporate information.

First party costs include legal and IT services, data restoration costs, reputation management, notification costs to all affected data subjects, credit and ID monitoring, cyber extortion and loss of profits following from a network interruption. Third party costs include damages and defence costs arising from liability to others, following from theft or manipulation of data held in your care, custody and control.

“As our digital connectivity continues to grow and more entities conduct aspects of their business online, the threats are likely to grow exponentially. Regardless of size or status, no business is safe from hackers, unless it includes security as its ultimate priority. There is no one-size-fits-all approach to cyber risk insurance. It all depends on the size of the company, the nature of its business and its unique levels of exposure. In this regard, consulting with a professional risk adviser is an invaluable exercise in assessing your exposures, developing a risk mitigation strategy and transferring that risk to an insurer in order to protect your reputation, data, clients and bottom line,” says Curtin.

Kerry Curtin, Manager: Financial Institutions & Professional Risks, Aon South Africa

RISK 27

31 January 2019

Brokers need to keep up to date with growing crime levels

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rganised crime continues to grow in size and the level of planning and execution is more advanced than ever. That’s the word from Cloud Saungweme, Chief Claims Officer at risk specialist Bryte.

“Brokers and insurers need to keep abreast of challenges facing businesses and proactively provide customers with solutions that can endure in a multifaceted risk landscape. These include maintaining heightened awareness, installing/updating security features and conducting annual risk engineering assessments to ensure the business is adequately protected as well as covered should an incident occur.”

Saungweme’s comments follow the release of Bryte’s SA Crime Tracker – an indicator of long-term crime trends as captured by insurance claims – for the second quarter of 2018.

The Q2 2018 Bryte Crime Tracker measures the annual change, on a quarterly basis, in crime-related claims (due to hijacking, robbery, theft and malicious damage) committed against South African businesses.

Bryte Crime Tracker: April to June 2018 Graph 1 compares crime data from Q2 2016 to Q2 2018 based on percentage growth or decline. The Bryte Crime Tracker recorded its highest level of crime during Q2 2018, peaking at 13.51% following an increase in Q1 2018.

At 13.51%, the Bryte Crime Tracker indicates a substantial peak in the total incidents of crime perpetrated against businesses in Q2 2018, compared to the same period in 2017 where it reflected a deceleration to 7.73%. Levels of crime have continued to increase quarter on quarter since Q2 2017.

A key contributor to the rising levels of crime may be the dire socio-economic challenges facing the country, specifically the high unemployment rate, which was 27.2% in Q2 2018. Further exacerbating the situation is the revised GDP growth outlook for 2018, which has now fallen to 0.7% from 1.5%.

Finance Minister Tito Mboweni expressed in his medium-term budget policy statement that, “for ordinary South Africans‚ it has become a difficult time. Administered prices such as electricity and fuel have risen. Unemployment is unacceptably high. Poor services and corruption have hit the poor the hardest.”

Graph 2 compares business crime data – specifically contact crime (hijack/theft by force),

malicious damage and theft. The data extends to just over two years and is based on percentage growth or decline. Incidents of crime across every category continued to increase substantially, peaking in Q2 2018.

Hijack/theft by force (contact crime) Accelerating to 6.8%, levels of hijacking/theft by force were at their second highest in Q2 2018. This data is in stark contrast to Q2 2016, where levels of hijacking/ theft by force were at one of the lowest, reflecting a deceleration to 16.8%.

Hijacking continues to be a major concern for motorists. While the period covered is April 2017 to March 2018, the SA Police Service crime statistics noted more than 17 527 hijackings – averaging 45 incidents per day. This is a fair indication of the general hijacking trend and as this number continues to escalate, so too does the violent nature of crimes committed.

Reports from Tracker have stated that every month, approximately 18 hijacking victims are assaulted.

Saungweme says that violent behaviour by criminals during hijackings and theft has intensified due to many factors, including the use of drugs and alcohol.

“Substance abuse can desensitise criminals and fuel frustration and hostility. Additionally, drug abusers are more likely to resort to other forms of theft in order to support their drug habits,” he adds.

“Motorists should take note of prominent hijacking hotspots and remain on high alert when passing through these areas. Some precautions that may be taken to mitigate against the risk of hijackings would be to ensure that windows are closed, all doors are locked and any distractions are avoided – especially the use of cell phones. We also propose that handbags, laptops etc. are locked in the boot.”

Theft Incidents of theft have risen consistently over the past four quarters, reaching an all-time high in Q2 2018, where they accelerated to 5.7%. This is in direct contrast to the 10.9% deceleration noted in Q2 2017, which was the lowest level during the period tracked. The SA Police Service crime statistics further indicate a 7.2% increase in the theft of stock; however, petty crime such as shoplifting and theft out of motor vehicles is reported to have decreased by more than 6% during this period.

BRYTE CRIME TRACKER GRAPH 1: CHANGE IN CRIME-RELATED CLAIMS TRENDS

“The element of surprise is a critical component of successful criminal activities and an emerging trend in this regard is that of fake policing,” Saungweme points out.

“With police officers commanding a great deal of respect among citizens, criminals are taking advantage of this by impersonating them. They are luring citizens into submission, thus making it easier to rob them or access restricted areas and successfully commit crimes.”

He adds that the recent heist at I’langa Mall in Nelspruit is one such example, which saw criminals dressed in police uniforms attempting to rob an exclusive jewellery store.

“As risk specialists, we strongly urge all business owners to take proactive precautions to mitigate against the immense financial and operational losses associated with crime, but to also have measures in place to safeguard their employees. Employers should ensure their members of staff are aware of emergency protocols in the event of a burglary. Staging a simulation, for example, is an effective way to ensure employees are able to manage the situation in the event of a criminal incident on the business premises.”

Malicious damage Incidents of malicious damage have remained considerably high over the past two quarters; the Q2 2018 Bryte Crime Tracker noted an acceleration to 20.8% versus a contraction to 15% during the same period in 2017.

“More and more businesses are installing effective security equipment to protect their premises, such as heavy-duty fencing, security doors and shatterproof windows, making it increasingly difficult for criminals to gain access,” Saungweme notes.

“This has led to more damage to properties as offenders attempt to gain access. Business owners are thus advised to continue conducting security upgrades and assess their risk exposure frequently to ensure they have sufficient insurance cover in the unfortunate event that they become victims of crime.”

Cloud Saungweme, Chief Claims Officer, Bryte

BRYTE CRIME TRACKER GRAPH 2: CONTACT CRIME, MALICIOUS DAMAGE AND THEFT

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RISK

31 January 2019

Being prepared for travel risks

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ravelling for business or pleasure comes with its own set of risks. According to short-term insurer Travel Insurance Consultants (TIC), a division of Santam, some of the most claimed-for travel events are pre-existing medical expenses, cancellation of journey, luggage loss and travel delays. Being prepared for these risks is critical.

In a recent panel discussion, three travel industry experts – Monique Swart from African Business Travel Association (ABTA), Albie de Frey from The Travel Doctor and Jason Veitch from Travel Insurance Consultants (TIC) – discussed all things travel insurance.

The experts suggest looking at the following aspects of travel insurance before hopping on that plane.

Credit card – know what it covers There is a common misperception that your ‘free’ credit card cover will adequately insure you for all risks when travelling. And while it has its advantages, assuming that your credit card cover will pay out is not enough. You need to look into exactly what is covered by the credit card insurance and weigh up whether this is sufficient.

Veitch says that credit card insurance can be very specific and usually has a range of exclusions.

“Typically, it excludes undeclared pre-existing medical conditions, which means that if someone suffering from diabetes has a IN COUNTRIES medical event WHERE MALARIA when they are abroad, they will IS PREVALENT, not be covered. It GOOD MEDICAL is vital for anyone with a pre-existing COVER IS VITAL medical condition to be adequately covered when travelling.”

He says this is but one example of where credit card insurance does fall short. Others include the low level of cover for medical incidences and accidents, no or low luggage cover limits, no cover in the event you need to cancel your entire holiday, and cover for sporting activities.

Free travel insurance on your medical aid cover Free travel insurance attached to your medical aid cover also sounds great, but again it is critical that you look carefully at how it is structured.

De Frey says that some medical aid travel insurance will pay out at South African medical aid rates. “This may be adequate in some parts of the world, but in countries like the USA or France, where medical costs can be up to 15 or 20 times

PATRICK BRACHER, Director, Norton Rose Fulbright

Bitcoin and insurance higher than South African ones, this is not going to be enough. Extra travel insurance can help avert an extremely expensive situation.”

Business/leisure trips Often business trips have a day or two of leisure tacked on to them. Swart says that if the trip has been insured by the company, it is important to investigate whether the days of leisure are also covered by the policy for the trip.

“Often a family member may join you and, in that case, additional insurance will most likely be necessary because they are not a company employee. The onus should be on travellers to investigate the insurance offered by the employer to ensure that all aspects of the trip are covered for all parties travelling,” she says.

Corporates – know the health of your employees With medical preconditions excluded by many insurance policies – unless declared – it is vital that employees travelling are open and honest with their employers about any such conditions.

Veitch says it is vital that corporates not shirk responsibility in this regard. “Employers need to make sure they have frank conversations with employees about declaring medical preconditions before they travel. If something does happen connected to an undeclared medical condition, it can end up being extremely costly, and it may result in the expenses not being paid by the insurer. Transparency is vital – and so is ensuring an insurance policy that covers the precondition is in place.”

Travelling in high-risk areas When travelling to high-risk areas, the necessity for travel insurance is even more important.

“In countries where malaria is prevalent, both preventative treatment and extremely good medical cover are vital. In Africa, this is particularly important, as the preventative programs that have previously been implemented in various African countries to reduce malaria have been curtailed, which means incidences of malaria are now increasing at an alarming rate,” says de Frey.

And some countries in Africa and the Middle East have heightened kidnapping and ransom risks, so cover for these is vital. “And making every attempt to remain trackable via tech when you are in these countries is also a very good idea,” he adds.

A court in Ohio found that bitcoin is covered ‘property’ under a homeowner’s policy and not ‘money’ and therefore the claim for lost bitcoin was not limited by the money sublimit. The decision was based partly on a recent Internal Revenue Service document that categorised virtual currency such as bitcoin as property for federal tax purposes.

The ruling enabled the policyholder to claim $16 000 for stolen bitcoin rather than the money sublimit of $200.

A decision on this issue in South Africa will depend on how bitcoin is seen in relation to currency by the authorities. In the meantime, insurers should consider sublimiting bitcoin claims in the same way they sublimit money claims.

RISK 29

31 January 2019

Why income protection is a crucial part of wealth planning

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hen it comes to financial planning, many Two-thirds of surveyed respondents said of us follow the conventional wisdom that they’d completely run out of money, and encourages a back-up savings account nearly 20% said their house and assets would to cover you for a period of roughly three months, be repossessed within three months of not should some unfortunate incident occur. earning their income.2 In reality though, we make these decisions Take FMI policyholder and business owner, underestimating our exposure to such incidents Allan Swanepoel, as an example. He started small and the likelihood of these injuries or illnesses but today his company is a major culinary herb either recurring, or triggering a supplier to large retailers nationwide, related event, that compounds our employing around 150 people. Over TWO-THIRDS financial stress. Our overconfidence the years, Allan has had to undergo OF SURVEYED means we invariably misjudge the various surgeries, resulting in a total frequency with which we need to of seven claims with FMI. Though RESPONDENTS dig into those emergency funds. each of these were temporary, SAID THEY’D Life insurer FMI, a division of accumulatively this meant Allan was COMPLETELY RUN unable to work for a total of 313 days.

Bidvest Life Ltd, reveals that seven out of ten people will experience For any employee, coping with OUT OF MONEY at least one injury or illness during such a substantial amount of time off their working career that will prevent them from would prove challenging to say the least. But for an earning an income. Frighteningly, over 50% of our entrepreneur, any financial interruption could spell claims paid, are to returning clients.1 disaster – not only for his personal livelihood – but The danger of this overconfidence in our savings for his staff and the extended families who rely on account, is the assumption that misfortune only that income. strikes once. FMI’s #RealityCheck survey shows that In Allan’s case, it was the structure of his life for most South Africans, financial ruin is less than insurance policy that made all the difference. A three months’ pay-check away. combination of monthly income and lump sum

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benefits meant he was comfortably covered during those periods of recuperation. Had Allan’s policy only included a lump sum benefit that paid out on permanent disability (as is traditionally the case), and not an income benefit – potentially only one of his seven claims would have been paid. By securing the type of benefits that replace his income, Allan never had to worry about being able to afford his monthly expenses and keep his business running.

The end of Allan’s story is a happy one. One that advocates for the irreplaceable value of sound financial advice: opting for the right mix of life insurance benefits that will shield you from sacrificing important areas – like emergency funds – when unexpected disruptions to your income arise.

1 FMI Claim Stats, 2015 2 FMI #RealityCheck Consumer Survey 2018

BOOKS ETCETERA

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BOOKS ETCETERA

EDITOR’S BOOKSHELF

31 January 2019

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

THE RESURRECTION OF WINNIE MANDELA

By Sisonke Msimang The death of Winnie Madikizela Mandela on the 2nd of April last year unleashed a hailstorm of opinion.

On one side, her legacy was cast by the media and public in the shadow of her ex-husband. She was history’s loser. She was damaged goods; Nelson Mandela was whole and pure.

A younger generation, in particular women, took a different view and so a battle of ideas began that sought to reframe Madikizela Mandela’s career and reclaim her identity as an extraordinary woman and fierce political activist.

Sisonke Msimang, an acclaimed author and public commentator, wasted little time in jumping into the fray. And when the dust settled, what emerged is this short but razor-sharp book that reflects critically on the turbulent yet remarkable life of Madikizela Mandela. Msimang situates her political career and legacy in the contemporary context – what she means today in social and political terms – by exploring different aspects of her iconic persona.

The Resurrection of Winnie Mandela is an astute examination of one of South Africa’s most controversial political figures, of the rise and fall – and rise, again – of a woman who not only battled the apartheid regime, but the patriarchal character of the struggle itself. In telling Madikizela Mandela’s story, Msimang shows that activism matters, and that the meaning of women’s lives can be reclaimed.

THE SOUTH AFRICAN INFORMAL SECTOR: CREATING JOBS, REDUCING POVERTY Edited by Frederick Fourie While the informal sector is the ‘forgotten’ sector in many ways, it provides livelihoods, employment and income for about 2.5 million workers and business owners. One in every six South Africans who work, work in the informal sector. Almost half of these work in firms with employees; these firms provide about 850 000 paid jobs – almost twice the direct employment in the mining sector.

The annual entry of new enterprises is quite high, as is the number of enterprises that grow their employment. There is no shortage of business initiative and desire to grow. However, obstacles and constraints cause hardship and failure, pointing to the need for well-designed policies to enable and support the sector, rather than suppress it. The same goes for formalisation. Recognising the informal sector as an integral part of the economy is a crucial first step towards instituting a ‘smart’ policy approach.

This volume is strongly evidence- and data-driven, with substantial quantitative contributions combined with qualitative findings – suitable for an era of evidence-based policy-making – and utilises several disciplinary perspectives.

THE EXPERTISE ECONOMY – HOW THE SMARTEST COMPANIES USE LEARNING TO ENGAGE, COMPETE AND SUCCEED

By Kelly Palmer and David Blake The Expertise Economy shows companies, big and small, how to transform their employees into experts and ultimately their biggest competitive advantage.

The world of work is going through a largescale transition with digitisation, automation and acceleration. Critical skills and expertise are imperative for companies and their employees to succeed in the future, and the most forward-thinking companies are being proactive in adapting to the shift in the workforce.

Kelly Palmer, Silicon Valley thought-leader from LinkedIn, Degreed and Yahoo, and David Blake, co-founder of Ed-tech pioneer Degreed, share their experiences and describe how some of the smartest companies in the world are making learning and expertise a major competitive advantage.

The authors provide the latest scientific research on how people really learn, as well as concrete examples from companies in both Silicon Valley and worldwide who are driving the conversation about how to create experts and align learning innovation with business strategy. The book includes interviews with people from top companies like Google, LinkedIn, Airbnb, Unilever, NASA and MasterCard; thought-leaders in learning and education like Sal Khan and Todd Rose; as well as Thinkers50 list-makers Clayton Christensen, Daniel Pink and Whitney Johnson.

AFRICA’S BUSINESS REVOLUTION: HOW TO SUCCEED IN THE WORLD’S NEXT BIG GROWTH MARKET

By Acha Leke, Mutsa Chironga and Georges Desvaux For global and Africa-based companies looking to access new growth markets, Africa offers exciting opportunities to build large, profitable businesses. Its population is young, fastgrowing and increasingly urbanised, while rapid technology adoption makes the continent a fertile arena for innovation. But Africa’s business environment remains poorly understood; it’s known to many executives in the West only by its reputation for complexity, conflict and corruption.

Africa’s Business Revolution provides the inside story on business in Africa and its future growth prospects and helps executives understand and seize the opportunities for building profitable, sustainable enterprises. From senior leaders in McKinsey’s African offices and a leading executive on the continent, this book draws on in-depth proprietary research by the McKinsey Global Institute as well as McKinsey’s extensive experience advising corporate and government leaders across Africa.

Brimming with company case studies and exclusive interviews with some of Africa’s most prominent executives, this book comes to life with the vibrant stories of those who have navigated the many twists and turns on the road to building successful businesses on the continent.

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.

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

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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.

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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

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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.