MoneyMarketing July 2024

31 July 2024

INSIDE YOUR JULY ISSUE HEDGE FUNDS By incorporating hedge funds, advisers can optimise portfolios and navigate various market conditions effectively.

Page 10-13 SAVINGS South Africa boasts one of the world's lowest saving rates, a trend that has persisted for several years.

Page 15-16 ESG INVESTING Should ESG investing have a more important role in clients’ portfolios in South Africa?

We take a closer look.

Cover story and pages 18-20 FAMILY OFFICES A Family Office can ensure that the estate planning of high-networth individuals is handled effectively.

This can eliminate any friction in the event of a death. It’s all about creating ease of management.

Page 22-24

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First for the professional personal financial adviser

What is the point of wealth in a broken world?

BY SIOBHAN CASSIDY MoneyMarketing contributor

I

t’s not a simple case of choosing between purpose and profit for asset allocators, many of whom are taking a more nuanced view as they engage with issues rather than avoiding them by disinvesting. Investors are increasingly applying non-financial factors related to Environmental, Social and Governance (ESG) issues to identify material risks and growth opportunities.

Environmental relates to conservation of the natural world; Social talks largely to people and communities, including how a company manages its relationships with employees, suppliers, customers and other affected parties; and Governance relates to standards applied in running a company, including executive pay, audits and shareholder rights.

Whether an investor is worried about floods or wildfires, rising global inequality and the social unrest it threatens to unleash, the executive team pocketing all the profits, or simply beating inflation and/or the market, there is a growing consensus that everyone needs to care about where companies stand on ESG. “Even if you don’t care about the sustainability of our planet, or our species, just from a financial perspective we need to care about how companies are tackling these issues,” says Linda Eedes, Investment Professional at Foord. “Understanding the risks posed by environment and social costs in the real economy is central to the practice of investment. Internalising these costs could

significantly impact the costs and profits of companies’ products and services, affecting their bottom line.”

Companies that ignore ESG concerns risk everything from financial penalties to their assets becoming stranded or obsolete, says Eedes, who adds, “ESG factors are increasingly critical in the context of identifying material risk and growth opportunities. These things are critical in terms of the sustainability of a business, or the sustainability of business activities within the context of the greater world, or both.”

Gontse Tsatsi, Head of Retail Clients at Old Mutual Investment Group, articulates it very powerfully when he says, “What is the point of wealth in a broken

world?” He expands on this, “ESG is a big priority for Old Mutual Investment Group as it enables us to pursue superior, risk-adjusted returns for our clients, while also positively impacting the communities and environment in which we operate... it’s about getting the returns but making sure the world (ESG) is maintained so that the wealth/goals can be enjoyed. Issues such as resource depletion, climate change, poor governance and social inequality pose both investment and systemic risks to our customers’ goals.”

Tanya Naidoo, ETF & Portfolio Analyst at ETFSA, adds, “Companies with poor environmental practices, weak governance, or negative social impacts may face reputational damage, operational disruptions or even regulatory fines.

Continued on next page

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31 July 2024

NEWS & OPINION

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Continued from page 1 Fund managers and portfolio managers who encourage the implementation of ESG investing in their investment processes tend to avoid these risks, making them more resilient in the long term. This aligns with the goal of achieving sustainable returns for investors.”

Beyond voting with their feet by disinvesting from companies that present problems in terms of ESG, shareholders can engage on various levels. They can use proxy voting to signal discontent or, as many asset managers are doing today, they can engage in a more meaningful way to try to influence the company positively.

Beyond voting on resolutions proposed by the board, shareholders can engage with companies on existing issues, or those not yet addressed. That would perhaps be “We don’t think your net-zero target of 2050 is ambitious enough”. Or perhaps, “When we look at your cash flows and your capex budgets etc, we don’t think they align to your targets”.

A shareholder or investment manager can do that unilaterally, or they can rally together with others who have similar concerns.

The devil, however, is in the detail, not least in terms of how to isolate and measure the various aspects of ESG, who measures them, and how to police implementation. You might have thought South Africa would be further along this road, considering it is “a country of activists with high social awareness”, as Tsatsi put it. He adds that “investors (institutions and retirement fund members) have long demanded that their assets be invested in a sustainable manner”.

He explains, “If you consider Broad Based Black Economic Empowerment and the Financial Services Charter, you could argue that ESG is part of our DNA. When one analyses the structural changes that came about since 1994, all aspects of ESG are in the South African system and we are continuously strengthening these from a government and industry perspective.”

Premal Ranchod, Head of ESG Research at Alexforbes, expands on South Africa’s existing regulatory and legislative environment, adding his own ‘highlights’, which include the King IV Code on corporate governance, which is still a feature for all JSE-listed companies through listing requirements; Regulation 28 of the Pension Funds Act, which requires ESG application; the Code for Responsible investing in SA and Principles for Responsible Investment, which have strong adoption by asset managers.

So why, then, are we lagging, especially on social issues? Eedes says the industry has long been proactive about governance “because it’s far easier to see the direct impact of poor governance or remuneration policies on the value of a business... while capturing the risk of environmental damage is often difficult”.

“Historically, the problem is that profits have been privatised, while the costs to the environment or the local communities has been socialised. So, the costs of producing profits have not been borne by those who participate in the profits, but by communities, or the world at large.”

She adds, “As an investment team [at Foord] we spend a lot of our time trying to quantify the potential risks of doing harm, the financial impact of pursuing profits in an unsustainable manner, and the financial benefit of orienting your business towards more sustainable practices.”

Eedes also says it’s important for investors to understand the transition to green energy will take

time. “Renewable energy sources have been growing exponentially, but over the past decade, 90% of energy demand growth has come from coal, oil and gas.”

From avoidance to engagement There’s been a shift in the trend from simply avoiding companies that aren’t responsible corporate citizens to actively seeking out opportunities to influence them to change course. Ranchod, of AlexForbes, agrees there are few simple ‘yay or nay’ decisions.

He gives the example of making bold calls to decarbonise portfolios in favour of environmental risk reduction without consideration for job losses and other consequences. In contrast to a pure activist stance, Ranchod suggests a steady engagement in the short to medium term “for the benefit of additional disclosure, and effecting change”.

Making the point that “non-financial risks become financial risks over time if not addressed”, Angelique Kalam, Head of Sustainable Investment Practices at Futuregrowth Asset Management, says placing emphasis on partnership and engagement with investee companies “provides a pathway for these companies to commit to sustainable change”.

“Companies that ignore ESG concerns risk everything from financial penalties to their assets becoming stranded or obsolete” Mandi Dungwa, Portfolio Manager at Camissa Asset Management, concurs. “Camissa cares about the sustainability of the businesses we invest in [but] we would not be in favour of divestments or exclusionary policies, as active engagement on these risks could result in material changes that could benefit society at large.” She adds, “Excluding companies with higher sustainability risks disables our ability to engage and potentially be a change agent in such businesses.”

There’s growing evidence that investors don’t have to sacrifice returns to do the right thing and that companies with higher ESG scores will outperform over the long term. ETFSA’s Naidoo says, “By focusing on the opportunities while actively managing the risks, it’s possible to build a robust, future-oriented investment portfolio that meets both financial and sustainability objectives, potentially leading to more stable long-term returns.”

Old Mutual Investment Group’s Tsatsi says, “According to MSCI, companies with higher ESG ratings were associated with higher profitability, lower tail risk (chance of a loss occurring due to a rare event) and lower systematic risk (risk beyond the control of a company, e.g. economic, political, social factors).”

Sustainability as a macroeconomic theme is reshaping the competitive landscape and there is a growing consensus that companies that innovate early will reap the rewards, from better growth prospects to a clearer social licence to operate, and even lower cost of capital.

As Tsatsi says, “Responsible Investing is rooted in an understanding that how we invest today determines the quality of our future... if we continue to invest in unsustainable companies that erode public trust, pollute the environment, and perpetuate inequality, we should accept that this is the kind of future we will bestow on our future generations.”

ED’S LETTER

I

’m feeling highly optimistic as a I write this Ed’s Letter.

The Government of National Unity (GNU) finally seems to have come to a compromise regarding Cabinet posts, and while the DA might not have received exactly what it wanted, international markets have responded positively to the new composition of the government. It’s very early days of this burgeoning new government, and these next few months are going to be critical as parties with differing ideologies find a way to interact and govern. We can only hope they’ll act in the best interests of the people they represent.

The reappointment of Enoch Godongwana as Minister of Finance is widely seen to be a positive move. He has shown he isn’t moved by populism and has a solid plan to address rising debt and debt service costs. He now also has two deputies, David Masondo from the ANC, who was deputy previously, and the DA’s Ashor Sarupen.

It feels like a power team – let’s hope they can remain steady against the micro- and macroeconomic forces that are having such an impact at the moment.

Someone who’s going to have to hit the ground running is Kgosientsho Ramokgopa, who is now leading a combined ministry for energy (which was previously Gwede Mantashe’s domain) and electricity (which he already heads). He has maintained a high profile since he first took the portfolio, and his track record seems positive so far, including overseeing the country’s longest period without loadshedding. Renewable energy is firmly on his radar, with him expressing a desire to overcome the red tape that currently affects many of these projects.

Renewable energy is an essential, not an option. In this issue of MoneyMarketing, we’re focusing on the world of ESG, looking at where South African companies and investors stand, and why ESG policies are crucial for companies. Not only do they help to manage risks, enhance reputations, attract investment and ensure longterm financial stability; from an investment standpoint, companies that have firm ESG commitments tend to be better at seizing opportunities and ensuring long-term profitability and sustainability, making them potentially more profitable investments. From where I’m standing, it seems to be non-negotiable – not just for the future of energy in this country, but for a better planet in general.

Stay financially savvy,

SANDY WELCH Editor, MoneyMarketing

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31 July 2024

NEWS & OPINION

MPHO MOLOPYANE, CHIEF ECONOMIST ALEXFORBES How did you get involved in the financial world – was it something you always wanted to do?

Not always. In my early years I wanted to be a medical doctor, a dream inspired by my mom who was a nurse. This is why I took maths and science in high school – but I soon discovered that blood and deep wounds were unbearable. I then enrolled for a BSc in Mathematical Statistics at the University of Pretoria as I enjoyed and was comfortable with working with numbers. It wasn’t until I walked into an economics first-year class that I fell in love with the subject matter and never looked back. After graduating with a Master of Commerce degree in Econometrics at the University of Pretoria and spending four years at the National Treasury, I decided to pursue a career in the financial sector. The rationale was that I wanted to gain a deeper understanding of how fiscal and monetary policy affected financial markets and investment decisions.

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

My first investment was a house, which I jointly bought with my husband. Yes, I still have it and still live in it. We are diligently trying to pay the bond as fast as possible to minimise the interest costs. The interest burden on debt makes me uneasy. I think that is because growing up, I witnessed my mom paying exuberant costs on her furniture store accounts. It was just unbelievable – as soon as she finished paying back the debt, the furniture would need to be replaced as it wasn’t of high quality, entrapping her in another debt cycle.

How are you enjoying your relatively new position as Chief Economist and what are you responsible for?

Honestly, I am still settling into my new role, as it has only been six months since I joined Alexforbes.

While the macroeconomic analysis does not really change that much, each stakeholder consumes the information differently and the message must be tailored such that the end user understands what the impact of the economic outlook is on their business (or rather investment landscape, in this case). So far, I am enjoying the new challenge and the contribution I am making towards our investment processes and strategic positioning.

What are your goals in the role?

Over and above my primary responsibility of providing economic and financial analysis as well as macroeconomic strategy, I would like to contribute to thought leadership on the country’s macroeconomic policies and challenge the status quo. As economists, we need to be innovative and start solutioning for South Africa’s specific socio-economic problems.

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

My best financial decision has been maintaining a low-cost base and not altering my lifestyle as my income increased. I still drive the same car I bought back when I worked at National Treasury.

The only regret I have is not starting to invest earlier on in my life.

What are some of the biggest lessons you have learnt in and about the finance industry?

It has been interesting to observe how prevalent short-termism and group think is in the industry.

Investors can be driven by fearmongering and prefer simple

“I would like to contribute to thought leadership on the country’s macroeconomic policies and challenge the status quo”

narratives instead of interrogating issues holistically. As a result, they end up making decisions that are not in their best interests. This is despite well-documented historical analysis that show markets fluctuate but that recoveries do take shape over time, and well-diversified portfolios, with a dose of patience and the magic of compound interest, can deliver strong returns.

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

The current macroeconomic environment is challenging.

The global economy has been battered by a multitude of shocks over a short period of time. Think: trade wars, Covid-19, Russia-Ukraine-war-induced inflation shock, and the subsequent aggressive synchronised monetary policy tightening. This has led to persistent volatility and heightened uncertainty. A well-diversified portfolio, including value stocks, bonds, some liquid assets and alternative investments, can help investors weather turbulent times.

What are some of the best books on property/finance/investing/leadership that you’ve ever read – and why would you recommend them to others?

The First 90 Days by Michael D. Watkins and The Psychology of Money by Morgan Housel are the two most interesting books I have read recently.

The first book helped me navigate the transition from being an analyst to taking up a strategic leadership position and watching out for potential career pitfalls. The second book has helped reinforce my sense of frugality and revealed that successful wealth creation is the culmination of having a well-diversified portfolio and staying invested over the long term to let compound interest work its magic.

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FIRST FOR THE PROFESSIONAL PERSONAL FINANCIAL ADVISER

31 July 2024

NEWS & OPINION

NEW APPOINTMENTS BCG appoints new Managing Director and Partner in its Johannesburg office • Boston Consulting Group (BCG) has appointed Jacqueline FosterMutungu as Managing Director and Partner in its Johannesburg office. She will play a key role in the financial institutions, people and organisation practices. In her new role, she will continue to work with financial institutions across Africa, focusing on strategic growth, turnaround objectives, organisational design, culture, and leadership development. Before joining BCG, she worked in the consumer food industry, managing brands in the US, South Africa and Zambia, and in investment banking in the US and UK. She holds an MBA from the Wharton School of the University of Pennsylvania and a BSc in Economics from Duke University.

• BCG also announced additional appointments in the region: Aly-Khan

Jamal as Managing Director and Partner in Lagos, Nigeria, and Nabil Mikou and Badr Choufari as Managing Directors and Partners in Casablanca, Morocco.

of Chartered Accountants (SAICA), the Institute of Directors in Southern Africa (IoDSA), and South African Restructuring and Insolvency Practitioners (SARIPA).

New Head of Business Restructuring Services in BDO Advisory Buhle Hanise has been appointed as the Head of Business Restructuring Services in BDO Advisory at BDO South Africa.

With a wealth of experience in business restructuring and turnaround management, as well as in guiding businesses through periods of transformation and growth, Hanise has navigated the intricacies of business restructuring. She has consistently demonstrated a keen ability to identify opportunities for improvement and to implement strategic initiatives to drive sustainable results. Hanise is a qualified Chartered Accountant and currently serves as the Non-Executive Director for multiple organisations. She also holds memberships at The South African Institute

Ninety One appoints CIO for South Africa Ninety One has appointed Duane Cable as Chief Investment Officer South Africa (CIO SA). In this newly created role, Cable will play a pivotal role in driving investment excellence, talent and representing the investment teams both internally and externally. He is also a member of the South African Management Committee under the leadership of Thabo Khojane and will work closely with the Global CIO office led by John McNab and Mimi Ferrini. In addition, Cable retains his position as portfolio manager and Head of South Africa Quality. Prior to joining Ninety One in 2018, Cable was Head of SA Equities at Coronation Fund Managers, where he spent 13 years.

Momentum Metropolitan Boards appoints new non-executive director Momentum Metropolitan has appointed Sharoda Rapeti as an independent non-executive director of both Momentum Metropolitan Holdings (MMH) and Momentum Metropolitan Life (MML). Rapeti has over three decades of experience in the electronics, technology, broadcasting and telecommunications sectors, with years of operational, board and c-suite experience.

Her blend of experience comes from having held executive positions in broadcasting and telecommunications, and from management consulting involvement in South Africa, Sub-Sahara Africa and South-East Asia. She has led multiple STEM-based talent development and senior management accelerator programmes.

She holds a higher national diploma in Electronic Engineering from the Durban University of Technology and a Master of Business Administration from the University of Wales.

Top eight steps to strengthening SA’s path to overcome greylisting

BY JAMES SAUNDERS Co-founder and CTO at RelyComply

S

outh Africa’s greylisting by the Financial Action Task Force (FATF) in early 2023 has created significant economic challenges. The development tarnishes the country’s reputation, causes delays and higher costs in international transactions, and potentially deters inbound foreign investment. But the good news is that the damage to the country’s international standing and economy needn’t be permanent. A concerted effort across the financial ecosystem to strengthen Anti-Money Laundering (AML), Know Your Customer (KYC) and Counter-Terrorist Financing (CTF) frameworks could facilitate a rapid exit from the greylist.

Here are some steps each regulated organisation should take to strengthen its AML and KYC controls: 1. Continuous ID verification: Verifying a customer’s identification documents at the start of the business relationship is not enough. It’s also essential to implement a Customer Identification Programme (CIP) that gathers crucial details like the source of funds, business activities, and Ultimate Beneficial Ownership (UBO). Build an audit trail of activity backed up with a continuous identity verification process.

2. Bolster risk assessments: Assigning accurate risk ratings in KYC is crucial for effective resource allocation

“Verifying a customer’s identification documents at the start of the business relationship is not enough”

and compliance. Look for red flags such as inconsistent or incomplete personal information, unexplained wealth, unusual transaction patterns, links to Politically Exposed Persons (PEPs) or sanctioned entities, and complex corporate structures.

3. Stay up to date with regulatory changes: AML/KYC regulations evolve and change as new money-laundering threats emerge. Don’t assume that your existing AML/ KYC process will remain compliant indefinitely. Look out for changes in national and international AML/ CFT regulations. Also, customer risk profiles should be regularly reassessed based on updated information and changing circumstances. Review your entire AML/ KYC programme at least once a year, including policies, procedures, technology, and training.

4. Invest in modern, integrated technology: Outdated systems can’t keep pace with the rate of change in the regulatory environment or the evolution of criminals’ behaviour. An advanced end-to-end compliance platform that integrates seamlessly with existing business systems can automate compliance current workflows, pulling data from legacy systems while adding new automation and intelligence capabilities to help battle changing criminal typologies.

5. Keep customer data up to date: Incomplete or outdated customer data creates easily exploitable gaps that criminals seek when probing for AML/KYC oversights.

In addition to the upfront gathering of essential details like the source of funds, the nature of business dealings, the transaction rationale, and expected account activity,

it is critical to periodically re-screen customers to detect changes and keep data current.

6. Focus on internal training and culture: Instilling a culture of compliance is critical, so establish KYC and overall AML compliance as a core value across your institution. This includes regular training to reinforce its importance at all levels, fostering shared responsibility for adherence, and cultivating an ethical, diligent atmosphere to reduce organisational blind spots.

7. Automate processes: The risks of human error, duplication, and blind spots are much higher with manual workflows, where mistakes can easily slip through the cracks. Automation provides a solution to streamline compliance activities for greater accuracy, speed, and efficiency, with today’s AI-powered tools taking automation to new heights. AI can automatically scan historical transactional data to uncover hidden patterns, detect anomalies, and flag suspicious or high-risk behaviours.

8. Monitor transactions: Ongoing transaction monitoring and risk-based alert resolution are vital in detecting behaviour indicative of money laundering. Leveraging AI and data analytics can help monitor transactions across customer accounts.

South Africa’s greylisting is a clear call to action for financial institutions and other sectors to strengthen their AML and CTF frameworks. By strengthening compliance systems, processes and culture, every regulated institution can restore the country’s international standing and move it off the greylist as soon as possible.

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31 July 2024

NEWS & OPINIONS

Consequences make a comeback as ‘free money’ era ends

BY ANDREW WILLIAMS Investment Director in the Value Team at Schroders

Changed environment A significant – if not the most significant – impact of rising interest rates is that the era of unlimited free money would seem to be over. Whether we actively register it or not, we can all intuitively feel the changed environment around us. The chances, for example, of an Uber arriving in the time it takes to stand up from your restaurant table and put on your coat, before travelling across your hometown for R60 are now vanishingly thin.

In the last five years alone, Uber spent more than $30bn (£23.3bn) of investors’ cash subsidising your trip home – happy to lose money chasing market share, in a bid to squeeze out competitors, before focusing on profits. But what if a company achieves scale, as surely Uber has – operating across 10 500 cities in 72 countries, with 118m monthly users and 6.3bn rides – yet still cannot make an economic return on capital?

What then?

WeWork is the highest-profile casualty so far. Having got one call right in a row, Softbank CEO Masayoshi Son then decided to bet the house on disruption, burning through the equivalent of the GDP of Jamaica by becoming WeWork’s biggest investor. In the end, just short of $17bn of investors’ money was wasted.

Unfortunately, WeWork will not be the last casualty of this more normalised economic environment.

As consumers, we have been spoiled. Investors have subsidised our Spotify listening, our Netflix bingeing (creating along the way the golden age of TV content) and the deliveries of all manner of goods bought on the internet. Uneconomic pricing has been used

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as a Trojan horse into our life across many different business models, disrupting markets and allowing start-ups to capture significant market share.

Again, when interest rates are zero, it is easy for private equity and venture capital investors to be generous. It is easy to disrupt too – but the ‘not-forprofit’ tech sector is now under pressure as higher rates bite. According to US startup tracker PitchBook, 3 200 private venture-backed enterprises went out of business in 2023. Nor were these two-person garage startups, having raised a combined $27.2bn – this time, the GDP of Iceland.

Reduced pressure on value This dose of economic reality should, in turn, mean less pressure from startups on incumbent businesses.

Traditional office companies are squeezed less when WeWork folds. Black cab drivers grow busier when there are fewer subsidised Uber drivers competing. Bricksand-mortar retailers face less competition for every e-tailer that collapses.

And this should serve to ease the pressure on the profits of ‘traditional’ businesses, which tend to be more value-oriented than growth. And if we consider the significant valuation dispersion between these two investment styles, the prospects of value stocks enjoying both profit growth and re-rating look strong. That can offer value investors significant confidence that recent good performance can continue over the medium term.

In an ironic twist of fate, the disruptors are being disrupted by a return to the ‘old normal’ level of interest rates and those who misallocated capital while believing

in a consequence-free tomorrow are realising the light up ahead is an oncoming train. “It’s the same thing your whole life,” moans Phil. “‘Clean up your room. Stand up straight. Pick up your feet. Take it like a man. Be nice to your sister. Don’t mix beer and wine, ever.’ And, oh yeah: ‘Don’t drive on the railroad track.’” “Well, Phil,” says Gus uneasily. “That’s one I happen to agree with.”

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A

rguably the most significant impact of rising interest rates is an end to the era of unlimited free money – and those who misallocated capital over the last decade are beginning to understand what that means.

“What if there were no tomorrow?” wonders Phil Connors, the misanthropic weatherman played by Bill Murray in Groundhog Day. “No tomorrow?” replies Gus, one of two passengers Phil is driving home after a very long night at a local bar. “That would mean there would be no consequences. There would be no hangovers. We could do whatever we wanted!” “That is true,” agrees Phil. “We could do whatever we want ...”

At some point after the global financial crisis of 2008/09, a similar realisation must have hit the managers of countless businesses as quantitative easing brought interest rates close to zero across the world’s major markets. If money is effectively free, then there are no consequences to poor decisions. Spent borrowed money unwisely? Just go back and borrow some more.

“There would be no hangovers. We could do whatever we wanted!”

Confident (or hating the fact) he was reliving the same day over and over, Phil’s way of testing this ‘no consequences’ theory was to drive the car onto the railway tracks and into the path of an oncoming train – duly waking up unscathed the next day, as did his passengers. Nevertheless, Murray’s character was destined, eventually, to see another tomorrow – and interest rates, eventually, were always destined to rise.

31 July 2024

NEWS & OPINION

Be happy, don’t worry: Improving longevity with confidence

BY KIM ZIETSMAN Laurium Capital

B

illions of US dollars are spent annually by companies that are focused on understanding the biology of aging and how lifestyle choices affect longevity. Much is written about improving longevity through healthy habits like a wellbalanced diet, reducing stress, and getting enough sleep. In recent years, studies have also highlighted how mental health has a powerful influence on our physical health.

However, not enough airtime is perhaps given to the risks of living longer without the funds to provide for these years, and how money problems can affect your mental health. Some of the reasons for investors underfunding their retirement is not saving enough, not starting early enough, and not taking enough risk at a young age. However, no asset allocation limits to post-retirement savings apply, so individuals may choose to invest outside the constraints of Regulation 28. But many investors don’t review their investment choices post-retirement, and remain invested in conservative Balanced

Funds when perhaps they should be considering funds that are less constrained and have the flexibility to include a higher allocation to risky assets.

Longer life expectancies require more resources and more portfolio growth, and a strategic asset allocation of investments to growth assets. Better returns and capital protection increase the longevity of your portfolio. This is why hedge funds are the ideal investment for both pre- and post-retirement portfolios.

While some large South African institutions ‘get it’ and have done well in their portfolios due to the allocation to hedge funds and other alternative asset classes, the institutional and retail market remains very underinvested in hedge funds. Arguably, the best investment brains in the world run the largest endowment funds, with a significant allocation to alternative assets. The Harvard Endowment Fund, for example, allocates 39% of its endowment portfolio to private equity and another 31% to hedge funds.

Public equity accounted for 11% of the asset allocation. Real estate had an allocation of 5%, bonds made up 6% of the portfolio, and cash was 5% (23 Oct 2023).

Over the last 10+ years, SA General Equity Funds have returned 7.2% per year, while SA Multi-Asset High Equity Funds delivered an average return of circa 8.0% per year, pedestrian real returns for people saving for retirement. Many hedge fund managers, on the other hand, have managed to generate significant alpha, often with similar or less risk. Take the Laurium Aggressive Long Short Prescient QI Hedge Fund (‘Aggressive Long Short’), for example. This fund over the same period has delivered 14.3% return per year, double that of SA General Equity Funds after fees with similar risk to the equity market (Morningstar Direct, 31 May 2024).

Better returns increase longevity of portfolios. In this scenario, we assume that R1 000 000 is invested on 1 Jan 2013 in the Laurium Aggressive Long Short Fund, and the same sum invested in the average general equity fund.

You then draw a monthly income of R8 000, increasing at 6% per annum. After just over 10 years (30 April 2024), you would have zero left if you had invested in the average general equity fund, but if you had invested in the Laurium

Aggressive Long Short Fund, you would still have R1 792 926 invested.

The good news for retail investors is that they can now access Laurium’s Aggressive Long Short strategy via the newly launched Laurium Enhanced Growth Prescient RI Hedge Feeder Fund (‘The Fund’). The Fund largely follows the same mandate as our Aggressive Long Short Fund but is structured as a local Retail Investor Hedge Fund (‘RIHF’). RIHFs are open to all investors with the enhanced benefit of daily liquidity. The mandate differs slightly from the Aggressive Long Short, in that the Fund may make an allocation to select international equities. This Fund is available via LISP platforms.

Disclaimer: Laurium Capital (Pty) Ltd is an authorised financial services provider (FSP 34142). Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. For Laurium’s full disclaimer, please visit https://lauriumcapital.com/legal/hedge-fund-disclaimer

Source: Morningstar 1 January 2013 to 30 April 2024.

Riding out the rollercoaster of investor emotions

BY MALCOLM CHARLES AND ADAM FURLAN Ninety One Emerging Market Fixed Income Portfolio Managers

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ncertainty in the global environment and domestic risks around the upcoming election have led to an increase in market volatility. What can SA fixed income investors expect when the election dust has settled?

Coming into 2024, market sentiment in global bond markets improved on a better outlook for inflation, fuelling expectations of a series of global rate cuts during the year.

However, a more resilient US economy and stubborn global inflation have delayed the start of the US rate-cutting cycle, with lower rates only expected toward the end of the year.

With investors once again repricing in ‘higher for longer’ rates, we’ve seen an uptick in global bond market yields, which has also resulted in higher SA bond yields. Adding to this, local election fears have weighed heavily on our market, further pushing up SA bond yields. Foreigners turned net sellers of SA government bonds in February, which abated towards the end of April following the Figure 1: SA election temperature on the rise

release of more constructive polling results. Consequently, the SA bond market has clawed back 30 basis points of the underperformance relative to its emerging market (EM) peers, as can be seen in Figure 1.

Nevertheless, the chart still shows that approximately 60 basis points of extra risk premium have been priced into our bond market since the start of the year (nineyear SA government bonds vs. EM peers). This comes at a time when South Africa has had a pragmatic Budget, a material decline in loadshedding, and an improvement in Transnet’s operational performance. Our bond market’s underperformance versus our peers highlights SA election concerns.

What can we expect after the election dust has settled?

If the politicians manage to reach a pragmatic outcome after the election, the focus should return to broader macro issues.

We’ve seen some positive developments that should help to support investor sentiment: • Eskom: Loadshedding continues to improve, thanks to better performance at some of the power stations and the growth in private generation.

• Transnet: The situation appears to have stabilised. We are seeing a material turnaround at the Durban and Cape Town ports, with the coal line and iron ore line back at pre-pandemic levels.

• The South African Reserve Bank (SARB) remains solid. The new appointments and term extensions signal institutional stability and policy certainty.

The green shoots that we are witnessing on the energy front and at the ports should also help to bolster our fragile economy.

SA inflation fairly ‘well behaved’ CPI inflation remains contained within the SARB’s target band but continues to be sticky. We see headline inflation averaging 5% in 2024, and core inflation averaging 4.6%.

With global rate cuts pushed out, we only expect the SARB to lower interest rates later in the second half of the year.

This will be dependent on several factors, including the SARB’s assessment of the sustainability of the downward trajectory of inflation towards the 4.5% target, and the timing of rate cuts in the US. For now, we at Ninety One are riding out the rollercoaster of investor emotions, but we believe there will be opportunities for us to participate when market conditions improve. Our view is that the eventual election outcome is likely to be more pragmatic than some expect and, as such, there will be an opportunity to take advantage of this mispricing. Timing will be important as fears are likely to peak in the days ahead of the actual election.

While uncertainty prevails, we believe the high yields on SA bonds sufficiently protect against the risks and represent good value over the medium to longer term.

Income will remain an important driver of return, with high yields offering investors the opportunity to earn returns well ahead of inflation. We remain cautious on positioning and continue to emphasise the importance of maximising yield and protecting capital.

Source: Bloomberg

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31 July 2024

NEWS & OPINION

Ethical dilemmas of AI in financial planning and advice

BY FRANCOIS DU TOIT CFP® PROpulsion

A

I is changing the game, but it also comes with a lot of ethical questions. Financial planners and advisers must face these questions as they use AI-powered tools to automate tasks like investment analysis, portfolio optimisation, and even client interactions such as taking and processing notes.

How can they make sure these tools are ethical and trustworthy?

Bias and fairness One of the biggest ethical issues with AI in finance is the risk of algorithmic bias. AI systems learn from historical data, which may have biases and inequalities from society. This can result in unfair outcomes, such as excluding some demographic groups from financing or investment opportunities.

Financial planners and

“Financial planners and advisers have to watch out for these biases and correct them”

advisers have to watch out for these biases and correct them, making sure that their AI-powered advice and decisions are fair and just for all clients.

Transparency and explainability Many AI models are like ‘black boxes’ that don’t show how they come up with their outputs. This makes it hard for financial professionals to know the logic behind the system’s outputs. This can hurt client trust and make it hard to ensure the suitability of AI-driven recommendations.

Financial planners and advisers should use explainable AI models that can give clear, understandable reasons for their decisions. This will help them to better explain the basis of their advice and keep client confidence. Then there is the question of whether you are transparent about the fact that you used AI to assist in the advice process.

Privacy and security The financial services industry deals with a lot of sensitive client data, which is needed for AI-powered applications. But this data must be protected to respect client privacy and prevent unauthorised access or abuse.

Financial planners and advisers must put in place strong data-protection measures, such as encryption, access controls, and regular security audits to ensure the safe and ethical use of client information. Small firms may find it difficult to do all of this, mostly due to a lack of resources and expertise.

Accountability and responsibility As AI systems become more independent in their decision-making, there is a question of who is accountable and responsible for AI-driven recommendations and actions. Financial planners and advisers must set clear rules for responsibility for AI-driven advice and decisions, making sure there is human supervision and the ability to step in when needed. Also, they should have comprehensive policies and procedures for checking and auditing the performance of their AI systems to meet ethical and regulatory standards.

Collaboration and ethical governance Solving the ethical challenges of AI in financial planning and advice will need a team effort among industry players, regulators, and technology providers. Financial planners and advisers should be involved in creating industry-wide ethical guidelines and best practices, sharing their practical knowledge and insights.

Also, they should work with their organisations to create strong ethical governance frameworks that include ethical considerations in the design, deployment, and ongoing management of AI systems. By following this guide, financial planners and advisers can deal with the ethical dilemmas of AI and ensure that this powerful technology is used in a reliable and ethical way.

By focusing on principles of fairness, transparency, privacy, accountability, and ethical governance, they can build client trust, comply with regulations, and contribute to the ethical development of AI in the financial services industry.

IMAGES: Shutterstock.com

About Francois du Toit Du Toit founded PROpulsion, a thriving community for financial planners and advisers focused on helping them belong, grow and thrive. He hosts the PROpulsion LIVE show (every Friday at 8 AM live on YouTube) with more than 250 episodes and counting, sharing his 2.5 decades of experience and engaging with local and international guests to inspire and inform. Committed to learning and using new technology, he is on a mission to change lives at scale. Visit www.propulsion.co.za for more information.

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31 July 2024

NEWS & OPINIONS

Cyber incidents top concern for Financial Services sector in 2024

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he financial services sector is facing a growing threat from cyber incidents, according to the Allianz Risk Barometer. The report highlights that cyber incidents have emerged as the primary concern for financial institutions in 2024, with 43% of respondents ranking it as a significant risk. This alarming trend is further exacerbated by the recent surge in ransomware attacks, which has seen insurance claims activity increase by over 50% compared to 2022.

The Allianz Risk Barometer, an annual survey conducted by Allianz Commercial, gathered insights from industry experts and executives across the financial services sector and other industries.

The survey revealed that cyber incidents are followed closely by macroeconomic developments and changes in legislation and regulation, both ranking at 26%. Business interruption and natural catastrophes also pose significant risks, with 22% of respondents expressing concern about each.

Hackers are increasingly targeting IT and physical supply chains, launching mass cyber-attacks, and finding new ways to extort money from businesses. As a result, early detection and response capabilities and tools are becoming increasingly crucial.

Investment in detection backed by artificial intelligence is expected to enhance incident identification. Without effective early

detection tools, companies may experience longer unplanned downtime, increased costs, and a greater impact on customers, revenue and reputation.

“Cyber criminals are exploring ways to use new technologies such as generative artificial intelligence (AI) to automate and accelerate attacks, creating more effective malware and phishing. The growing number of incidents caused by poor cyber security, in mobile devices in particular, a shortage of millions of cyber-security professionals, and the threat facing smaller companies because of their reliance on IT outsourcing are also expected to drive cyber activity in 2024,” explains Santho Mohapeloa, Cyber Insurance Expert, Allianz Commercial.

In addition to cyber incidents, financial services respondents also highlighted macroeconomic developments factors such as inflation, which is one of the most difficult risks to manage in 2024. The impact of inflation can have long-term consequences, with investments taking a while to regain value even after the economy seemingly recovers. Furthermore, inflation triggers higher interest rates, which increases net interest income but slows down loan demand and brings a higher default risk.

Compliance ranks as one of the biggest challenges for financial services companies, with legislation and regulation constantly evolving around digitisation, climate change, and environmental,

social and governance (ESG) issues. The compliance burden for financial institutions has significantly increased over the past decade, with regulatory enforcement intensifying. To navigate these challenges, financial institutions must improve the effectiveness and efficiency of their compliance activities and make wise use of data and technology.

Business interruption poses significant risks to the financial services industry, including disruptions to operations, loss of revenue, reputational damage, and regulatory compliance challenges. Cyber incidents and natural catastrophes are the top two causes of business interruption feared most by companies, followed by fire and machinery/equipment breakdown or failure. To mitigate these risks, companies must focus on improving business continuity management, identifying supply chain bottlenecks, and developing alternative suppliers.

SARS threatens criminal sanctions for non-compliant crypto traders

BY JASHWIN BAIJOO Head of Strategic Engagement & Compliance at Tax Consulting SA

A

s a cryptocurrency trader, have you ever heard of SARS’ Electronic Forensic Services team? Chances are you haven’t. You have, however, certainly heard of the revenue collector enhancing their Audit capabilities to more than just a ‘quick count’, through the use of data-driven insights. Now consider the risk you face, in a world where artificial intelligence (AI) is employed to aid SARS in their goal of eradicating non-compliance, bolstering further the precision of SARS’ seasoned Audit snipers, with the technological support of Electronic Forensic Experts.

The question that comes to mind is why such a team-up would be necessary; the answer is, quite simply, to detect and remedy historic non-compliance pertaining to cryptoasset trading.

Auditor: Compliance Senior Manager: Electronic Forensic Services ISSUED ON BEHALF OF THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE Excerpt from pg.3 of the SARS Request for Information, pertaining to crypto asset transactions

SARS’ automatic exchange of information with crypto-asset exchanges For years, crypto-asset traders have transacted under the misconception that their crypto-related profits fall outside the domain of SARS, and if they don’t tell, how will SARS ever know? Unfortunately for those too busy monitoring bear and bull markets, a pivotal shift has been missed.

SARS have confirmed that, similarly to how they may demand transactional records from banks, they may very well do the same with crypto-asset exchanges: The purpose of this letter is to inform you that SARS has received information through various crypto asset exchanges.

It is our intention to initiate a review of your affairs regarding this information.

Excerpt from pg.1 of the SARS Request for Information, pertaining to crypto asset transactions

Criminals in the crypto-verse Those who hold, or have ever held, crypto, should certainly not assume that historical non-declaration means that SARS will not look to tax these profits in future. SARS has made it very clear that no stone will be left unturned in fulfilling their mandate to collect revenue, by whatever means necessary. Not only will a review of this historical transgressions be conducted but, should the crypto trader

Natural catastrophes present significant risks to the financial services industry, including physical damage to infrastructure, disruption of operations, increased insurance claims, and potential liquidity challenges. The financial implications of natural disasters were underscored by the $82bn in insured losses globally in 2021. To effectively manage these risks, financial institutions must prioritise robust risk modelling, diversification strategies, and disaster preparedness measures.

The Allianz Risk Barometer serves as a valuable tool for financial services companies to identify and address the most pressing risks they face. By understanding these risks and implementing proactive risk management strategies, companies can safeguard their operations, protect their customers, and maintain financial stability in an increasingly volatile global business environment.

under the radar not comply, severe penalties, or even jail time, is immediately on the cards, per section 234 of the Tax Administration Act, 28 of 2011: Further, please note that failure to provide requested information to SARS may constitute a criminal offence in terms of sections 234 of the Tax Administration Act and may attract severe penalties.

Excerpt from pg.2 of the SARS Request for Information, pertaining to crypto asset transactions

Practically, this means that even though taxpayers are requested to make full disclosures to SARS on local and foreign crypto transactions, this is more for verification than data-gathering purposes. While taxpayers falsely assume that what they do not disclose remains so, they are sorely mistaken and underestimate SARS’ non-discriminate approach to the eradication of non-compliance.

Giving credence to a total compliance crackdown, SARS has secured several recent tax fraud convictions, ranging from the infamous Chef Sizo, DJ Ganyani and other celebrities, to doctors and their practices.

Avoid penalties and prosecution Now is not the time to hide your crime – due to the intangible and uncertain nature of crypto-asset transactions, it is market best practice to seek the guidance of a specialised tax attorney. This will aid in ascertaining the classification of specific crypto assets and transactions and ensure you are protected under legal professional privilege. Not only will this place you in a better position of knowledge, but when the correct tax and legal strategy is followed, proactively, it will ensure compliance with SARS.

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31 July 2024

NEWS & OPINION

Conversations to have with clients around full disclosure

BY LISA GIBBON Liberty Divisional Executive for Onboarding

P

sychologists define fear as a protective, primal emotion that evokes both a biochemical and emotional response that, in many cases, might not be rational.

It is this emotional response that some financial advisers often find themselves grappling with when signing up new policies. From a client perspective, they may feel that disclosure involves releasing intimate medical and life history to an insurer who they may see as a distant entity that is then enabled with the power to judge them in extreme life circumstances.

For advisers, recent media coverage of extremely rare incidents where clients have taken to social media to complain about policies seemingly not paying out may add to this angst. Obviously, the truth in these cases is much more complicated than what is publicly portrayed.

When applying for a policy, it’s fair to say that many clients fear that should they disclose certain issues, it will make their

premiums more expensive, or that they may even be denied cover in a worst-case scenario. They may also hold on to a belief that certain facts are not significant, and so, they avoid revealing them.

It’s here where the skill of the adviser shows through, putting clients at ease and managing their fears in a professional way so cover can be effectively created. In doing so, they also convey the message from insurers that clients should always make a full disclosure of their relevant data.

Explaining the rationale of an insurer If an adviser suspects not all the facts are being declared, it may be worth discussing how an insurer approaches cover, and displace unfortunate common social myths about insurance.

So, to understand from our side as insurers, it’s fair to say that we’ve seen it all in terms of disclosure. We deal with a multitude of life situations every day, and with this in mind, we account for everything

HEDGE FUNDS

Divergent strategies – better outcome

BY EMMA BOTHA Investor Relations at Amplify

B

lending hedge funds is like a political coalition, without the volatility and without compromising returns. You might be intrigued to discover the unexpected parallels between the inception of the new Government of National Unity and the blending of hedge funds.

Just as the ANC, DA, EFF and MK parties bring their distinct nuances to the unity government – some more palatable than others – different hedge fund strategies also bring something unique to the table.

Some strategies (and political factions) inject a dose of volatility, some introduce a hint of unpredictability, and others serve as a pillar of reliability – slightly boring and often overlooked until uncertainty arises and stability is paramount.

However, whereas different ideologies and policies can create friction between political factions, the same does not hold true when blending hedge funds. In fact, the more

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divergent their strategies, the better they work together.

We all know that we should not put all our eggs in one basket, and most investors follow this principle religiously when it comes to traditional investment vehicles. But when it comes to hedge funds, investors tend to stick to one, which can be as exciting as going to the races but can also often leave you out of pocket. What makes matters worse is that investors tend to opt for the ‘racier’ funds, which come with great returns but high levels of volatility. As soon as a fund’s returns start hitting a rocky patch, as they inevitably will, investors become squeamish and often opt out, locking in material losses.

This results in a seriously bad investor experience, which is why we suggest a different approach.

At Amplify, we always recommend blending hedge funds, in the same way as you would blend four or more balanced funds, as it significantly reduces the volatility associated with hedge funds and improves return outcomes. Diversification is key, and just as relevant when investing

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feasible in our offerings to make them as individually applicable as possible.

Liberty’s latest claims statistics show that during 2023, we paid out R6.72bn in claims to individual clients, their families, and beneficiaries. This amounted to some R25.85m every working day. However, we declined 0.3% of all claims due to nondisclosure of key client details.

Through our depth of experience in covering differing life situations, we can continually refine our processes to ensure that if the time comes, clients experience the very essence of insurance cover: a claim payout.

For us to do this consistently, we want clients to provide complete information, even when they think it is not important.

As an insurer, we want to offer the best cover possible, taking into account a client’s personal circumstances and history.

In a nutshell, an adviser should aways impress on the client that the underwriting process in insurance is not in any way meant

to be exclusionary; it is, in fact, the opposite.

The more an insurer knows about a client, the easier it is to create effective cover.

in alternative asset classes as it is when investing in traditional investment vehicles.

However, diversification is unfortunately not as simple as investing in four or more different funds and hoping for the best. While this approach will almost certainly provide better outcomes, you would achieve a much better outcome by seeking hedge funds that follow unique approaches and behave differently to market movements. Simply put, you do not want to blend funds that all perform well, or all perform poorly, at the same time.

The table below illustrates the benefits of blending uncorrelated strategies. Fund A to E represents five Amplify hedge funds, each with a unique strategy and risk profile, and the blended portfolio is an equally weighted blend made up of these five strategies. While the individual

funds come with significant volatility, when you blend these uncorrelated strategies, improving diversification, the total risk in the portfolio is less than the sum of its parts. In addition, the maximum drawdown of the blended portfolio is significantly lower than that of each individual fund.

Lastly, you have not compromised on returns, but more importantly, due to the low volatility of the blend, the journey will be much smoother than had you only invested in any one of the individual funds.

To summarise, the more divergent the strategies are, the better the outcome, and as with any successful union, striking the balance between the steady eddy, the slightly unpredictable, and the slightly erratic is key.

Morningstar, 31 May 2024

Don’t rush if you sense fear The initial signing of a policy is always a significant point in the relationship between adviser and client, and for this reason there might be some haste in getting it done.

If there is a sense that some details are missing, we encourage further conversations with the client to ensure full disclosure as a final check. The importance of this cannot be underestimated in creating effective cover.

Ensuring full cover is a two-way street, with the adviser as an informed and experienced intermediary between the client and the insurer. We as insurers have a duty to ensure that we pay all valid claims, and as a collective, we continue to educate our clients on all the important requirements to ensure a great experience when that moment of vulnerability comes.

For disclaimer, please visit www-adm.amplify.co.za/hedgefunds-disclaimers/

For more game-changing insights, visit amplify.co.za/rethink/

31 July 2024

HEDGE FUNDS

Don’t marry the wrong fund manager

BY ALAN YATES Head of Distribution at Peregrine Capital

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being long-term happy investors with us.

Peregrine Capital is a focused fund manager. The upside is that we have a decent shot at being very good at what we do. The downside is that we cannot be all things to all people. There are investors whose objectives will fit very well with ours and those who will not. This is a very important element of the process because mismatched expectations result in everyone being let down.

As an investor, you want the funds to perform in a manner that complements your financial objectives. You will only remain invested in those funds that meet those expectations, and as a fund manager, we want the right clients investing with us for the long run. So, it’s in everyone’s interest to ensure we’re a good match.

The client willing to endure the bumpy ride on the way to a potential outsized return will not see value in a low-risk, market-neutral fund like Peregrine Capital’s Pure Hedge H4 QI hedge fund designed to deliver very stable and consistent returns. Being invested in a fund that has never had a negative return year in the

past 25 years* probably isn’t valuable to them, whereas it might be very appealing to a risk-averse investor who is looking to protect their capital and grow it at a healthy rate above inflation, but wants to do it in a manner that gives them the smoothest ride possible.

Conversely, many investors might be horrified to endure the large swings in performance that might come with a highly concentrated equity fund, which is seeking to generate those big return outcomes but must accept the inevitable volatility that will come with such a style. Other investors might be more than happy to accept these risks in pursuing actual market-beating returns.

But how does one best assess the compatibility of a fund with your own personal objectives? The first step would be to consider the fund’s stated objectives for the returns it’s looking to generate and the risk it’s willing to take to get those returns.

The second is to see if it has achieved those goals in the past. Ideally one would like to see this achieved over a long period of time, through various market cycles. The

“We like the broader toolkit that hedge funds offer us as fund managers because we find them helpful in generating better riskadjusted returns”

risk of a shorter-term track record might have been overly influenced by factors outside of the fund manager’s control (like a buoyant overall market, exceptionally low interest rates, or just a bit of good old-fashioned luck). These things play a hand in all short-term return outcomes for all fund managers, but they tend to be less and less of a driving force the longer the measurement period becomes.

The final piece of the puzzle is to assess your options for investment relative to the risks they will take. One wants to be able to compare apples with apples, and in this case, that means comparing the risk-adjusted return potential for each fund under consideration. By doing this, one can get a sense of what return outcomes can look like at various levels of risk and, therefore, find the best possible fit for one’s own appetite for risk and reward.

Investing in your future is not a one-sizefits-all approach. It's about finding the right fit for your financial goals and risk tolerance.

This initial effort in choosing the right investment option is time and effort well spent.

Please consult your Financial Adviser to determine if hedge funds are suitable for your financial goals. *Refers to the Peregrine Capital Pure Hedge H4 QI Hedge Fund. Pure Hedge Fund annualised return: 18.93% | SA Multi Asset - Low Equity Category annualised return: 9.67% | CPI annualised return: 5.58%, all since inception (July 1998). Date to 30 April 2024 | Source: Peregrine Capital, Morningstar, Bloomberg.

For more information and full disclosures please visit www.peregrine.co.za.

IMAGES: Shutterstock.com

f I asked you what the objective of a hedge fund was, what would your answer be? Most people I ask say something like “generating big returns by taking lots of risk”. I must confess that before I joined the hedge fund industry, I would probably have given a similar answer. But the truth is that a hedge fund is just the vehicle and, like any other type of fund structure, the return objectives and risk profiles of different hedge funds vary markedly.

Understanding the hedge fund objective is crucial. They can range from beating a cash return with minimal variation to attempting to generate significant returns.

However, many investors overlook this, and the fund they choose often doesn’t match their personal financial goals.

While this mismatch of objectives is not specific to hedge funds, it might be more prevalent within our small niche of the market because many people see all hedge funds as being part of an ‘asset class’, like equities, property or bonds, rather than what they are – vehicles that can be used to invest in those other asset classes but which have a broader set of tools that can help mitigate downside risks and reduce correlation. We like the broader toolkit that hedge funds offer us as fund managers because we find them helpful in generating better risk-adjusted returns.

However, the return and risk profiles of our funds still need to be aligned with the objectives of our clients, resulting in them

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31 July 2024

HEDGE FUNDS

Beyond traditional investments: Strategies for diversification

BY KAMINI NAIDOO Chief Investment Officer at Equilibrium

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n the current environment of low returns and heightened uncertainty, individuals and institutions are finding it more challenging to reach their financial goals.

A diversified portfolio, carefully balanced between risk and return sources, has never been more important. One such avenue that investors are increasingly seeking out is alternative investment strategies.

For large institutional investors with a higher tolerance for illiquidity, these alternative strategies may include a mix of hedge funds and private markets opportunities through private equity, private debt, and real assets such as infrastructure. Although the underlying economic exposures of private and public investments may be quite similar, private assets are generally less liquid and more complex when compared with publicly traded stocks and bonds, and give investors access to additional sources of return. While holding illiquid assets means the investor must be willing to forego the ability to dispose of the asset in the shorter term, the additional return that the investor will gain from holding these assets is what we refer to as the ‘liquidity premium’.

For investors using model portfolios, the range of strategies may be more limited to those with more favourable liquidity profiles and more readily available on the investment platforms, such as retail investor hedge funds. Retail investor

hedge funds have gained in popularity over the recent years, as model portfolio architects are looking to hedge funds to access alternate sources of return within their portfolios.

How do hedge funds access alternative return sources?

Hedge funds have at their disposal a wider toolbox, such as shorting and the use of leverage and derivatives. Shorting refers to the ability to profit from falling securities – which enables the fund manager to profit from both rising or falling asset prices – and can provide protection in times of market stress. Leverage refers to the use of borrowed capital or the use of derivatives to increase capital at work, and enables the fund to potentially achieve higher returns.

Fund managers use this toolbox to create a range of distinct profiles, intended to play a specific role in a larger portfolio. Hedge funds can be seen, broadly, as either risk reducers (volatility dampeners), or return enhancers. Their ability to access uncorrelated risk and return sources compared to traditional asset classes makes them a prudent allocation to a portfolio, especially in periods of increased

uncertainty and low returns, and where the countercyclical relationship between bonds and equities is no longer reliable.

Despite the diversification benefits of alternative investments, incorporating them can be a challenging decision for model providers due to their high costs and nonstandard nature. Investors may need to rely on specialists for thorough due diligence and ongoing risk analysis. Moreover, the diverse nature of the alternative investments landscape requires careful selection. Strategies vary widely in terms of risk, return, liquidity, and correlation with traditional assets.

This diversity necessitates a well-thought-out approach, taking into account overall portfolio objectives. The team at Equilibrium has been actively involved in hedge fund model portfolio construction. Their established capabilities in alternative investments and hedge fund strategies provide investors with valuable insights and support in building diversified and resilient portfolios.

Equilibrium Investment Management (Pty) Ltd (Equilibrium) is an authorised financial services provider (FSP32726) and part of Momentum Metropolitan Holdings Limited and rated B-BBEE level 1.

“Hedge funds have at their disposal a wider toolbox, such as shorting and the use of leverage and derivatives”

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More time for your clients.

Equilibrium is a discretionary fund manager that brings balance into your advice practice.

We enable you to do what really matters.

That is the power of balance.

Equilibrium Investment Management (Pty) Ltd (Equilibrium) (Reg. No. 2007/018275/07) is an authorised financial services provider (FSP 32726) and part of Momentum Metropolitan Holdings Limited, rated B-BBEE level 1.

EQ-CL-569-AZ-0545

eqinvest.co.za

31 July 2024

SAVINGS

The South African way of saving: Old-school stokvel traditions meet new-school thinking

BY RAPULE MAHLANGU Head of Associations & Affinity Groups at Metropolitan

S

IMAGES: Shutterstock.com

outh Africans seem to have a unique way of doing just about anything. From the way we associate sports with national identity, to our proudly South African sense of humour that allows us to laugh off woes like loadshedding, ours is a country of people who do things differently. When it comes to handling money matters, the same applies. It’s not a country that’s renowned for its savings culture, but when South Africans do save, many make it a stokvel.

A stokvel is a savings scheme formed by a group of individuals pooling their financial resources towards a common financial goal. Most stokvels operate on a rotational basis, where members of the scheme agree to make a fixed, regular contribution on a weekly, monthly or annual basis. At the end of the predefined period, each member takes a turn to receive the entire pot of collected funds.

While a long-standing tradition in South African communities, stokvels were only formalised during the late 1980s. Today, the National Stokvel Association of South Africa estimates that the local stokvel market is worth R50bn, with more than 11 million

members contributing to these kinds of schemes.

For Rapule Mahlangu, Head of Associations & Affinity Groups at Metropolitan, “stokvels are an ingrained part of South African history, not only because they provide communities with a sense of social cohesion, but because they provide people with an effective way of saving money. These kinds of informal schemes play a vital role in promoting important national objectives such as financial inclusion or bringing more people into the fold of economically active citizens.

“The fascinating thing is that the traditional structure of stokvels has remained relatively unchanged over the years – as they say, ‘If it ain’t broke, don’t fix it.’ Thankfully, however, technology has played a key role in making stokvels safer and more secure, broadening their appeal to younger members of society.”

Stokvels of the digital age The history of stokvels goes way back, long before the advent of digital banking.

Traditionally they have formed part of the cash-driven economy, involving relatively large sums of money changing hands, when members get their chance to cash in on the collective savings.

“What we’ve seen over the past few years, however, is a noticeable shift from cold, hard cash to electronic funds. Some innovative, digital entrepreneurs have jumped on this trend, creating apps to bridge the gap between old-school money management and newschool technology. Not only has this

“Technology has played a key role in making stokvels safer and more secure, broadening their appeal to younger members of society”

introduced a more efficient way of pooling money and transferring funds, but it’s also made the process much safer,” says Rapule.

Finance market players come to the party Another development that’s taken shape over the last decade is the entrance of financial sector leaders into the stokvel space. In the past, stokvel members had no means to protect themselves financially from risks such as the death of a stokvel member.

Financial institutions such as Metropolitan offer a tailored product for members of a stokvel, burial society or religious group that share the same values and goals as a stokvel does, to maintain financial aid. In times of disruption, when a member of a stokvel passes away, their contribution can continue, alleviating stress and financial strain on the remaining members.

A new generation of stokvel savers A study conducted by market research specialist Ipsos also found a significant demographic shift in the kinds of people who participate in stokvels today, when compared to years gone by.

“Typically, we’ve associated stokvels with gogos and omakhulu who would use these kinds of schemes to pool money for groceries and household goods. But, over the last few years, we’ve seen younger generations of South Africans participate and use stokvels as a way to save up,” says Rapule.

Unlike their older counterparts, younger people have started a trend of using their stokvel funds for nonessential or discretionary spending on things like property, holidays, weddings and other investments.

Rapule concludes, “It’s encouraging to see the coming together of generations under the banner of local tradition and in a way that promotes good financial habits. Even in tough economic times, banding together goes a long way.

“And with the power of technology, we have an added layer of protection to enhance the accessibility of stokvels. As more financial services leaders see the value of these schemes, we can work together to bring this tradition to even more South Africans.”

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31 July 2024

SAVINGS

Unlocking the true value of TFSAs for South Africans

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outh Africa’s national savings rate fell to 14% in 2023. The country has one of the world’s worst savings rates compared to its emerging market peers. This has an inevitable knock-on effect, with the Financial Sector Conduct Authority (FSCA) finding that 90% of the population cannot continue the same standard of living in retirement. In the current high-inflation, high-interest cycle, financial advisers have a pivotal role to play in helping clients to save – and invest – what they can.

Duma Mxenge, Head of Business and Market Development at Satrix, advocates making Tax-Free Savings Accounts* (TFSA) a cornerstone of South Africans’ savings strategies, given that they offer tax-free growth on investments, dividends, and interest earned. “We need to shift our local savings culture to a mindset that every cent saved matters.

Duma Mxenge, Head of Business and Market Development at Satrix

We want to empower our populace to ‘sweat’ their savings to work harder, by investing these with a longer-term horizon. Regular contributions of small amounts add up. TFSAs are flexible, with tax advantages from the get-go – whether you are investing R100 or the full R36 000 yearly allowance upfront.”

TFSAs need a rebrand Mxenge stresses that advisers can show their clients that TFSAs can open up a world of investing options. “You are the custodians of client relationships; you know each client’s risk tolerance and time horizons. TFSAs assist you to build a diversified portfolio of assets around your client’s needs, often at comparably lower costs. From exchange-traded funds (ETFs) to high-yield savings accounts for shorter-term savings, there are a wealth of options to align with different budgets and financial goals.”

While TFSAs have traditionally been ‘sold’ to South Africans as savings vehicles, they need a ‘rebrand’ as robust investment tools. Mxenge adds, “Ideally, the true purpose of a TFSA should be

long-term investing to earn returns to supplement people’s retirement savings. As the allowance is capped at R36 000 per year, with a lifetime limit of R500 0000, people can often afford to take on more aggressive, highreturn investments. The limits protect individuals from heavy losses, while all ‘wins’ have zero tax liabilities.”

Here are some strategic methods to encourage clients’ TFSA savings: 1. Emphasise the investing aspect: Help clients to fully appreciate the TFSA as a robust investing tool, rather than simply as a savings vehicle. Build a unique, diversified portfolio around the client’s goals and timelines.

2. Help clients to automate contributions: Implement automatic transfers to ensure consistent contributions.

3. Budget prudently: Help clients to prioritise savings in their financial plans, allocating a portion of income before discretionary spending. This may mean shifting mindsets from simply being in survival mode to adopting a longer-term outlook.

4. Start small, scale up: Assist clients

to begin with modest contributions if necessary, and progressively increase them over time. Show how even small contributions can grow, given the magic of compound interest.

5. Encourage clients to stay the course: It's crucial to emphasise that a TFSA is not an emergency fund. Your TFSA doesn’t just benefit from the power of compound interest over time, it also benefits from tax savings.

6. Showcase the simplicity: Demonstrate how simple it is to move funds to the SatrixNOW platform and allocate these across the various vehicles – equities, bonds, balanced funds, index-tracking ETFs – that will make their money work harder for them.

By embarking on a strategic investing journey today, clients can unlock the full potential of their TFSA, paving the way for long-term financial prosperity. *Tax-Free Savings Accounts: Annual limit of R36 000, lifetime limit of R500 000, 40% tax penalty applicable for contributions above the limit, per individual. For more information visit https://satrix.co.za/tax-freeinvestments

Disclaimer: Satrix Investments (Pty) Ltd is an approved FSP in terms of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision. Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities. While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.

Tax-free saving this Savings Month

BY JANÉL KING AJM, Senior Associate

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avings month is upon us, and what better way to kickstart it than by exploring the tax-free saving options available on the market and their benefits?

Tax-free saving is a benefit available to South African residents. Originally created to promote a better saving culture in our country, it is now an internationally recognised savings and investment vehicle referred to as the Tax-Free Savings Account (TFSA). You may contribute a maximum of R36 000 per year to your TFSA, limited to R500 000 in your lifetime. Any contribution more than these amounts will incur tax at a rate of 40%.

TFSAs are powerful tools for aiding retirement savings and should be utilised from a young age. If you contribute the maximum yearly amount, you will reach your lifetime threshold within a mere 14 years, after which compound interest, the world’s eighth wonder, will be your best friend.

All interest, capital gains, and dividends earned from these contributions are taxfree (if it is contributed within the limits).

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In my view, this is the greatest benefit of a TFSA because the growth obtained from compound interest does not attract tax when you cash out your funds.

A TFSA should be treated as a longterm investment since withdrawals cannot be reversed and will not increase your yearly or lifetime limits again. Withdrawing funds from your TFSA reduces the capital in your fund and the potential tax-free growth thereof. For example, if you save R36 000 in year one and withdraw the funds and its growth in year two, your remaining lifetime contribution limit is now R464 000, and you have no capital saved. TFSA should, therefore, be your last resort when you require funds for a rainy day.

There are various types of TFSAs, such as unit trust funds (structured as a collective investment scheme), ETFs, fixed deposits and bank TFSAs. The best way to choose which type of product to invest in is to determine your objective. A long-term approach, such as aiding your retirement savings, will benefit

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more from an asset with a higher-growth target, such as unit trusts or ETFs, which have exposure to various shares and properties. If your goal is to save tax, a higher growth-yielding asset is also a good option, as it will result in a larger cash-out in the end.

If your goal is a shorter investment with a low-risk profile, a cash investment through a bank TFSA will be more beneficial. This option also allows you to make numerous small contributions, as it does not require a minimum contribution amount like unit trust funds and ETFs. However, it will not be favourable for a long-term approach as the growth will underperform against inflation.

Here's an example: A 25-year-old contributes R3 000 pm (which will add up to the maximum yearly contribution cap) to a high-growth portfolio, such as an ETF or unit trust fund. By the age of 39, this individual will have reached their lifetime maximum contribution of R500 000, whereafter they leave their capital in the TFSA rather than withdrawing it. At

retirement (65 years of age), the capital will be about R15,5m (assuming the portfolio has a growth target of CPI + 5%).

The withdrawal of this amount at retirement will not incur any dividends or capital gains tax.

From a practical perspective, it is most beneficial to utilise each year's maximum threshold of R36 000, as this would enable you to start growing the funds in your TFSA as quickly as possible and utilise the benefit of its compound interest. This could be done with monthly contributions of R3 000 or variable monthly contributions according to your cash-flow abilities and a lump sum at year-end with a salary bonus. The yearly timeline runs from 1 March to 28 February each year.

If you are to leave South Africa, the best option is to dispose of your TFSA, as such an investment is only tax-free for South African residents. It is then favourable to obtain a TFSA product in your new country of residence if they have such an option.

Indexation: Anything but Passive.

Ever thought that…

“Passive has no upside potential”?

“Passive can’t add value; it only reduces costs”?

“Passive is designed to underperform”?

“Passive is a bubble”?

They say never let the truth get in the way of a good story, but we’re not standing passively by.

Our story is better.

Satrix, Africa’s Largest Indexation House and Morningstar Best Fund House, Larger Fund Range, 2021 & 2022.

Contact us to learn more at institutional@satrix.co.za.

Satrix Investments (Pty) Ltd is an approved financial service provider in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (“FAIS”).

Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities.

31 July 2024

ESG INVESTING

The Tshikululu Social Investments team

BY THABISILE PHUMO Executive Vice President: Stakeholder Relations at Sibanye-Stillwater

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ining companies, along with other businesses, need to make the fundamental shift towards realising that corporate sustainability is dependent on the ecosystems in which they operate.

Our view is that we are not separate from the issues and the context of the environments in which we operate. If there is no South Africa, there’s no business. If there is no Zimbabwe, there’s no business... and because of this we want to share value with all our stakeholders. Once a company begins to appreciate that its success and the success of the communities in which it operates is intertwined, you have a vested interest in their development.

Although the ‘Environment, Social, Governance’ elements of ESG are intertwined and that separating out the ‘S’ is an academic exercise, the reality is that action on Environmental and Governance requirements have been propelled by the need to meet compliance standards, while Social has lagged because it hasn’t been enforced in the same manner.

However, the three elements are all critical in ensuring that businesses’ impact on the communities they operate in are sustainable.

It doesn’t help to begin to look at social issues in isolation of the economic drivers. Because people don’t eat social conversations. People need sustainable livelihoods for them to advance themselves. If we don’t listen to the needs of the people, we end up imposing solutions that don’t work.

If it doesn’t solve the context of the ecosystems in which they operate – even if it’s global best practice – it will never be sustainable.

When implementing on-the-ground social

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initiatives, the need for corporates to consider context, along with meaningfully involving and helping to improve the capacity of key community role players, was a predominant theme of the discussion.

“We need to consider an investment into the grassroots community ecosystems by way of strengthening the technical capabilities of community-based organisations so that they can also drive sustainable impact, as these organisations play a critical role in being responsive to community needs,” says Tshikululu Social Investments CEO Tracey Henry.

“There was a growing demand from investors for information on nonfinancial variables to better understand and assess the ESG strategies of companies” This is echoed by Dipalesa Mpye, Tshikululu’s Head of Social Impact: “Engaging stakeholders at a community level as part of processes of deciding on what to fund is critical. Part of that is enabling the capability and the capacity of, for example, community-based organisations on the ground to participate in those conversations. But there also needs to be the recognition that social investment requires a long-term mindset.”

Measurement and monitoring is another prevalent theme, given its importance in ensuring that social interventions are understood, managed, and effectively reported on. Johannesburg Stock Exchange Sustainability Officer Thato Seritili points out that there was a growing demand from investors for information on non-financial variables to better understand and

assess the ESG strategies of companies.

“Given the growing global drive for common ESG standards, we’ve seen that jurisdictions such as South Africa have started adopting these standards in the local context,” says Seritili.

“That’s why we launched the Sustainability and Disclosure Guidance in June 2022 to promote transparency and good governance by South African companies in a way that enhances best practice in environmental, social and governance disclosure.

This guidance is based on a combination of global best practice and local relevance to simplify ESG disclosure for companies in the context of several frameworks, guidelines, standards, and ratings in the market.”

The increasing demand for trustworthy sustainability information to inform decision-making was one of the key drivers of the formation of The ESG Exchange, a global knowledge-sharing network that aims to provide access to sustainability expertise.

“Although South Africa is far ahead of the rest of the world in terms of our social laws and regulations of companies, it remains a problem that we have these standards and they’re purely theory because we don’t know how to implement them – so we decided to bring together all the role players that are involved in sustainability and sustainability reporting,” says Carolynn Chalmers, CEO of The ESG Exchange.

Increased sharing of information and data, as championed by organisations like The ESG Exchange, paves the way for corporates to amplify and deepen the impact of their social projects.

“Companies are working in silos, which then creates the space for duplication of efforts, but also missed opportunities to partner beyond compliance.

Being open to partnerships is important,” said Tshikululu’s Mpye.

IMAGES: Supplied

Integrating the ‘S’ in ESG: ‘Socio-economic development is everybody’s business’

Truffle_MM-July 2024_Vertical.pdf

31 July 2024

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ESG INVESTING

Balancing carbon tax

BY VUYOLWETHU NZUBE ESG Analyst, Truffle Asset Management

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ctive stewardship is becoming an increasingly important aspect for asset managers and forms a key element of Truffle Asset Management’s approach to responsible investing. As part of stewardship, our preference is to engage company management and stakeholders around Environmental, Social and Governance (ESG) concerns, as opposed to excluding a company with a good investment case facing a particular ESG risk. We believe engagement is a strong tool to drive positive outcomes.

Engagement topics are typically informed by ESG research, data, and news flow, as well as topical themes that vary across companies and sectors.

Evolving environmental regulation An important theme informing our current research and engagement activity is the evolution of regulation relating to environmental protection. Countries with specific targets to manage climate change are regulating the business environment to reduce the impact of carbon emissions and achieve ‘net zero’ targets by 2050.

However, they are finding it increasingly important to ensure the ‘same rules apply’. A good example is the European Union’s (EU) Carbon Border Adjustment C Mechanism (CBAM) that was adopted in 2023.

M According to the Climate Action Tracker, less than 5% of global emissions Y have carbon pricing at, or above, the $40–$80/tCO2e range that is estimated to be consistent with a 2°C global temperature reduction pathway (“State of CM Climate Action”, November 2023). Europe is one jurisdiction that has regulated MY carbon pricing to fall within this range, meaning the cost of production for CY certain goods and services in the EU is higher than in other countries. The EU has therefore established CBAM to equalise the production cost across imported CMY and homegrown products. Through CBAM, an EU carbon tax is imposed on large K importers based on the exact carbon emissions embedded in those imported products. These importers may claim back any carbon tax paid in the country of origin, as applicable. The aim is to align the carbon tax paid on carbon-intensive goods produced in the EU to the carbon price paid on carbon-intensive goods imported from other countries.

Climate change is not cool.

As custodians of client capital, we aim to deliver sustainable returns through our impactful and responsible approach to investing.

“The pressure on countries in developed markets to reduce carbon emissions and support the path to net zero is increasing” Unpacking the potential impact Initially, CBAM will apply to high-carbon-emitting sectors, like electricity, cement, fertilisers, iron and steel, aluminium, and hydrogen. By 2030, additional sectors such as oil refining, all metals, pulp and paper, glass and ceramics, acids and organic chemicals will be included. Trade and Industrial Policy Strategies, an economic research organisation, estimates that based on the initial number of sectors impacted, 2.2% of South Africa’s exports are at risk. This amounts to approximately 0.8% of our GDP. Given the potential financial impact on certain sectors, Truffle engaged companies in the iron and steel, aluminium, and oil-refining sectors to understand how they are preparing for potentially higher taxes on products exported to the EU. Given the nature of products exported by these companies, the current impact is limited. However, the EU’s carbon tax on imports may just be the start. The pressure on countries in developed markets to reduce carbon emissions and support the path to net zero is increasing. Other countries, such as Japan, are also considering implementing their version of a carbon border adjustment mechanism.

At Truffle, evaluating the introduction of new regulations means gaining an understanding of the financial and business impact on the companies in which we invest. Critically, this informs our engagement agenda with company management and ensures we remain aware of the implications of environmental regulations for each business and sector.

For full Truffle disclaimer, please visit https://truffle.co.za/Internal/2024-Disclaimer.pdf

Invest in the value of experience.

Truffle Asset Management (Pty) Ltd is an authorised Cat I and II FSP (36584).

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31 July 2024

ESG INVESTING

Responsible investing in action: Practical insights from a fixed income perspective

BY ANGELIQUE KALAM Head: Sustainable Investment Practices, Futuregrowth

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s a fixed income manager, we have an important role to ensure that our clients’ capital is deployed in a responsible manner to sustainable enterprises that earn an appropriate risk-adjusted return.

We are part of the broader capital allocation mechanism in South Africa that contributes to the socio-economic growth of our country.

Futuregrowth is one of the largest institutional fixed income managers, with R198bn* of assets under management, and a track record of 30 years.

Approximately R35bn of our AUM is invested in a range of developmental impact funds. This allows us to participate in high-impact infrastructure sectors (water, renewable energy, transport, healthcare, education, etc.) and developmental sectors (like agriculture, affordable housing, SMME finance) that are key to socio-economic growth.

Risk return As capital allocators, we identify risks that could potentially erode value and price for these risks. Therefore, investing in sustainable enterprises is key to ensuring the appropriate long-term risk-adjusted returns for our clients. A key part of this is understanding the risks and sustainability practices of the entities that we fund. Each investment is unique and there is no ‘one size fits all’ when assessing non-financial risks.

Analysts have access to analytical tools, frameworks, scorecards, and research as an input, but it is key for them to apply judgment in assessing and making recommendations that will inform the rating and pricing of potential investments. It follows that entities with higher risk exposure will attract a higher cost of funding.

To ensure we promote sustainable and ethical practices, it is important to build investment processes that embed institutional memory, that recognise patterns, trends, and red flags that support the investment thesis, analysis, and decision-making process.

In addition, bond holder engagement is a key aspect of the overall process to manage risk and provides an opportunity for investee companies to adopt practices that can promote their long-term sustainability.

Bondholder engagement In some instances, appropriate milestones and timelines are negotiated

and included in the legal agreements to measure and monitor change.

Some engagement areas are driven by socio-economic demands: • Due to the urgency of the climate crisis, there is greater emphasis on climate mitigation (seeking ways to prevent or reduce emissions) and adaptation (seeking ways to adapt to a future state that considers the impact of climate change).

Investors are seeking innovative solutions that leverage technology to address social and environmental challenges, such as clean energy, energy efficiency, smart cities, and sustainable transportation. This could include investments in sustainable and regenerative agriculture and other sectors that support a low carbon economy.

• There is also a growing recognition of the importance of diversity, equity and inclusion (DEI) as investors seek companies to prioritise DEI as part of their overall transformation strategy.

Companies that operate in sectors where this is a priority, risk their license to operate if not addressed as part of an intentional strategic objective.

These can present both risks and opportunities, which are identified as part of the due diligence and risk assessment and will inform and guide the engagement approach with a company.

Industry engagement and collaboration There is an opportunity over and above individual engagement for broader industry engagement and collaboration. A recent example where Futuregrowth actively engaged was on the National State Enterprise Bill and the Public Procurement Bill. We engaged directly with the respective government entities, as well as through ASISA. As institutional investors, we all have a part to play in influencing our local economy and building a more sustainable future by engaging in these important issues on behalf of our clients.

In summary: We should never compromise on achieving sustainable risk-adjusted returns for our clients.

• Each investment is unique and there is no ‘one size fits all’ when assessing non-financial risks.

• As part of our fiduciary duty, both financial and non-financial risks need to be assessed and taken into consideration and priced for appropriately.

• Engaging and promoting sustainability and ethical practices is our collective duty, to ensure a better future for all. *AUM as at 31 March 2024

“Investing in sustainable enterprises is key to ensuring the appropriate long-term riskadjusted returns for our clients”

IMAGES: Shutterstock.com

Promoting sustainability and ethical practices A key part of our role is to promote sustainable and ethical practices within our sphere of influence. South Africa has a history of both corporate and SOE malfeasance. Over the past decade alone, we have witnessed firsthand the material impact of corruption on a company’s revenue, reputation, and overall sustainability. As a result, non-financial risks are no longer deemed ‘soft issues’.

Some important principles from Futuregrowth’s analytical work resulted in our SOE ‘Governance Unmasked’ report, released during February 2018, which highlights the following: • Being a responsible investor implies that we make decisions to allocate capital to those sectors and entities that adopt transparent, sustainable policies and practices.

• Governance standards are not primarily there to control the ethical, but rather to constrain the unethical.

• For governance to be properly effected, we need the appointment and retention of people of the highest competence and unimpeachable integrity.

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31 July 2024

ESG INVESTING

Global energy transition: Is it on the backburner? And what this means for investors

BY KONDI NKOSI Country Head for South Africa, Schroders

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s focus shifts toward nearer-term macro and geopolitical headwinds, energy transition efforts lose pace. But climate change will not solve itself, and Schroders believe there continue to be energy transition opportunities for investors.

As politicians, consumers and market participants battle with near-term issues such as stickier-than-hoped inflation and broader economic burdens, focus has shifted off longer-term issues such as climate change and energy transition. Coupled with this, benign weather in certain locations and a decline in global energy prices have undoubtedly relaxed the efforts to address both pressing problems. These long-term issues often take a back seat when the economic environment weakens or the direct stresses they create start to ease (e.g. energy crisis, extreme weather), but they are still problems that need to be solved eventually, as they will create potential financial risks if ignored.

This is according to Kondi Nkosi, Country Head for South Africa at global investment manager Schroders, who says that recent energy transition returns, as well as continued outflows from global sustainable energy exchange-traded funds (ETFs) have mirrored this shift in focus (see graphs below).

“Entering 2024, we were cautious about the potential for continued short-term volatility across energy transition equities, given the risks we saw with respect to both persistent inflation and higher rates, as well as the timing of earnings inflections across energy transition equities. The

uncertain political landscape was front of mind too. Given this perspective, the challenging sector returns seen in the first quarter are not hugely surprising, especially given the very strong performance observed to close out 2023.”

Nkosi explains that after a strong close to an otherwise challenging 2023, energy transition equities have once again been under pressure from adverse cyclical forces at the start of 2024. “Sticky inflation, resilient economic data, and continued fiscal largesse (particularly in the US) saw developed market bond yields turn higher again after their sharp decline towards the end of last year, putting renewed strain on valuations across more interest-rate sensitive parts of the space – such as energy transition equities.”

But Schroders believes a brighter outlook is tentatively shining through. “From an earnings perspective, we have started to see some signs of demand in consumerfocused markets troughing, and the high inventories built by distributors during the postpandemic disruptions starting to clear. Although different markets remain at different stages, electric vehicle battery, electric vehicle charging, and residential solar companies have suggested that the weakest quarters of shipments are currently being seen, with demand to then pick up throughout the rest of the year,” says Nkosi. “Although still relatively limited in number, both the early signs of improving earnings momentum and the positive reaction to such news gives us confidence in our future earnings outlook,” says Nkosi.

IMAGES: Shutterstock.com

“Focus has shifted off longer-term issues such as climate change and energy transition”

So, although volatility could remain in the short term with headwinds still in place, Nkosi believes the focus will shift again. “The long-term potential for many global transition companies has not changed at all, and that demand for energy transition products and services will flourish again as structural drivers continue to build and as the macro headwinds ease.”

Nkosi explains that the three core structural forces driving the energy transition – competitive economics, growing consumer demand, and policy support – remain largely as aligned as ever, and investment into the sector has stayed remarkably strong in absolute terms.

As we continue further into 2024, Nkosi says he believes the direction of travel for energy transition and energy transition equities will still largely be determined by three key dynamics: 1. The direction of travel for global monetary and financial conditions. “Interest rates and financial liquidity dominated 2023 and have already influenced returns in 2024. This situation is unlikely to change short term, meaning both the absolute level of nominal and real interest rates and the volatility of rates will likely matter going forward too.”

2. The extent to which fundamental company earnings improve. “2023 was highlighted by large downward earnings revisions in key sub-sectors across the energy transition universe, a dynamic that has so far continued entering 2024. The speed and extent to which earnings in under-pressure sub-sectors can stabilise and return to growth will be vital moving forward. Likewise, the resiliency of earnings in those sub-sectors that continue to outperform will be important for sentiment too.”

3. Changes to policy and politics. 2024 could be strongly influenced by politics, says Nkosi. “Most important here will be the US election in November, given the risks to Inflation Reduction Act (IRA) support in a strong Republican win, but European elections will be critically important too.”

Nkosi concludes that under almost all energy transition scenarios, and even in instances where we do not transition away from fossil fuels at all, the world is going to use a lot more electricity. “We need to electrify our economy not only to decarbonise it, but also to digitalise it through things like artificial intelligence and data centres. When adding on population growth and other potential structural shifts like industrial reshoring, higher electricity demand is unquestionably one of the surest structural themes associated with our future global energy mix,” he says.

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31 July 2024

FAMILY OFFICES

What is a Family Office approach to wealth management?

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ccording to data from the London Business School, family offices worldwide control some $10tn in assets and are becoming an increasingly important investment force. With Intelligence predicts that family offices globally will reach $11.41tn in assets under management by 2026.

In South Africa, the family office service has become a fast-growing wealth management segment with an AfrAsia Bank Africa Wealth Report predicting that total private wealth in Africa will reach $2.6tn by 2030.

Research conducted by Knight Frank found that more than 4 000 individuals will join the league of ultra-highnet-worth individuals (UHNWIs) in Africa by 2026, a growth rate of 33%, the fastest in the world after Asia.

The family office model offers HNWIs several unique benefits. Families benefit from a highly qualified, multidisciplinary team of advisors who are experts in different fields of finance, both domestically and offshore, such as asset management and global tax structuring, estate planning, as well as cash and risk management. They work together to make key financial recommendations and create financial solutions to suit the needs, expectations and goals of their client families.

Over the last few years, investors have faced some unexpected challenges, ranging from geopolitical instability, recession fears, stubborn inflation and aggressive interest rate hikes, which have added complexity to the management of family investment portfolios.

With the investment landscape looking more positive, the Global Family Office Report, published in September 2023, canvased almost 270 family offices, representing over $565bn in family net worth regarding their investment strategies going forward.

• The most significant asset allocation move was increased weightings to fixed income and private equity.

• Public equity saw a large retreat in allocations, while allocations to real estate increased.

• Direct investing remains a high priority, with two thirds of family offices looking for potential new opportunities at attractive valuations.

• An intensified focus on wealth management, with somewhat reduced emphasis on fostering family unity and continuity compared to previous years.

While the concept of a family office is by no means a new idea internationally, Private Client Holdings (PCH), a Cape Town-based company that offers a family office approach to wealth management, is taking the lead in South Africa when it comes to providing high-networth families with an all-inclusive wealth management solution. “As many decades of family office history have shown, the most successful investors are those who have followed a disciplined, long-term investment plan, which is regularly reviewed and adjusted,” says Andrew Ratcliffe, a director at PCH. The PCH family office approach to wealth management is underpinned by their goalsbased wealth management (GBWM) process. “GBWM integrates wealth planning and investment management into a cohesive, unified approach.

Traditional financial planning invests in portfolios with a single risk profile where performance

“As many decades of family office history have shown, the most successful investors are those who have followed a disciplined, long-term investment plan, which is regularly reviewed and adjusted”

is measured relative to the market or benchmark performance. In contrast, GBWM looks at what our client wants to achieve with their hard-earned wealth for themselves and for their family, during and after their lifetime. This is done by setting individual goals based on their current lifestyle and their future needs and wants. It is a complex and comprehensive process,” says Ratcliffe.

The PCH offering is a forward-thinking, heavily regulated service that is delivered as a result of a carefully developed, integrated organisational structure, provided by experienced, high-quality investment and wealth management teams. Being owner managed and 100% independent with no institutional parent, the wealth management advice they provide is solely aimed at achieving their client’s personal wealth goals.

“Our relationship with our clients is fundamental. We are not a large, unyielding corporate but pride ourselves on delivering a boutique service. At PCH, families benefit from a highly qualified, multi-disciplinary team of advisors who are experts in different fields of finance, both domestically and offshore, such as asset management and global tax structuring, estate planning, as well as cash and risk management,” adds Ratcliffe.

PCH has been recognised as the Top Wealth Manager in South Africa in the Boutique category of this year’s Krutham awards, announced recently. The PCH family office approach to wealth management is a unique and successful value proposition that continues to grow. The company is on track to being recognised as one of the top family office companies in South Africa.

IMAGES: Shutterstock.com

Private Client Holdings is taking the lead in South Africa when it comes to providing high net worth families with an all-inclusive wealth management solution.

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31 July 2024

FAMILY OFFICES

Fixing lengthy delays on deceased estates

BY DEENISHA NADESAN Capital Legacy Executive Director of Estates

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osing a loved one is hard. It’s even more difficult to deal with such a loss in the face of long and complicated estate administration processes. It can become emotionally and financially taxing.

In South Africa, it is not uncommon for a deceased estate to take two to five years to finalise. This leaves thousands of South Africans in limbo, leading to long waiting times before heirs and beneficiaries can receive their inheritances. Wills and estates specialists Capital Legacy are calling for transformation that would benefit large numbers of people whose lives are being impacted by these delays. Capital Legacy data shows that over a six-month period, their average time to wind up an estate was nine months, proving that it is possible to improve the time it takes to finalise a deceased estate.

Deenisha Nadesan, Capital Legacy Executive Director of Estates, says, “We are always looking at ways of making the loss of a loved one easier. We believe that legislation and the regulations around deceased estate administration require transformation. The changes we are proposing would benefit our entire industry and make a positive difference to thousands of South Africans’ lives, not only our own clients.”

Apart from benefiting heirs and beneficiaries of deceased estates, the changes that Capital Legacy is suggesting would also greatly aid the work of executors and many other industry professionals in our country.

The existing challenges are multifaceted but could be addressed with targeted solutions that have been shown to work in other spheres of South African life.

Capital Legacy is proposing collaborative

efforts with Masters of the High Court and banking partners to improve the processes involved in winding up deceased estates.

Nadesan sets out how this could be made to work for the benefit of all involved.

Masters of the High Court “A functioning and secure online portal where all executors could register estates with Masters of the High Court would be a positive start,” says Nadesan. An online system has been in trial phase since April 2023, but it has run into technical and other difficulties and has not met with broad approval.

“The changes we are proposing would benefit our entire industry and make a positive difference to thousands of South Africans’ lives” It would make more sense to leverage existing systems that have been shown to be fit for purpose and effective. “For example, electronic capture of deceased estate details already takes place when we start the estate administration after a person passes away. This is known in the industry as ‘estate onboarding’ and involves the same details required by the Master of the High Court to register a deceased estate when they start the process of winding it up,” explains Nadesan.

A centralised online solution would save time and solve several practical challenges.

It would remove the need for manual

data capture and scanning of physical documents at local offices of Masters of the High Court, while also addressing staff shortages, as well as outages and downtime due to loadshedding, equipment loss or malfunction. “Instead of being bogged down in routine admin, our colleagues at Masters offices would be able to serve the general public more effectively on a daily basis,” Nadesan adds.

Banking partners South African banks are truly world class, especially when it comes to digital innovation. In January 2024, South Africa’s financial services ranked second in a survey of 100 banks in 11 countries.

Known as the Oliver Wyman Digital Banking Index, it uses 300 metrics in the compilation of its rankings.

“We appeal to our banking partners to work with us to find effective ways of leveraging the impressive capabilities already in use. Capital Legacy wants to collaborate on improving the processes related to winding up deceased estates in South Africa,” says Nadesan.

Banks play a crucial role in estate administration. Executors are dependent upon them, for example, to provide a Certificate of Balance and statements of deceased accounts. Without access to the deceased’s accounts, executors cannot carry out their duties and the estate administration process cannot proceed.

The solution could be something that South Africans already use millions of times a day: online banking. “Our banking partners could consider adding a section to their existing online-banking offerings that would be dedicated to deceased estates,” says Nadesan.

It would be sufficient for executors to have view-only access to a deceased person’s bank account. “What we are proposing is a secure portal for access by professional executors to obtain essential documents and information like Certificates of Balance, deceased accounts and FICA. Transactional capabilities are not the chief concern,” explains Nadesan.

Keeping the scope contained could simplify the required functionality and reassure the banks that a separation of powers would be upheld. “Our banking partners can retain control of the security and integrity of their clients’ accounts.

Transactions can only be conducted once the account is closed and the funds are in an executor’s account,” adds Nadesan.

Apart from online banking, there are also real-world fixes that the banks could consider, which would greatly assist industry professionals in winding up deceased estates.

“We would also like to discuss with our banking partners the possibility of providing dedicated kiosks in key branches. This could be a way of giving executors direct access to services related specifically to deceased accounts, relieving bottlenecks in other areas of the banks, and addressing delays for executors and, by extension, heirs and beneficiaries,” Nadesan explains.

Masters’ offices, banks and executors are partners in the winding up of deceased estates. Improving efficiencies would not only benefit them, however, but crucially would also deliver closure and relief for thousands of heirs and beneficiaries who have been waiting very long for their loved ones’ estates to be wound up.

Dear 70% of South Africans with no will,

DON’T LEAVE CHAOS IN YOUR WAKE. Get your will done today. www.moneymarketing.co.za

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FAMILY OFFICES

INVESTING

31 July 2024

A family governance and How corporate succession strategy key to actions impact intergenerational success your portfolio

M

anaging the wealth of affluent families is a dynamic and global undertaking, often spanning multiple jurisdictions as family members establish roots in various countries.

This underscores the importance of adhering to a meticulous and resilient process to ensure all aspects of wealth and succession planning align with the family’s multi-generational objectives.

Establishing a family governance and succession strategy is a starting point for building that solid foundation.

This process involves families agreeing on the purpose of their wealth and developing communication techniques and a decision-making framework to help make that purpose a reality.

From this base, families, together with their family office advisers, can then proceed with identifying the potential risks that could impact their wealth, planning around these, implementing the plan, and monitoring it annually to ensure it continues to align with the family purpose.

risk is often the number-one concern for families. Another significant risk is that succession plans are not structured optimally because they must align globally. For instance, there may be different versions of the succession documents, including wills and trust deeds, that do not all align.

Planning for success Planning helps families navigate these risks and ensures wealth and succession decisions support the family’s purpose into the future. Family offices like Stonehage Fleming offer families a one-stop, seamless service that enables them to structure their affairs optimally, drawing on the expertise of its 19 offices in 14 different jurisdictions. As a multifamily office, it also benefits from the practical wisdom built up through dealing with similar experiences on behalf of the other families it services.

“A family office provides the necessary services to ensure the plan is implemented optimally and robustly”

Agreeing on a family governance and succession strategy An understanding of the family’s overarching purpose undoubtedly sets the family up for success. Many families think the biggest risk to their wealth is a market failure, but based on our experience, families do recover from that but don’t recover from family feuds or breakups.

The family governance and succession process take account of all family members’ expectations, differences, and potential conflicts that could derail succession planning by constructively addressing these risks.

Given the family’s usually diverse range of interests, a family office can act as an independent mediator, meeting with family members individually to understand their perspectives and then bringing the entire family together to agree on the family’s overarching purpose.

Navigating the many risks in a fastchanging world Families face a variety of macroeconomic, political, and wealth and success planning pitfalls – and it’s up to the family advisers to help them navigate these. In South Africa, political

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Implementation brings the plan alive Actualising and maintaining a family wealth and succession plan requires access to a wide range of experts who will implement all aspects of the overarching plan, including wealth managers and tax and legal experts. A family office provides the necessary services to ensure the plan is implemented optimally and robustly.

Conducting a health check annually It is crucial that families participate in an annual health check to ensure the plan is still appropriate and meets the family’s needs. A health check also identifies any changes that need to be made if, for instance, there has been a tax change in any of the jurisdictions the family is exposed to globally. The forthcoming elimination of the UK non-dom tax regime is an example of a significant change in the tax landscape for families with interests there.

The reality of wealth and succession planning for wealthy families goes far beyond traditional estate and tax planning. It necessarily includes getting families to agree on their wealth purpose, developing effective communication techniques and a decision-making framework that enables the family to bring its purpose to life and continue for generations to come.

BY WENDY MYERS Head of Securities at PSG Wealth

I

nvesting involves not only choosing the right stocks to ensure that you achieve long-term investment goals but also understanding portfolio performance evaluation and the impact of corporate actions on portfolio performance.

When a publicly traded company announces a corporate action, the savvy investor knows it’s an event likely to impact the stock price. If you’re a shareholder or considering buying shares of a company, you need to understand how a corporate action will affect the company’s share price.

Corporate actions can indicate a company’s financial health and its prospects in the near term. They can be either voluntary in nature, when investors choose to participate, or mandatory, when participation is obligatory.

Examples of corporate actions include dividend distributions, stock splits, spinoffs, and mergers and acquisitions.

Dividend distributions can result in a cash injection into an investor’s portfolio, offering options to reinvest into the market, or enhancing your cash reserves until you are ready to deploy it. Companies can also offer a dividend distribution in the form of stock instead of cash. This will naturally increase your exposure to market fluctuations, impacting your portfolio differently than cash dividends and their associated returns.

Stock splits is a type of corporate action that we have seen in the technology space, often subsequent to those companies enjoying tremendous runs in their share price performance. Google, Amazon and more recently Nvidia are examples where these companies split their shares, resulting in an increase in shares in issue, with concomitant decrease in share prices. This makes these stocks more tradeable due to affordability for retail investors.

Spinoffs occur when listed companies divest part of their assets. Post spinoff, investors own the original share in their portfolio plus the newly spun off share. The decision to undertake a spinoff could suggest the company is preparing for new growth ventures, centring its efforts on its core business or attempting to unlock value. A recent example of the latter was Transactional Capital’s announcement to separately list We Buy Cars division on the JSE to unlock value to shareholders.

Thus far, this corporate action has had a positive impact on the share price of Transactional Capital, demonstrating the benefit to investors this type of corporate action can have.

Mergers and acquisitions are also examples of corporate actions that could have a material impact on a company’s share price. A merger occurs when two or more companies combine, and all parties involved have agreed to the terms. In this case, one company formally surrenders its stock to the other. Shareholders may interpret a merger in two ways: either as a strategic move for business expansion or as an indication that the industry is consolidating, compelling the company to absorb competitors to maintain growth. Investors should carefully consider their positions upon the announcement of a merger or acquisition and whether the share still meets their investment requirements when considering their portfolio as a whole.

All of these events discussed have different tax implications for individual investors. For example, cash dividends are usually considered taxable income in the year they are received. In South Africa, investors are charged dividend withholding tax on cash and stock dividends received.

In the case of a merger, if you receive shares from the acquiring company in exchange for your shares in the target company, you might face capital gains tax. It is important to consult tax professionals to understand the specific tax consequences of corporate actions when they occur.

Corporate actions can significantly impact a company’s prospects and share price, so investors should seek guidance from a financial adviser on how to interpret a corporate action in the context of the strategic focus of the company, and what it will mean for their portfolio returns going forward. An adviser can also guide where there is an elective corporate action and when clients are unsure whether the best option for your portfolio is cash or shares.

Last but not least, it is important to also consult a tax professional on the implications of certain corporate transactions, as these could be material.

31 July 2024

INVESTING

Tech fusion: The future of investing

BY RUPERT HARE Head of Multi-Asset at Prescient Investment Management

IMAGES: Shutterstock.com

R

ecently, the Prescient Balanced Fund celebrated two significant milestones as it passed the 10year track record and R5bn in Assets Under Management (AUM). These achievements give us an opportunity to reflect on where we have come from and where we believe the asset management industry is headed.

This question of what the asset management business of the future will look like is something that we think about extensively, and it informs our strategy and interaction with our clients.

If we look into the future, we believe there is significant disruption coming in the South African asset management industry. It will no longer be a case where advisers will simply look at the top 5 biggest funds across asset classes and rotate between them.

Our departure point is that the concept of a personality-driven – or in some cases a cult personalitydriven – asset managers with star fund managers is not sustainable in the South African context. Going forward, as investors switch from the narrative to the numbers, there will be other drivers of success in the broader savings and investment landscape.

The first is technology. It is fascinating to watch the dynamic in the market currently, where you will see a number of active asset managers looking at the investment universe and talking about the economic potential that Artificial Intelligence (AI) will unlock.

Yet, at the same time, they continue

to depend on individuals to make discretionary investment decisions and have chronically under-invested in their technology capabilities.

If we look at our business, we currently employ 25 programmers, and they are constantly refining an investment process, which handles 120 million different data points to distil down to investment decisions.

Does it work? Well, if we consider that we are now closing in on the top 10 biggest managers in the country, we believe so. A key driver of our outperformance was that we were one of the early asset managers to push the offshore allocation – this wasn’t done because an individual portfolio manager thought offshore might trump domestic markets. Rather, this decision was taken because it mathematically made sense and we are not tied to any narrative.

This segues into the discussion around the type of people that asset managers should be hiring. It is interesting that very few of the asset managers are actively investing in quantitative analyst skills – something we believe is critical if you plan to run a technology-led asset management business.

Many people would be surprised to know that our investment teams are larger than many of the top 5 by AUM. The immediate rebuttal may be that all this brain power must surely be a cost that is being passed on to the investor, something which

“It will no longer be a case where advisers will simply look at the top 5 biggest funds across asset classes and rotate between them” will ultimately impact long-term investment performance.

The answer is the opposite. The key difference is that while other investment houses may have a similar team size, they rely heavily on sell-side research to build on their investment theses, which adds additional costs. At Prescient, we run all our research internally – preferring to build and test common investment theories often taken as a given by other industry players. We test concepts like “is a low PE ratio good for equity returns?”

Through our investments in technology and highly skilled analysts, we can extract efficiencies that we can pass on to the client. The evidence is in the public domain. If we look at the Prescient Balanced Fund, we can charge a Management Fee of 0.3%, incur Total Expense Ratio of 0.53% and a Total Investment Charge of 0.57%. This is a fraction of many of the other balanced funds and our actively managed peers.

Human nature is intriguing. We feel reassured that our money is being managed by one of the well-known industry experts we see being featured in the business media. Rightly so – our

investments, savings and retirement are all emotional subjects, and we want to know that the best is giving us the best chance to meet our financial goals.

Initially the idea that you are entrusting your wealth to a technology-driven environment will run counter to these emotions, but it is important to make a distinction here. While technology helps us to drive efficiency, people still play an important role in the relationship around your money management. One of the key criticisms from Independent Financial Advisors (IFAs) is that they get very little facetime with portfolio managers – the difference when your investment team is not centred around an individual is that you are able to present as a team, which allows you more opportunities to engage IFAs and understand client needs.

As a business, we believe our early adoption of technology has given us a 10-year head start over many of our peers. We are constantly asking ourselves: “What about the next 10 years?” – and if we look at the asset management industry, we see significant changes coming for those who do not embrace the shifting market.

www.moneymarketing.co.za

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31 July 2024

INSURANCE

Sanlam’s claims stats reveal fascinating trends for women and youth

S

anlam recently released its claim statistics for 2023, showing it paid out R10.7bn in claims across both Sanlam Group Risk and Sanlam Risk and Savings. Sanlam Risk and Savings paid over R6bn for claims, amounting to R18m in payouts every working day.

Furthermore, 67% of sickness and disability income claims were paid to clients under 45, highlighting a significant trend in the needs of younger clients.

This was one of the trends explored in depth in the Sanlam Risk and Savings division’s webinar on Individual Life Claims.

Key highlights from Sanlam Risk and Savings 2023 claim statistics: • Total claims paid: Claims came to over R6bn.

• Death claims: 99% of all submitted death claims were paid, with the largest individual claim amounting to over R36m. The oldest deceased claim was for a 109-year-old, and the youngest was for a 1-year-old.

• Younger clients: A significant portion of claims were paid to younger clients, with 67% of sickness and disability income claims paid to clients under 45.

• Five-year trend: Covid-19 caused a clear spike in claims, starting in 2020 and peaking in 2021. In 2022 and 2023, Sanlam continued to pay some claims for Covid-19 and saw a slight elevation in other respiratory claims.

• The big four: Across all Sanlam benefits, cardiovascular incidents were the biggest cause of claims at 18%; followed by cancer at 15%; then respiratory illnesses at 12%; and accidents, violence, and injury at 12%.

These four accounted for 57% of all claims paid.

AND DR MARION MORKEL Sanlam’s Chief Medical Officer

Cardiovascular severe illness claims are on an accelerating trend for men but remained relatively constant for women.

The Heart and Stroke Foundation of South Africa says one in three males will have a cardiac event before they die; for women, this is one in four. Younger women have marginal protection due to their hormones, which decreases when menopause is reached.

Men also experienced an increasing trend of severe illness claims for cancer; primarily for prostate cancer, which is highly treatable with an early diagnosis, and for melanomas.

most. We encourage people to start talking more openly about risk cover and the way they’re choosing to protect the people they love. By having these courageous conversations, we can help amplify awareness around the need for policies to help people have the right support for when unthinkable, costly life curveballs happen.

“Young people, especially, often think they are invincible, but our statistics show a significant number of claims come from clients under 45. It is crucial for younger individuals to have appropriate cover, such as income protection and severe illness insurance, to safeguard their financial futures.”

Focus on female clients The 2023 claim statistics highlight the specific risk cover needs of women, emphasising the importance of tailored insurance solutions to address their unique challenges and life circumstances. Here are some of the key trends to emerge: 1. Cancer coverage: Cancer remained a significant cause of severe illness claims among women, with breast cancer being the most prevalent.

This underscores the critical need for women to have cancer cover to ensure financial support during treatment and recovery. Colon and cervical cancer are also common cancers in women.

2. An increase in accidents: Interestingly, there was a marked increase in sickness income claims for accidents

Delving deeper into the heart of the problem For the last two decades, the rise in cardiovascular diseases has been flagged. Dr Marion Morkel, Sanlam’s Chief Medical Officer, says this is clearly linked to lifestyle diseases and was magnified by the extra mortality burden of the pandemic. “We continue to fail to address the key causes of diseases of lifestyle, so, sadly, we’re likely to see cardiovascular incidents exponentially increase in the future. Obesity remains a major challenge in our country, with Type II diabetes linked to this.”

Petrie Marx, Product Actuary at Sanlam Risk and Savings, says, “Sanlam recognises that behind every claim is a name, a story and a family. Sanlam remains steadfastly committed to helping move lives forward financially by paying on our promise when it matters the

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“67% of sickness and disability income claims were paid to clients under 45, highlighting a significant trend in the needs of younger clients”

and injuries from female clients, a significant number of which came from individuals aged 26 to 45. Sanlam will be watching this closely to see if it’s an anomaly or sustained trend.

3. Complications in pregnancy: In 2023, Sanlam paid R5.5m for C-sections as part of its cover for pregnancy complications under the sickness income benefit. Payment for pregnancy complications under its sickness income benefit have been increasing annually. Globally and in South Africa, C-sections are increasing because pregnancy complications are on the rise, linked primarily to diseases of lifestyle. Dr Morkel says, “Obesity, hypertension and Type II diabetes are starting earlier. These conditions are magnified by pregnancy. We’re also seeing women have first pregnancies later in life, which can bring more complications and cause obstetricians to opt for caesarean sections.”

Risk incidents among younger clients A notable trend in the 2023 claim statistics is the prevalence of claims among younger clients, particularly in the areas of sickness and income protection: 1. 62% of disability claims came from people younger than 55, in their prime working years; for females, this sits higher at 70%. Two-thirds of sickness and disability income claims came from individuals younger than 45. Additionally, more than half of all severe illness claims (57%) were for clients younger than 55; for women this was 70%.

2. In young people, the biggest claim events are for cancer, cardiovascular disease, and trauma and injuries.

3. People are living for longer, which means by the time an individual reaches old age, they’re likely to have already experienced two to three lifechanging events. This underscores the need for cover early on.

The question of Covid-19 Dr Morkel says that claims for Covid-19linked deaths have come right down, now only impacting individuals that are elderly or immunocompromised. However, there’s been a rise in pneumonias linked to influenza and respiratory syncytial virus (RSV). This has caused an increase in hospitalisation claims, which mirrors global trends. “Covid-19 is still here but competing with influenza and RSV. So, we’re seeing the effect of these combined.”

Marx concludes, “Sanlam remains committed to our claims philosophy, ensuring clients have the right cover for their needs and providing financial security across generations.”

IMAGES: Shutterstock.com

BY PETRIE MARX Product Actuary at Sanlam Risk and Savings

31 July 2024

INSURANCE

The future of insurance in Africa

BY JO-ANN POHL Associate Director for Kearney

P

resently, the insurance industry stands at a pivotal juncture marked by prominent shifts in the environmental, economic, societal and technological landscapes. These transformations highlight both challenges and opportunities that demand careful consideration and a strategic response. To adapt to the current circumstances and secure the longevity of their businesses, insurers must move beyond being resilient to being disruptive.

Jo-Ann Pohl, Associate Director for Kearney, says, “The creation of lasting value through the reimagination of strategic and operating fundamentals, alongside the vision of ‘a future that works for everyone‘ through active commitment to society and the natural world is required – a concept we refer to as regeneration.”

Kearney’s report The State of Africa’s Insurance Industry 2024, explores the multifaceted influences on the insurance value chain, emphasising the immediate need for a regenerative mindset and

strategy that normalises ongoing, systemic changes.

With a dedicated focus on Africa, the report underscores the significance of four pivotal trends driving transformation in the insurance landscape: environmental factors, political and economic dynamics, societal shifts, and technological advancements. The race towards climate change adaptation and the uncertainty surrounding the trajectory of clean energy adoption exert significant environmental pressures on insurers, who must simultaneously strive to maintain competitiveness and resilience to disruptions while navigating a shifting risk landscape. A key challenge in this regard lies in securing the technical balance in underwriting.

From a political standpoint, a multitude of economic crises have exacerbated global poverty and inequality in recent years, with escalating inflation and interest rates posing substantial challenges for insurers. Nonetheless, Africa is anticipated to experience the second-highest growth rate

among major global regions in 2024.

Consequently, capitalising on this growth and sustaining profitability emerges as a primary focus for insurance entities.

With Africa boasting the youngest population globally, the region stands poised for substantial expansion, provided it can cultivate a robust, resilient economy that acknowledges the imperative of promoting sustainability.

In addition to facing growing pressure from the international community regarding sustainability, the steady increase in intra-African migration and immigration escalates the demand for new types of insurance. With Africa’s insurance sector primarily being fuelled by economic expansion rather than a significant increase in market penetration, the need for practical action to drive regenerative transformation is evident.

The advent of transformative technologies such as self-driving vehicles, artificial intelligence, quantum computing, genetic manipulation, and digital currencies engenders profound implications for insurers' commercial and

operational frameworks, fundamentally altering their modus operandi and business strategies.

“Regenerate is the answer to ‘what’s next’ in a post-resilience world. Optimising got many companies where they are today, but regenerating will move them forward. With a focus not limited to resilience but anchored in regeneration, adaptability and the ability to act as ecosystem orchestrators, insurers are encouraged to embrace these golden rules as they navigate the uncertainties of the next decade and beyond,” says Pohl.

The report offers a thought-provoking analysis of the current African insurance market, addressing both challenges and opportunities. It yields actionable insights and a strategic framework aimed at enabling insurers to not only survive but thrive in this era of profound transformation.

For the full report, go to https://www. kearney.com/industry/financialservices/article/the-state-of-globalinsurance-in-2024

Explosive growth in kidnap for ransom in South Africa

BY RICHARD HOOD CEO of OLEA South Africa

W

hen the South African Police Service (SAPS) reports 51 cases of kidnapping for ransom in three months in South Africa, it has become a catastrophic problem. SAPS reported a shocking 4 577 cases of kidnapping for ransom during the third quarter of 2023.

There are only six countries in the world that have higher kidnapping and ransom incidents than South Africa.

Currently, the epicentre of the kidnapping crisis is the Gauteng province, with more than half of the total cases so far having been reported from the province (7 818 annually). Gangs are now expanding to other parts of the country in search of new targets. At the beginning of March 2024, Nelson Mandela Bay in the Eastern Cape was identified as a hotspot.

Four days later, businessman Neal Ah-Tow was abducted from his shop and a R27m price tag was placed on his life. Mercifully, he was released unharmed two weeks later, albeit physically assaulted and traumatised, without a ransom being paid.

The financial and psychological implications of a kidnapping can be staggering. Ransom demands can run into millions.

There’s also the newly coined concept

of ‘express’ kidnapping, which involves criminal groups who kidnap and force people to withdraw the maximum amount allowed from ATMs or make them open their banking apps to EFT funds. The kidnapping often ends when the victim can no longer withdraw money. But not always.

It is no longer just high-net-worth individuals (HNWIs) who are the target.

Risk is determined by an individual’s location, community or nationality, vulnerability, and type of employment or business. But everyone is a potential target. Kidnappers change the ransom demands according to what they think the victim, or their families, can afford.

Professional syndicates focus on smooth transactions and victims suffer less. However, copycat counterparts are more violent. The Institute for Security Studies (ISS) reported in 2023 that the main reasons for kidnappings are ransom, human trafficking and extortion.

While kidnapping for ransom makes up only 5% of the criminal cases in South Africa, it still works out to around two people being kidnapped for ransom per day.

Now, more than ever, companies and individuals need to proactively manage

their kidnap risk and exposure by taking out specialised cover for such an event.

Although there is no way to protect yourself against kidnapping for ransom, there are ways in which you can mitigate the consequences. Cover is available that provides additional protection for a range of expenses associated with a kidnapping incident, and most policies provide assistance services to manage the incident to secure the best possible outcome.

The impact of kidnap for ransom is devastating: • Financial impact: This can be staggering. Ransom demands can run into millions of dollars, and associated costs such as negotiation fees, legal expenses and medical care for victims can escalate.

• Psychological toll: Kidnapping is a traumatic experience not only for the victim but also for their families and loved ones. The emotional and psychological impact may require extensive therapy and support.

• Legal complexity: Dealing with a kidnapping incident involves navigating complex legal and regulatory frameworks, both domestically and

internationally. Having access to legal expertise and resources can be invaluable.

• Comprehensive insurance coverage: For a range of expenses associated with a kidnapping incident, including ransom payments, negotiation costs, medical care, and crisis management services. Having this insurance in place can provide peace of mind and financial protection in the event of an abduction.

• Expert assistance: These professionals can provide guidance and support throughout the ordeal.

• Risk mitigation: In addition to financial protection, many insurance providers offer risk assessment and mitigation services to help individuals and businesses identify and minimise the likelihood of kidnapping incidents.

“The threat of kidnapping in South Africa underscores the importance of having comprehensive insurance coverage tailored to address this specific risk,” says Hood. “Beyond financial protection, such insurance provides access to expert assistance and resources essential for managing and resolving kidnapping incidents effectively.”

www.moneymarketing.co.za

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31 July 2024

RETIREMENT

How divorce may impact occupational retirement fund savings

BY FELICIA HLOPHE Legal Adviser at Allan Gray

T

he Pension Funds Act, read together with the Divorce Act, and Islamic law, provides that the court granting a decree of divorce may make an order that all or part of the pension interest of the spouse who is a member of a retirement fund must be paid by the fund to the non-member spouse. When it comes to occupational funds, the Divorce Act defines “pension interest” as “the benefits to which the member would have been entitled in terms of the rules of the fund if their membership of the fund would have been terminated on the date of the divorce on account of their resignation from their office.”

This means that only active members of an occupational fund have a pension interest in that fund and non-member spouses of paid-up members cannot access any portion of the member’s benefit in the fund.

Once the member and the non-member spouse have agreed on the content of the drafted order or settlement agreement, the court will hand down a divorce order, which includes the allocation of pension interest to the nonmember spouse. For the occupational fund to process the deduction and payment of pension interest, a copy of the final divorce order (and settlement agreement, if applicable) must be forwarded to the fund.

When would a fund be unable to give effect to a divorce order?

1. If the member has terminated employment but has elected to become a paid-up member in the fund; or 2. If the divorce order/settlement agreement does not contain the appropriate wording to enable the fund to make a pension interest deduction; or

3. If the spouses are married out of community of property without accrual and entered into the marriage on or after 1 November 1984.

When would a fund be able to give effect to a divorce order?

1. The member spouse must be an active member of the fund as of the date of divorce; and 2. The wording of the divorce order/settlement agreement is competent; and 3. The parties are married: • In community of property; or • Out of community of property with accrual; or • Out of community of property without accrual and entered into the marriage before 1 November 1984.

Payment options and tax consequences available to the non-member spouse once the divorce order has been approved Once the fund has reviewed the court order and determined that it is appropriate, the non-member spouse must decide how they wish to receive their allocation of the pension interest. The Pension Funds Act offers the non-member spouse two options: either to receive the amount as a cash lump sum, or to transfer the available amount to another approved retirement fund.

KINGJAMESJHB 222658

Pension interest and matrimonial property regimes A member’s matrimonial property regime determines whether the non-member spouse can claim pension interest from their fund. In South Africa there are three different regimes: marriage in community of property; marriage out of community of property without accrual; and marriage out of community of property with accrual. It is important for intended spouses to consult with a lawyer and financial adviser to determine which matrimonial property regime is best suited for their needs.

The divorce order process Before going to court, the member may approach their occupational fund with a request for information, which can be both, or either, of the following: 1. Checking the wording used in the drafted order or settlement agreement to determine whether it is appropriate, and that the occupational fund would be permitted to give effect to an order in those terms.

2. Calculation of the possible pension interest value (for information purposes only).

The Allan Gray Umbrella Fund.

Fundamentally different.

We may not be the first company that comes to mind when you think of umbrella funds, but that is exactly why you should speak to us. Over the past five decades, we have built our reputation by designing simple and transparent products that meet our clients’ investment needs.

Our Umbrella Fund is no different. It is everything you’ve come to expect from Allan Gray.

To find out more about our Umbrella Fund, visit www.allangray.co.za, call Allan Gray on 0860 000 870 or speak to your financial adviser.

The Allan Gray Umbrella Retirement Fund (comprising the Allan Gray Umbrella Pension Fund and Allan Gray Umbrella Provident Fund) is administered by Allan Gray Investment Services (Pty) Ltd, an authorised administrative financial services provider and approved pension funds administrator. Allan Gray (Pty) Ltd, also an authorised financial services provider, is the sponsor of the Allan Gray Umbrella Retirement Fund.

28222658_Umbrella www.moneymarketing.co.za Fund_2023_The AG Umbrella Fund_155x220.indd 1

2024/05/23 11:34

31 July 2024

RETIREMENT

Advisers urged to highlight risks of two-pot system to over-55s

BY KEITH PETER Advice Manager at Old Mutual Personal Finance

W

ith introduction of the Two-Pot Retirement System due on 1 September 2024, financial advisers are gearing up for significant changes to retirement savings. However, the new system, which allows for more flexible access to retirement funds, demands careful consideration, especially for customers aged 55 and over.

It’s important for older fund members to be cautious. Introducing the two-pot system is a pivotal moment for individuals over 55. With only a few short years until retirement, they must carefully manage their contributions to secure a stable financial future.

The system divides retirement contributions into two pots: one-third for savings that can be accessed before retirement and another for funds only accessible at retirement. The Two-Pot Retirement System provides specific provisions for individuals who were 55 years old as at 1 March 2021, and members of the same provident fund.

From 1 September this year, these individuals can choose to remain under their current system, which allows for a 100% cash withdrawal of all funds saved before 1 March 2021 when they retire.

Alternatively, they can opt for the new system, which could provide better tax efficiency and income stability.

It’s crucial that advisers comprehensively understand their customers’ needs and encourage them to make informed decisions.

Withdrawals only for emergencies Whatever option the customer chooses, we advise against premature withdrawals from the savings pot, because of the tax implications and the potential reduction in retirement income. Accessing funds early could lead to a significant tax burden, as withdrawals will be taxed at the marginal rate, whereas funds accessed upon retirement receive more favourable tax treatment under the retirement tax tables.

They will also miss out on the power of compound growth on the funds in the savings pot.

Consider a 55-year-old customer planning to retire at 60 with a current pension fund valued at R1 000 000 as of the 31 August 2024. The customer’s monthly pension contributions total R6 000, or R72 000 annually, with R2 000 (R24 000 annually) allocated to the savings pot and R4 000 (R48 000 annually) to the retirement pot. We will factor in a 6% annual contribution increase and an 8% growth rate for the pension fund.

On 1 September 2024, the customer’s savings pot will hold R30 000, the lesser of R30 000 or 10% of the total pension

fund value. Consequently, the vested pot, representing the remaining balance after the savings pot allocation, will be R970 000 (R1 000 000 minus R30 000).

If the customer withdraws from the savings pot annually, including the initial seeding capital, the total value of the retirement fund at age 60 will be R1 765 066. If the customer does not withdraw from the savings pot, including the seeding capital, the total value of the retirement fund at age 60 will be R1 979 023 – a difference of over R200 000.

Consistency is the key Financial advisers should emphasise stability and adherence to their customers’ established financial plans when guiding them through the Two-Pot Retirement System. Often, the best approach is to maintain their current strategy and avoid prematurely accessing the savings pot.

This helps safeguard the capital they have accrued over their working lives. Financial advisers should review customers’ plans annually, adjusting only as needed to address any shortfalls while continuing to invest in conservative to moderate funds. This strategy ensures that the investment growth remains steady, albeit not explosively high, thus securing the necessary funds for a comfortable retirement.

Furthermore, each customer’s unique circumstances – such as their specific financial needs, aspirations and retirement goals – should dictate tailored advice, ensuring that advisers provide personalised and practical guidance through the intricacies of the new retirement system.

Resources and continuing education for advisers The new system presents both challenges and opportunities. For advisers, this is a chance to deepen customer relationships and improve financial outcomes for retirees. Ample resources are available to support financial advisers through the transition to the Two-Pot Retirement System.

Extensive information is provided by fund administrators, insurance companies and asset management firms, and continuous education through webinars and updated resources are recommended.

Advisers can access detailed information by searching "Two-Pot Retirement System" online, and platforms like the National Treasury and SARS offer valuable FAQs and documents.

Additionally, industry bodies such as the Financial Planning Institute and the Association for Savings and Investments South Africa (ASISA) provide further educational opportunities.

Five things to know before you withdraw your savings under the new two-pot system

W

hile experts continue to debate the merits of the two-pot system, it has been almost a week since it has been signed into law.

The reality is that as from 1 September 2024, many South Africans will start withdrawing from their savings pot under the new system.

In this article we provide five key considerations that fund members must be aware of before making a withdrawal.

1. Seed capital and withdrawal limits On 31 August 2024, 10% of the value of your existing retirement fund, or R30 000, whichever is lower, will be allocated to your savings pot. This initial allocation of funds has been termed seeding capital.

The seeding capital allocation is a onceoff transfer at the commencement of the two-pot system and will not be repeated in the following years.

The savings pot will be accessible at any time to a fund member with only one

withdrawal permitted in a tax year. There is no maximum withdrawal amount set for fund members looking to withdraw from their savings pot, but it must be a minimum of R2 000.

2. SARS has the first right to your savings pot withdrawals Fund members need to be aware that before any payment will be released, the fund administrator will need to apply to SARS for a tax directive. Where the taxpayer has an outstanding tax debt with SARS, the fund administrator will be issued with a notice to pay this debt from the withdrawal amount first and only pay the taxpayer the balance.

3. Annual withdrawals are NOT limited to a single policy per tax year Another dimension of the savings pot is that a fund member is permitted to make one annual withdrawal per policy.

This incentivises the concept of having a more diverse policy portfolio.

An example of this scenario is where an individual is contributing to three policies, the fund member would be eligible to make an annual withdrawal from each respective policy. A fund member will be limited to the actual amount that is held within their savings pot at the time of withdrawal.

4. Tax on savings A withdrawal from a fund member's savings pot will be subject to tax at the fund member’s marginal tax rate.

This means that any withdrawal will be taxed in the same manner as a salary or other similar income. The tax on the withdrawals will be withheld by the respective fund administrator and paid directly over to SARS. 5. No resignation required Fund members must be aware that

the new system has limited their right to withdraw from their 2/3 retirement pot. Previously, fund members were permitted to access their total lump sum amount under their retirement policy upon a resignation. The new two-pot system implements a lock-in of the retirement pot until a fund member reaches retirement.

The takeaway for fund members We can expect to see fund administrators send out communications to their members on how savings withdrawal claims will be processed going forward.

We urge fund members to consider the practical implications relating to their withdrawals from their savings pot, most importantly the tax implications.

An impulsive withdrawal without understanding the implications could lead to far more harm than the relief afforded by accessing those funds.

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29

RETIREMENT

Resist the urge to access retirement annuity savings unnecessarily

31 July 2024

BY PIETER KOEKEMOER Head of Personal Investments at Coronation

F

or the first time, RA investors will have early access through an annual withdrawal option when the twopot retirement system comes into effect in September this year. While the catalyst for allowing early access to one’s retirement savings was the economic hardship caused by the Covid-era lockdowns, utilising this option will be costly. It should ideally be reserved for periods of genuine financial hardship. We urge investors to ensure they understand the implications of early access.

RAs have technically been a two-pot system already Investors retiring from their RAs have technically become accustomed to two separate pots in their retirement plans already. This is because when you retire from your RA (at the age of 55 or later), you have the option to take one-third of your accumulated savings in cash (think of it as your lump sum pot), while the remaining two-thirds must be used to buy a regular retirement income such as a guaranteed or living annuity (your retirement income pot).

What changes for RA investors under the twopot reform?

The two-pot reform formalises this ‘split’ of your retirement plan into separate pots by somewhat confusingly introducing three formal components into RA investors’ accounts: • A vested pot (representing most of your RA fund value at the time of implementation) • A retirement lump sum pot • A retirement income pot.

Exercising your access option is tax-disadvantaged If clients wait until retirement (i.e. any time after 55 for RA investors) before withdrawing their money, the preferential retirement lump sum tax tables will apply.

However, if they withdraw early, the more punitive marginal tax rates will be deducted from the withdrawal. This can significantly impact retirement.

Let’s assume the annual taxable income is R240 000. Whatever withdrawal made from a client’s savings pot will be taxed at a rate of at least 26%, or more than a quarter of the money accessed. This compares to zero tax on the first R550 000 lump sum withdrawn at retirement age. The principle also holds at the higher end of the income scale. For a R10m lump sum withdrawal at retirement, the effective tax rate will be 33% compared to the early withdrawal rate of 45%, assuming the client earns more than R1.8m in that tax year. This is a 12-percentage point difference in tax payable.

Early access is borrowing from your future self Withdrawing early effectively means your client is borrowing from their future self over a fixed term at the expected rate of return on an RA investment. To illustrate this, let’s assume you are 35 years old and intend to retire at age 65.

Any R1 accessed through an early withdrawal may cost R30 in lost retirement benefits at the time of retirement. In other words, by resisting the urge to access savings early, your client’s money could have multiplied by a factor of 30 over the three decades until retirement. While the numbers become less dramatic when you shorten the period between early access and retirement, they remain retirement-defining.

Even for an individual making an early withdrawal 10 years before their intended retirement date, it would still cost them R3 in lost retirement benefits for every R1 taken out early.

The bottom line A single decade of missed compounding means that your client has effectively halved the purchasing power of the money taken out as part of their early withdrawal. The bottom line is that to avoid a significantly reduced standard of living in retirement, clients must resist the temptation to make regular early withdrawals to fund discretionary spending today. By not accessing retirement savings early, they allow the powerful effect of compound growth to work to their full advantage.

IMAGES: Shutterstock.com

As of 1 September 2024, we will split all RA accounts into these three components in all the reporting that we make available to clients.

The most significant change under the new system is that clients will be allowed one annual early withdrawal from their retirement lump sum pot (or savings pot as it is called in the legislation). The value in the savings pot will initially be seeded by R30 000 or 10% of the fund value at implementation (whichever is the lowest), transferred from the vested pot. One-third of future contributions (from 1 September) will also be allocated to this savings pot.

The following table shows the allocation of vested savings and future contributions from 1 September 2024.

An option but not an obligation Once every year, clients will be able to access the entire balance available in the savings pot, but they don’t have to exercise this option.

The significant change is that, in future, clients will have the option, but not the obligation, to make one annual withdrawal from the entire balance in their savings pot. It’s vital to understand that this new liquidity option comes with an important health warning. Early access is costly and can seriously reduce a client’s standard of living in retirement. They are effectively borrowing money from their future self over a fixed term, and will essentially lose the tax benefits received from the government when they contributed towards your RA.

30

www.moneymarketing.co.za

31 July 2024

HEALTH INSURANCE SECTION

Medical schemes’ new financial reporting standards

BY CRAIG COMRIE Chairperson of the Health Funders Association (HFA)

“For medical scheme members, these changes make no difference to the way their funds and benefits are managed”

M

edical schemes in South Africa have adopted the new International Financial Reporting Standards (IFRS) 17, aligning with regulatory guidance. While this changes the reporting terminology, it won’t affect medical scheme members or the way their funds are managed.

“The move from IFRS 4 to IFRS 17 is aimed at making the financial information of insurers – including entities that offer insurance-type products such as medical schemes – more easily comparable across countries and industries offering a broad range of cover,” explains Craig Comrie, Chairperson of the Health Funders Association (HFA).

“For medical scheme members, these changes make no difference to the way

their funds and benefits are managed, and it is important to understand that medical schemes will continue to operate on a not-for-profit basis.

“Also, the fiduciary obligations of medical scheme trustees to manage these funds for the benefit of medical scheme members remain firmly in place, as do the social solidarity principles that underpin how medical schemes operate. The disclosures of surpluses and/or deficits are no longer visible in the new disclosure requirements where medical schemes are regarded as mutual funds, as any retained surpluses belong to the members of a scheme,” Comrie points out.

“In IFRS 17 terms, medical schemes’ contractual agreements with members are providing insurance cover for healthcare

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costs, as contained in their rules and as regulated by the Council for Medical Schemes [CMS] under the Medical Schemes Act, just as before,” he says.

“Although the international financial accounting language describes the service medical schemes provide in insurance terms, these semantics do not have any bearing on the way health cover is managed or on the medical scheme members’ experience.”

The HFA, a professional body representing medical schemes in South Africa, provides a basic summary of the updated aspects and terminology to assist the public in better understanding the industry’s annual reports.

Under the new IFRS 17 terminology, medical schemes’ reserves are reported as ‘insurance liability to future members’, and the HFA emphasises that this does not affect the financial sustainability or solvency of the medical schemes.

“Although it is now reported as a liability, this describes the scheme’s accumulated surplus funds in line with regulatory obligations to ensure additional protection

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in the event of extraordinary costs, such as the Covid-19 pandemic,” Comrie says.

• Reporting on risk aggregation is now at the overall scheme level, reflecting total membership as standard.

• Personal Medical Savings Accounts (PMSAs) are no longer reported separately on the Statement of Financial Position and are now included as ‘insurance contract liabilities’.

• The line items incurred but not yet reported (IBNR) and outstanding claims provision are replaced with ‘liability for incurred claims’ (LIC).

• Contribution income will, from now on, be shown as ‘insurance revenue’.

• Members and advisors will also note that relevant healthcare expenditure is now reported as ‘insurance service expenses’, and similarly, net healthcare result will from now on be referred to as ‘insurance service result’.

“The language may take some getting used to for healthcare consumers and reminds every member that they effectively own the scheme they belong to. The new phrases will not impact the financial soundness or position of medical schemes and, most importantly, there are no changes affecting the rights or benefits of medical scheme members, which are defined in each scheme’s rules and the Medical Scheme Act.”

CONTACT FELICITY GARBERS Email: felicity.garbers@newmedia.co.za Tel: +27 (0)78 758 6227

Johannesburg Office: New Media, a division of Media24 (Pty) Ltd, Ground Floor, 272 Pretoria Avenue, Randburg, 2194 Postal Address: PO Box 784698, Sandton, Johannesburg, 2146 Cape Town Head Office: New Media, a division of Media24 (Pty) Ltd, 8th Floor, Media24 Centre, 40 Heerengracht, Cape Town, 8001 | Postal Address: PO Box 440, Green Point, Cape Town, 8051 Tel: +27 (0)21 406 2002 | newmedia@newmedia.co.za

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

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