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30 November 2021
BY JANICE ROBERTS Editor: MoneyMarketing
A
s South Africa journeys into a post-pandemic world, the nature of financial advice is changing, with the greatest shift involving technology and how it is enhancing the practices of financial planners – radically changing the way they connect and communicate. That’s just one of the messages that two advisers brought to this year’s Morningstar Investment Conference. Quinton Ralph,
First for the professional personal financial adviser
MD of Resolute Wealth Management, and Robert Adshade, Founder of Alchemy Financial Solutions, were in conversation with Debra Slabber, portfolio specialist at Morningstar Investment Management South Africa, to outline how they’re adapting their practices as the ‘new normal’ takes hold. Prior to the pandemic, Ralph, who describes himself as “very old school”, was used to regular face-to-face client meetings. “During COVID-19, I was forced to use Zoom and Microsoft Teams, and it’s changed our business considerably,” he told the conference. “It’s nice to see that clients have opted for Zoom meetings, but I’d still like to have at least one physical meeting a year with a client, and possibly one Zoom meeting.”
“A big part of our work involves creative thinking, and while robo-advice has its place, it’s certainly not in creative thinking”
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The changing nature of financial advice
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Quinton Ralph, MD, Resolute Wealth Management
Adshade has been working from his home office for at least three days of the week for the last 15 years, so the pandemic has had less of an impact on his advice practice, although his Zoom meetings have grown in number, “and face-to-face meetings have become more informal, and more of a relationship-building
process as opposed to business as such”, he stated. Both Adshade and Ralph are using the DocuSign digital transaction platform that allows them to send, sign and manage legally binding documents securely in the cloud. Ralph’s practice has been communicating through monthly newsletters, which include general financial planning information and market updates. In the past, he’d held client-facing presentations featuring guest presenters but has now opted for webinars. “We’ve even brought in a political analyst, and we’ve found that our clients love the webinars – and it’s not always just the content, as clients like the fact that you’re engaging with them. Webinars have definitely worked well for us.” Robo-advice vs traditional financial planning Neither of the two advisers see robo-advice as a threat to their business. Adshade, who entered the financial planning industry in 1993, co-founding Alchemy Financial Solutions in 1997, explained that the practice’s financial planning solutions are specific for each client. “It’s very difficult to put any clients in boxes. There’s no software that we can plug them into; we work with a blank canvas, structuring a unique financial plan for each client. A big part of our work involves creative thinking, and while roboadvice has its place, it’s certainly not in creative thinking.”
Continued on page 3
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30 November 2021
NEWS & OPINION
Continued from page 1 He added that he thrives on dealing with human beings “and clients enjoy dealing with us, so there’s huge value attached to the trust relationship, and that is at the centre of our business”. Ralph, who joined the industry in 1997 and founded Resolute Wealth Management in 2004, similarly believes that people like to buy financial planning products from other people. “No-one wants to make mistakes and people typically like reassurance. They need positive affirmation that they’re making the right decisions, especially when it comes to their lifelong financial planning needs.” Keeping emotions in check Both advisers have their own unique way of managing their emotions – and those of clients’ – during periods of market volatility and negative news flow. According to Adshade, this has become easier with age. “Over the years we’ve built up a team of advisers. Each one of us deals with the same type of stress, and none of us work by ourselves,” he told the conference. “We hold team meetings every week where we offload our thoughts, and these can be directly related to the industry,
Robert Adshade, Founder, Alchemy Financial Solutions
or they can be outside the industry. My adviser team is definitely part of my sanity, we’re work colleagues and we’re also friends; and if you have that kind of calmness in your practice, it flows over to your clients,” he said. Ralph has been giving what he calls “the same good financial advice” to clients “year in and year out”. What has been noticeable is that over time, his clients’ reactions to market pullbacks have changed. “When I started my career in the late nineties, I’d have clients phoning me if there was a market drawdown, but when the COVID crash happened last year, I received only a handful of telephone calls. When you’ve been giving clients advice for years, they know that it’s the correct advice and they’re calm and patient.” He does, however, find the current domestic political environment challenging. “You tell clients to ignore sensational headlines, but that’s even hard for us as advisers because we’re trying to plan our future as well as the future of our clients. It’s hard not to be drawn into the political side of what is happening in the country, to rather see the bigger picture.” Discretionary fund management Both advisers use Morningstar’s discretionary fund management (DFM) expertise, with Ralph’s practice adopting model portfolios about ten years ago that, he believes, unquestionably transformed the business, enabling him to run a bigger practice with more clients. “We’ve got seven advisers and a paraplanner to ensure that everybody is giving the same, consistent advice. But I think efficiencies are just amazing when run by professional people, and the returns we’ve had out of the portfolios have really been a game changer for us.” Adshade’s use of a DFM came about five years ago after his practice carried out its own due diligence on DFMs, by creating a 16-point questionnaire for its advisers of components important to them as a business. “Every practice has different factors that are important
to it, and for us some of these are independence, values and key person risk. We rated all the DFMs in a process that took us about six months, with Morningstar coming out favourable.” His motivation for bringing a DFM into his practice was initially to unify the investment process. “If I reflect back now, there are so many other factors to a DFM I didn’t expect that make the business so much better. It’s definitely professionalised our investment process. Prior to bringing in a DFM, we were doing a very good job, dedicating one day a week to due diligence and research. The DFM capability has upped this to another level, increasing our research capability enormously. We’re surrounded by a phenomenal team of people that we can lean on at any particular time.” Ralph explained that although he was concerned about costs when he first considered using a DFM, fees have come down. “I think that’s one of the benefits – if you partner with the right DFM who can negotiate on your behalf, it’s a collective, so the pricing is great.” He believes that the industry has changed, “The typical adviser fees have dropped, the LISP platform fees have dropped, and the DFM actually holds the asset management companies to account and negotiates on our behalf.” For Adshade, the issue of costs was also initially a concern, “but now what’s bizarre is that every client we moved across is paying less in terms of costs,” he added. A closer adviser community When considering the financial planning industry as it presently stands, Adshade wishes that a closer adviser community could be created, “I definitely don’t see Quinton [Ralph] as a competitor but rather as a colleague, and I see how generous he is with his knowledge.” Ralph also believes that likeminded advisers, particularly IFAs, should hold forums to share information. “We, as independents, don’t really get an opportunity to engage, and more so lately, due to the pandemic,” he added.
EDITOR’S NOTE
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slew of virtual conferences has taken place this year in the investment, insurance and financial planning industries – and most have been really informative. I can’t say that I miss leaving my home at the crack of dawn in order to avoid the morning traffic for an in-person conference at the Sandton Convention Centre, or at one of the big hotels in the northern suburbs of Johannesburg. With these conferences, if one missed a presentation, there was very little chance of hearing it again. With digital events, many of the presentations are pre-recorded and then uploaded onto a platform for people who were unable to listen to the talk the moment it debuted. This is extremely helpful to journalists, and while in-person conferences will make SUBSCRIBE a comeback, I can TO OUR certainly say that I’ll miss the digital events. NEWSLETTER bit.ly/2XzZiMV JANICE ROBERTS janice.roberts@newmedia.co.za @MMMagza www.moneymarketing.co.za
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30 November 2021
NEWS & OPINION
PROFILE
Arno Lawrenz Chief Investment Officer, Sasfin Wealth
How did you get involved in financial markets – is it something you always wanted to do? In my (very much) younger days, all I wanted to do was play chess. One of the lessons I learnt from chess is that you can resign or at least propose a draw if you see unhopedfor outcomes. So, by the time I was in high school and my other dream of becoming a pilot seemed increasingly unlikely, I resigned myself to other interests. I had noticed my father poring over the financial pages in newspapers, and having only just become good enough to beat him at chess, I decided to try to beat him at stock-picking as well. That’s where my interest started, and by the time I started university, the bug had bitten to the extent that I realised my passion for investing would be a life-long interest and that my career could be built around that. What was your first investment and do you still have it? My very first investment on the stock market was a long since defunct stock that old-timers would recognise: Gefco (which in today’s ESG-focused world would never pass muster, as it was, horror of horrors, an asbestos company.) But at the time I observed a pattern that it traded at a price between 2c and 6c per share. So, I figured if I bought it at the bottom and sold it at the top of the range, I could enhance my rather limited pocket money budget. I have, of course, moved on from my teenage day-trading career and realised my success at the time was more luck than skill.
“People have realised that there is such a thing as a once-in-100years event”
What have been your best – and worst – financial moments? There are many moments in my career that I feel enormously proud of in terms of making the right decisions for clients invested in the funds I have managed – especially at times of crisis, such as the
Emerging Markets Crisis in 199798, or the Global Financial Crisis in 2008. But one of the moments I feel most proud of at a deeply personal level was a refusal to turn a blind eye and accede to an incident of unethical trading at the company I was working for, and, as this was at a relatively early stage of my career, I had to sacrifice my future prospects there and rather move on in life. That seared into my mind the importance of one’s value system in the investment management process. The worst moment was the realisation that I had sold the company I started to the wrong buyers, as there was a dissonance in the corporate culture and value system. Has the COVID-19 pandemic changed the way we invest? It almost certainly has, as people have realised that there is such a thing as a once-in-100-years event. It has made us so much more aware of the unforecastable Black Swan risk events that we may have thought impossible, but which have enormous impact on markets. So, risk perceptions (and appetite) have shifted. The perception is also growing that the pandemic has accelerated some of the nascent technological trends, so in some sense we have a heightened awareness of risk and yet a desire to also capitalise on market trends that seem increasingly likely to succeed. What’s the best book on investing that you’ve ever read, and why would you recommend it to others? The most influential book I’ve ever read in developing the right mindset for successful investing was Nassim Taleb’s Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets. The essence of the book is that humans don’t really understand probability properly and assign too much or too little probability to events. We often acknowledge life and markets as not being linear, yet we spend too much time extrapolating the past. So, why read a book that makes you look a bit stupid? Simply put, it’s entertaining in that it covers life and not just markets, and it induces an important value into your decisionmaking framework – that of humility, which I believe is one of the most important tools in any investor’s toolkits.
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VERY BRIEFLY Morningstar’s Investment Management Group has announced the appointment of Dan Kemp as Global Chief Investment Officer (CIO). Kemp will be replacing Daniel Needham, who will be transitioning from his position as Global CIO Dan Kemp to focus on leading the business in his role as President of the Investment Management Group. Having joined Morningstar Investment Management Europe in 2014 as Co-Head of Investment Consulting and Portfolio Management EMEA, Kemp was promoted to CIO-EMEA in 2015. He will continue his responsibilities as CIO-EMEA while Morningstar’s Investment Management Group recruits for his replacement. Prior to joining Morningstar Investment Management Europe, Kemp was a founding Partner at Albemarle Street Partners LLP, providing client risk profiling, fund research, portfolio construction and asset allocation. He has also held roles with Williams de Broe, Douglas Deakin Young and Holden Meehan. “Dan is an experienced investor, and his insight and expertise have been integral to the transition to a research-focused investment management team,” says Needham. “Throughout his tenure, he has developed a robust team, producing high-quality research and investment strategies that seek long-term outperformance for the end investor.”
Keillen Ndlovu, Investment Team Head at STANLIB Listed Property, will be leaving the business after a long and successful career there to pursue other interests. Nesi Chetty, a senior portfolio manager in the team, will take over as head Nesi Chetty of the Listed Property Portfolio, ensuring a seamless transition. “All our investment teams are deliberately structured to ensure that there is a depth of skill, talent and experience,” says Mark Lovett, Head of Investments at STANLIB. “Our clients’ listed property investments remain in very capable hands. Nesi and the strong team of analysts will continue to follow the team’s entrenched investment philosophy and process.” Ndlovu started his property career with Standard Bank in 2004, joining STANLIB in 2005. He was appointed head of Listed Property in 2010. Chetty joined the team in 2019 and has since been co-managing the STANLIB local and global listed property funds with Ndlovu. He has more than 20 years’ experience and was head of listed property at Momentum Investments for 10 years prior to joining STANLIB.
30 November 2021
NEWS & OPINION
Cryptos and taxes – why your intention matters BY HERNA-DETTE VAN DER ZANDEN
includes the frequency of transactions, method of funding and reasons for selling.
Junior Associate, AJM Tax
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hose who thought they could bank their crypto profits without SARS noticing are in for a surprise. Crypto assets may be gaining a firmer foothold in the market, increasing opportunities for diversification and growth, but it is important to remember that normal tax rules apply to gains and losses. Anyone taking the leap into the virtual currency world should keep in mind that non-capital amounts are subject to tax at a higher effective rate than capital profits. In the case of natural persons, the maximum effective rate for capital gains is 18% (compared to 45% on revenue gains), companies are taxed at 22.4% (compared to 28%) and trusts at 36% (compared to 45%).
I lost my job and had to sell my cryptos – what now? COVID-19 and the undesired consequences such as job losses is an example of intention changing – you needed to sell to fill the hole in your pocket you simply never expected, or could have prepared for! Where cryptos have been purchased and sold as part of a scheme for profit-making, however, there is no question that gains will be regarded as revenue in nature. An occasional sale of crypto yielding a profit suggests that a person is not a trader engaged in a scheme of profit-making. The “slightest contemplation of a profitable resale” is also not necessarily determinative, but cryptocurrencies sold for a profit very soon after the acquisition is an indication of the potential revenue nature of those profits. However, that measure loses a great deal of its importance when there has been some intervening act, for example a forced sale of the cryptocurrency assets as in the example above.
Whether COVID-19 can constitute such a forced sale, will have to be individually evaluated with reference to each taxpayer’s purpose and their circumstances. How to prevent negative tax outcomes Yes, dear taxpayer, it is entirely possible for you to hold and sell your cryptos, with some people recently making a tidy profit. However, you will need to prove these profits were not revenue in your hands. It is easier said than done, which is why cryptos remain something of an enigma for many investors, as well as a potential tax burden for those banking on fast profits.
“A taxpayer would undoubtfully want their crypto profits classified as capital”
What if I change my intention? A taxpayer would undoubtfully want their crypto profits classified as capital. The million-dollar question is how to convince SARS this is indeed the case. A taxpayer’s intention, both at the stage of purchase and disposal is the most important factor. However, many people acquire cryptocurrencies with mixed intentions (bought partly to sell at a profit and partly to hold as an investment) or they even change their rationale for the purchase later. The dominant or main purpose is paramount, and evidence relating to intention must be tested against the circumstances of each case, which
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30 November 2021
NEWS & OPINION
Finding the right tech/human ratio BY RICHARD RATTUE Managing Director, Compli-Serve SA
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he race to integrate technology (tech) into a business can result in casualties if not handled in the right way. Business owners may wonder as to the correct ratio of human versus tech function, but unfortunately there is no one-size-fits-all – it will very much depend on the nature of what your business offers. But ignoring tech altogether, or falling behind, is just as risky as integrating too much tech. How do you find the balance? We can perhaps look to the principles of ESG for guidance, particularly the ‘Social’ element of this increasingly critical acronym. Arguably to replace too many or all your people with machines or tech isn’t the most socially responsible or ethical course of action, especially when local unemployment is at record highs. There are some areas of the financial services sector that are ripe for tech disruption, but the target demographic level of financial knowledge also needs to be taken into consideration to ensure a fair product is brought to market. An example
might include cost-effective funeral cover. Any position in any industry is vulnerable to tech, but some jobs are less vulnerable than others. A research analyst in an asset management firm is likely to struggle as AI can scan data much faster than a human can. An insurance assessor could scan a car needing an accident assessment in a more accurate and time-efficient way than a machine could, due to the assessor’s experience. Insurance premium calculation, however, is perfect for machine labour. AI could get to the level of performing actuarial
"Arguably, to replace too many or all your people with machines or tech isn’t the most socially responsible or ethical course of action"
duties, replacing some high-level thinking positions. Where a job involves a lot of engagement with people, humans will likely be preferred over machines, hopefully for many years to come. The financial services industry relies heavily on relationships. Technology may be able to produce the product but will rely on the human salesperson to sell – thus, it will be difficult to replace humans in the sales process, particularly in the more sophisticated product mix. Doing business the ‘same old way’ because it feels better, could mean coming up short. If you can repurpose an employee within a more tech-savvy workplace, that is fantastic – but it’s not always that simple, and some jobs will inevitably fall away. If you don’t keep up with technology capabilities in your industry or as your competitors do, you may be out of the game. It is important to make the right upgrades, at the right time, and for the right reasons. The ESG principles should be considered as much as possible, since we all have a responsibility to do the right thing within our stakeholder communities,
and for the wider public. It is also likely that regulators will pay closer attention to ESG practices in times to come. Talking to a voice bot as a first level of support is now standard practice in many firms and a good example of tech integration we have now become familiar with. But this works because you can also speak to a human if you have further queries – and it combines tech and human capacities. If we talk about an overall customer experience, at any such financial institution or otherwise, there should be a human element in the process somewhere, for the best success.
If not a mandatory state pension, then what? BY PETRI GREEFF Head: Investment Advisory, RisCura
Are micro pensions a viable alternative?
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ccording to the Green Paper on Comprehensive Social Security and Retirement Reform, 6.2 million workers, primarily low-income in both the formal and informal sectors, are not covered by private pension schemes. Even though the paper has been withdrawn, the problem hasn’t gone away. The paper proposed reforms to several tiers of the social security system. Proposed reforms to the first tier include the universalisation of the old-age grant, and the introduction of a Basic Income Grant. Reforms to the second tier proposed a state pension scheme, the National Social Security Fund (NSSF) – a defined benefit scheme sponsored by the government, with contributions from all workers under a certain income threshold, which would be used to provide pension and insurance benefits to all. Reforms to the third tier proposed certain standards for current private pension schemes and the introduction of a default state pension scheme. The proposal that
created the most controversy was the NSSF, a mandatory contributory state pension fund. The many challenges facing the proposed NSSF have already been outlined by others. Instead of adding any further comment in this regard, I’d like to propose a viable alternative to the NSSF that should receive serious consideration: decentralised micro pensions. With micro pensions, small amounts of money that informal and formal workers can individually save during their working lives, are invested collectively to not only provide for short-term requirements, but also yield returns in the long term. This design also addresses a growing need of many retirement fund members who need access to part of their retirement savings due to unexpected circumstances,
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and that government is trying to address by retrofitting a two-bucket system onto existing retirement funds. The concept of decentralised micro pensions has successfully been deployed in many frontier and emerging market countries like India, Uganda, Ghana, Nigeria, and the Solomon Islands. The high number of informal workers in Africa is a major factor in the drive to find other social security solutions such as micro pensions. The International Labour Organisation reports that 89% of employment in Sub-Saharan Africa is informal. In Nigeria, according to RisCura’s latest Bright Africa pensions research, the informal sector makes up 90% of the workforce, which precipitated the National Pension Commission to launch a micro pension scheme in 2019. This kind of innovation could be adopted by South Africa, which has a long history of informal savings in the form of stokvels and other savings clubs. We
also have a well-developed investment and pensions industry with the skills and experience to manage short- and longterm savings. Further, our well-developed banking industry has a large digital footprint among both formal and informal workers, which could provide the platform for micro pensions to operate. Our current social problems may seem insurmountable even with the most generous social benefits. The current broken trust relationship between taxpayers and the government suggests that any implementation of social security will be challenging. Private pensions are playing their part in investing in social infrastructure, but that can only get us so far in creating a prosperous and more equal society. The government should consider partnering with the private sector and embracing micro pensions to provide this much-needed social security support to keep our country from sinking further into the abyss of growing inequality and frustration.
“The concept of decentralised micro pensions has successfully been deployed in many frontier and emerging market countries”
Offshore SUPPLEMENT
WHAT’S INSIDE ...
Markets change quickly, investments shouldn’t ‘Our long-term results will ultimately be determined by the performance of individual businesses’ Page 8
An adviser’s guide to winning and managing more offshore assets the right way Offshore investing has some pitfalls that are best avoided Page 12
Will rising inflation spoil the party? The official line has been that the evident price and wage pressures are ‘transitory’ Page 14
Getting to grips with global The debate shouldn’t be about active versus passive, but rather about whether investors are getting value for money Page 16-17
30 November 2021
OFFSHORE SUPPLEMENT
Markets change quickly, investments shouldn’t BY JOHN CHRISTY Investment Counsellor Group, Orbis
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China risk While we have long been mindful of ‘China risk’ in its various forms, the ever-present possibility of regulatory change has now become a certainty. Our job is to rationally assess – and seek out – attractive risk based on research and to remain disciplined during uncomfortable periods. This sounds easy on paper, but never feels that way at the time. Some of the biggest winners in the history of the Orbis Funds – XPO Logistics, NetEase and Samsung Electronics,
International banks – a pocket of value Currently, banks make up about 10% of the Orbis Global Equity portfolio – compared to about 6% of the World Index – with holdings including ING Groep in the Netherlands and Sberbank of Russia. Banks are an even greater overweight in our International and Balanced Strategies.
Variant uncertainty notwithstanding, the demand for loans has picked up as businesses reopen, travel resumes, and people start going back to the office. Having gone into the current pandemic with ample capital buffers as a remnant of the tighter regulation following the global financial crisis, and having created generous default provisions at the start of the pandemic, banks are now in an unusually strong position. These overstated provisions are starting to unwind just as dividends are reinstated.
"Banks are now in an unusually strong position" Many of the rest of the companies in the portfolio are executing in line with our expectations and, in some cases, exceeding them altogether. Yet a higher than usual number seem to be completely ignored by the market. That only makes us more excited about the long-term opportunity.
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few trends have dominated global markets in recent years. US stocks have beaten their ex-US counterparts, highly valued stocks have beaten cheaper ones, shares of big companies have beaten those of small companies, and businesses insulated from the economic cycle have crowded out their cyclical peers to represent an evergrowing portion of world stock markets. Most of these trends were headwinds for the out-of-favour shares that we found most attractive, and the pandemic only made it more intense. Pfizer’s vaccine announcement last November was just the sort of catalyst needed to turn some of those headwinds into tailwinds, but this has lost some steam in recent months along with concerns about the COVID-19 Delta variant. While we are mindful of these trends, our long-term results will ultimately be determined by the performance of individual businesses.
to name a few – made us look foolish on more than a few occasions before ultimately living up to their fundamentals. We can’t help feeling the same way about a lot of our holdings today. Our China holdings represent some of the very best opportunities we have found anywhere in the world and continue to warrant large positions in the Orbis Funds. Our assessments of intrinsic value are now somewhat lower – and we are being increasingly judicious about overall China exposure – but we believe the selloffs in the likes of NetEase and Naspers/Tencent have been excessive. Both NetEase and Naspers offer exposure to exceptional businesses, yet they are currently selling for below-average price multiples.
Why limit yourself to only 1%? Discover the full picture by investing offshore with Allan Gray and Orbis. Most investors tend to focus their attention on seeking opportunity locally, but with South Africa representing only around 1% of the global equity market, we understand the importance of seeing the full picture and unlocking investment opportunities beyond the local market. That’s why Orbis, our global asset management partner, has been investing further afield since 1989. Together we bring you considerably more choice through the Orbis Global Equity Fund and Orbis SICAV Global Balanced Fund.
Invest offshore with Allan Gray and Orbis by visiting www.allangray.co.za or call Allan Gray on 0860 000 654, or speak to your financial adviser.
Allan Gray Unit Trust Management (RF) (Pty) Ltd (the “Management Company”) is registered as a management company under the Collective Investment Schemes Control Act 45 of 2002. Allan Gray (Pty) Ltd (the “Investment Manager”), an authorised financial services provider, is the appointed investment manager of the Management Company and is a member of the Association for Savings & Investment South Africa (ASISA). Collective investment schemes in securities (unit trusts or funds) are generally medium- to long-term investments. The value of participatory interests or the investment may go down as well as up and past performance is not necessarily a guide to future performance. The Management Company does not provide any guarantee regarding the capital or the performance of the fund. The Orbis Global Equity Fund invests in shares listed on stock markets around the world. Funds may be closed to new investments at any time in order to be managed according to their mandates. Unit trusts are traded at ruling prices and can engage in borrowing and scrip lending. A schedule of fees, charges and maximum commissions is available on request from the Management Company.
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2021/08/06 08:32
Ashburton Fund Managers (Proprietary) Limited (Reg. No 2002/013187/07) is an authorised financial services provider (FSP number 40169) in terms of the FAIS Act, 2002. Ashburton Management Company RF (Pty) Ltd is an approved CIS manager in terms of the Collective Investment Schemes Control Act, 45 of 2002. The Global Leaders Equity Fund is a sub-fund of the Ashburton Investments SICAV; a Luxembourg-registered collective investment scheme approved by the Commission de Surveillance du Secteur Financier (CSSF) and which has been approved for distribution in South Africa in terms of section 65 of the Collective Investment Schemes Control Act, 2002. Issued by Ashburton (Jersey) Limited. Registered office IFC 1, The Esplanade, St Helier, Jersey JE4 8SJ. Regulated by the Jersey Financial Services Commission.
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30 November 2021
OFFSHORE SUPPLEMENT
Multi-jurisdictional estate planning may be crucial for investors who have assets offshore BY MANDY DIX-PEEK Head: Fiduciary Services, Old Mutual Wealth
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ccording to the University of South Africa (UNISA), South African households’ real net worth increased by over R1tn from the second to the last quarter of 2020, despite the economic contraction due to the pandemic. Consequently, more people are inclined to make offshore property investments in popular destinations such as Portugal and Mauritius. In fact, property sales of more than R500m, involving South African and international property buyers, have been concluded in Mont Choisy La Réserve, a luxurious estate in the Indian ocean island nation of Mauritius. As the trend is expected to continue as more South Africans snap up offshore assets across the globe, it is critical that a will is set up in the jurisdiction of those assets to protect them, as a South African will might not be recognised there. Where a South African will is not recognised, those assets abroad may be subject to succession law in those jurisdictions. Because there is no one-size-fitsall approach for all countries, the most prudent line of action is to make use of multi-jurisdictional estate planning. This would go a long way in mitigating nasty surprises further down the road. Currently, by law, South Africans don’t need more than one will if they have assets locally and elsewhere in the world. However, a South African executor is only permitted to manage matters and assets that are held domestically. An offshore will would, therefore, have to be handled by an executor in that jurisdiction,
"Where a South African will is not recognised, those assets abroad may be subject to succession law in those jurisdictions" 10 www.moneymarketing.co.za
or permission would have to be sought for the South African executor to administer the estate. This process can take time and can draw the process out further. Generally, if someone dies without a will and has assets in a country that recognises South African wills, their assets will devolve according to the South African law of intestate succession. However, some territories that are popular with South African investors, such as Portugal and other European countries, have forced succession in their inheritance laws. If someone dies without a will in countries with forced succession, their foreign assets may devolve according to the laws of the country in which those assets are situated. Not all assets and countries are equal though There are different permutations depending on the asset type and country. For example, in Mauritius, while immovable property is governed by Mauritian law, when it comes to movable assets, the inheritance thereof is governed by the laws of the last jurisdiction of domicile of the deceased or his/her country of permanent residence. This applies to Mauritian and foreign nationals. Beyond that, South Africans who own or plan to purchase property in Mauritius need to be cognisant that Mauritius is a forced heirship jurisdiction that reserves a portion of the deceased estate for the children of the deceased, and this applies to both Mauritian citizens and foreigners. Another example is that of Portugal’s inheritance law, which is derived from the Portuguese Civil Code and dictates that the inheritance process should be governed by the laws of the home country of the deceased, if he/
"Some territories that are popular with South African investors, such as Portugal and other European countries, have forced succession in their inheritance laws" she is a foreigner. Furthermore, Portuguese inheritance law follows forced heirship, meaning that certain relatives will be entitled to a portion of an estate, despite what is stipulated in the will. Another factor for South Africans to consider when planning their estates is double taxation that occurs when winding up an estate. To avoid this, investors should eye jurisdictions where South Africa has double taxation agreements (DTAs). Currently, South Africa has DTAs with Botswana, Lesotho, Swaziland, UK (including Northern Ireland), US and Zimbabwe. There are a few things all South Africans should consider when planning multi-jurisdictional estates. The first port of call is engaging with specialists and getting advice on the best course of action. Broadly, this will involve the jurisdiction of choice, the nature of the assets and DTAs. Depending on how these three circumstances stack up, a decision needs to be made about whether a will in the foreign jurisdiction is necessary. For more information visit: https://www.oldmutual.co.za/wealth/solutions/ fiduciary-services
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30 November 2021
OFFSHORE SUPPLEMENT
Navigating stagflation risks when investing offshore BY SCOTT COOPER Investment Professional, Marriott
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fter a great start to the year, international equity markets are coming under increasing pressure. As an unintended consequence of massive fiscal and monetary stimulus, and the rapid reopening of economies, global supply chains are currently struggling to keep up with a surge in demand. This is placing upward pressure on prices and holding back the global economic recovery, just when pandemic relief measures are coming to an end. As a result, the euphoria of economies reopening has given way to
concerns around stagflation (a situation in which inflation rates are high, and economic growth is low). The risk of stagflation presents a significant dilemma for economic policymakers, as actions intended to lower inflation may exacerbate the slow-down in economic activity. Over the past few months, economic data has suggested that the risk of stagflation is increasing. Central banks hope, therefore, that inflation is transitory, so they do not have to react by raising interest rates. At Marriott, we continue to agree that inflation will be transitory, albeit with a longer transition than was originally predicted by many market commentators. It is well known that supply chain bottlenecks, base effects, rising energy prices, shipping delays and other costs associated with the reopening of economies continue to have an impact on global inflation statistics. However, we also need to recognise that some inflationary pressures are stickier than others, such as the shortage of long-distance truck drivers in the UK, which is currently putting upward pressure on wages. These additional costs are flowing through to the final cost of transporting goods, and although the shortages will dissipate over time, they will not disappear overnight.
"Central banks hope, therefore, that inflation is transitory, so they do not have to react by raising interest rates" Our key focus remains to identify companies that will prosper in the long term but can effectively deal with the shorterterm inflationary pressures. We believe the companies we hold in our international equity portfolios are well-suited to current economic conditions due to our rigorous security filtering process. This process ensures a well-diversified selection of stocks with pricing power and resilience – two critical attributes for companies to successfully navigate stagflation headwinds. Take Procter & Gamble, for example, a company held in our international equity portfolios, which has an excellent track record of growing dividends even through market and economic turmoil. It has increased dividends 65 years in a row,
including a 10% increase earlier this year. Aside from an excellent track record, the company has a strong balance sheet, is diversified across countries and product lines, and holds market-leading positions resulting in powerful brand loyalty and pricing power. Last year, Procter & Gamble was able to grow its organic revenue and core earnings per share by 6% and 11% respectively, and is pushing through price increases for key product lines in the 2021 calendar year. At Marriott, we believe there are a range of companies that are well-suited to the long term and which can effectively deal with short-term inflationary pressures. Companies of this nature tend to be less volatile and more resilient, meaning that outcomes for investors are more predictable. Our international equity portfolios contain such companies. These portfolios can be accessed via: • Marriott’s offshore share portfolio (International Investment Portfolio) • Marriott’s international unit trusts (Using your annual individual offshore allowance of R11m) • Mariott’s local feeder funds, which invest directly into our international unit trust funds (Rand-denominated).
An adviser’s guide to winning and managing more offshore assets the right way
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any South African investors regard offshore investing as an effective investment strategy for building and preserving their wealth. When all our assets and investments are held locally, including property and retirement savings, it makes sense to have a certain portion of our wealth abroad. Investors derive numerous benefits from offshore investing. It gives them the opportunity to minimise their risk through diversification. It allows them to invest in themes of the future – including social networking, ecommerce and electronics – that are not always readily available in the local market. Having assets overseas could also allow investors to retire in a different country, or give their children the opportunity of an international education. However, offshore investing has some pitfalls that are best avoided. There are many factors to consider when externalising wealth, including income tax implications, exchange control, foreign currency transactions, offshore trusts, and wills and estate planning. We believe that Discovery Invest’s Guide to offshore investing will provide you with all the information you need to negotiate most of these risks and complexities. It will also help you to create and implement a successful offshore investment strategy, whether you’re a financial adviser or an investor. It’s important to always gather as much information as possible before making a final decision on an investment. That’s why this guide is a necessary tool to help financial advisers identify and consider offshore investment opportunities and pitfalls, as it enables them
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to offer the best advice. The guide highlights details of the wide range of investment solutions available, including the benefits and solutions like those offered by Discovery to offshore investors. For more information, visit Discovery’s Offshore Investment
information hub on our website https://www.discovery.co.za/ portal/investments/offshore-investing-opportunities. We recommend that individuals consult an accredited financial adviser before making international investment decisions.
International Investment Portfolio Invest offshore in high quality, dividend-paying companies.
More Predictable Investment Outcomes Contact our Client Relationship Team on 0800 336 555 or visit www.marriott.co.za
30 November 2021
OFFSHORE SUPPLEMENT
Will rising inflation spoil the party? BY PHILIP SAUNDERS Co-Head: Multi-Asset Growth, Ninety One
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nflation is presently investors’ top concern due to supply shortages that have arisen in the wake of the V-shaped recovery. The persistence of supplydemand mismatches has been highly unusual, and we have to go back to the post-WW2 recovery to find a precedent. Market inflation sensitivity is not surprising given the impact of yet more financialisaton within developed economies, which boosts valuations even as it underpins a system more prone to episodic volatility. The most serious risk for markets is the risk of regime change: if eventually inflation expectations were to become unanchored, the low interest rate regime would be challenged, and central banks would be forced to tighten significantly more than current expectations, with severe consequences for financial asset prices. The official line has been that the evident price and wage pressures are ‘transitory’. Fed Chair Jerome Powell explained at this year’s Jackson Hole retreat why he believes inflation will subside. In his view, inflation is not broad based, some price surges are already abating, base effects from 2020 will wash out, wage pressures are no threat so far, and longer-run inflation expectations
remain anchored near to the Fed’s target level of 2%. Furthermore, many of the structural disinflationary headwinds, such as demographics and technological change, will continue to blow over the medium to longer term. The Fed retains this line even as its own median forecasts for core inflation in 2022 have nudged up from 1.8% last September to 2.3% at the most recent forecasts. In other words, ‘transitory’ may last a little longer. Some have argued that the Fed no longer cares about inflation, and has pivoted towards a focus of achieving full employment. If inflation temporarily overshoots its target, so the argument goes, today’s Fed will be a lot more relaxed than it was in past incarnations. This is much too strong a view as it conflates time horizons. Supply-demand mismatches while the economy is restarting cannot be extrapolated into a self-reinforcing inflationary spiral underpinned by permanently higher consumer expectations. In addition, it conflates the new central bank commitment to tolerate higher inflation with a central bank that cares little about inflation. In our view, central banks may have pivoted somewhat but they show no signs of allowing inflation expectations to become unanchored, and thus squandering their hard-won legacy of credibility. They will tolerate probably 2.5% inflation on a sustained basis, but anything more beyond will, in our view, be met with a tightening bias. Finally, while we are not expecting inflation to be quite as low as was the case in the ten years or so after the global financial crisis, we think that Powell is right about the strength of offsetting structural factors.
All this must upset the conspiracy theorists who believe that central banks are secretly conniving in a plan to get inflation up to levels that would help to inflate away government deficits. Short of a set of circumstances that were to result in central bank independence being severely circumscribed by governments, we believe central banks’ ‘reaction function’, or their response to events, has not changed in any revolutionary way. In the shorter term, the cycle will be determined by growth dynamics. A continuing moderation towards trend growth rates in the key economies would arguably allow excess demand and supply shortages to ease and price pressures to ebb. This is particularly true given that the bar to further increases in inflation numbers are mechanically made difficult by the steep base effects – used cars may struggle to go up 30% for two years in a row. Furthermore, consumer and business inflation expectations, while currently elevated, are adaptive and notoriously unreliable. The risk to this view is a reacceleration of growth, resulting from widespread herd resistance to COVID-19, which causes a series of rolling demand shocks that disrupt key sources of supply. This causes inflation to remain stickier for longer, forcing central banks to raise rates well above current consensus expectations. We remain in the former camp – ‘high prices tend to be the best cure for high prices’ – and supply responses tend to be what gets underestimated, as does the impact of tightening liquidity; something that is a more likely candidate to ‘spoil the party’.
From connecting in person to over 3 billion connecting on social media. Change is inevitable. Why not prepare for it? ninetyone.com/change-changes (Source: Statistat.com, 2020) Ninety One SA (Pty) Ltd is an authorised financial services provider.
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Investing for a world of change
THE DISCOVERY INVEST GUIDE TO OFFSHORE INVESTING
An adviser’s guide to winning and managing more global assets, the right way. Offshore investing is a key component of holistic wealth planning. That means financial advisers who want to build sustainable revenue and nurture long-term partnerships with high-value clients need to master the fundamentals of offshore investing. Discovery Invest has applied its leading-edge technological capabities to bring you and your clients the best investment opportunities from around the globe. But technology is simply a tool: it cannot replace the expertise and peace of mind that trusted advisers give to their clients. That’s why we created the offshore guide to investing. We believe in shared value and we want the best outcome for you and your clients when you invest their wealth globally with us. To download the guide visit: https://www.discovery.co.za/portal/investments/offshore-investing-opportunities
Product rules, terms and conditions apply. This document is meant only as information and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser. Discovery Life International, the Guernsey branch of Discovery Life Limited (South Africa), is licensed by the Guernsey Financial Services Commission under the Insurance Business (Bailiwick of Guernsey) Law 2002, to carry on life insurance business. Discovery Life Limited is a licensed life insurer under the South African Insurance Act of 2017 and an authorised financial services provider (registration number 1966/003901/06). Discovery Life Investment Services is an authorised financial services provider (company registration number 2007/005969/07). The information given in this document is based on Discovery’s understanding of current law and practice in South Africa and Guernsey. No liability will be accepted for the effect of any future legislative or regulatory changes.
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OFFSHORE SUPPLEMENT
Getting to grips with global Global investing is increasingly in the spotlight, but for many South African investors, putting together a diversified global portfolio can be a bit daunting. MoneyMarketing caught up with two experts from Old Mutual Multi-Managers to talk about all things global. Andreea Bunea is Head of Global Equities, and Busi Ngqondoyi is Head of Local and Global Property at Old Mutual Multi-Managers. What is the current state of the global investment landscape almost two years into the pandemic? Busi: In a nutshell, it is still a good environment for investors. We’ve seen strong growth in company profits supported by low interest rates and a recovery in global consumer demand. However, COVID has not gone away and its impact continues to linger. Global supply chains are disrupted, there are shortages of key items, and outbreaks are still wreaking havoc with production and logistics. All of this has contributed to elevated inflation rates across the world. Inflation and how central banks react to it is probably the biggest risk facing the market. While we think the disinflationary forces of technology, globalisation and demographics will more than likely reassert themselves, inflation can also prove to be sticky and remain uncomfortably high if all these COVID-related distortions continue to impact prices. Markets might then question whether central banks are right in viewing it as a “transitory” phenomenon. In fact, central banks themselves might start to sing a different tune about how quickly interest rates are expected to rise. While we try and understand these risks, there is a high level of uncertainty regarding how this will play out. No one can predict the future. The best we can do is to increase exposure to asset classes that are cheaper and ensure our funds are properly diversified. If inflation is persistent, how could this impact global equities? Andreea: Inflation is not bad for company profits per se. After all, one person’s inflation is another’s income. But the valuation that investors have put on global shares – the amount they are prepared to pay for each dollar worth of profit – is elevated partly because they expect inflation and interest rates to be well behaved over time. If this view changes fundamentally, equities can sell off. However, individual shares and sectors could be affected differently.
The biggest beneficiary of low rates has been the so-called ‘growth’ companies that can generate their own earnings growth – often by taking market share – and who are therefore not as dependent on general economic growth. Today’s share price reflects the present value of future cashflows a company is expected to generate. When those future cashflows are discounted back to the present using prevailing long-term government bond yields, lower rates make them more valuable today. In other words, to benefit more from lower interest rates, companies need a longer runway of expected cashflows. Cyclical or value companies tend to enjoy expected cashflows much sooner, and therefore benefit less from low rates. This helps explain why US equities have outperformed Europe and Japan, even though the latter two have lower prevailing interest rates – negative rates, in fact. The US market is dominated by growth companies, particularly the big technology platforms Facebook, Amazon, Microsoft, Apple and Alphabet (Google), that have delivered impressive earnings growth and look set to continue doing so. And what about property? Busi: As Andreea mentioned, higher inflation does mean someone’s income is rising. In the case of property, it means rising rental income. For instance, in the case of the US CPI basket, implied and actual rent makes up 40%. Now that’s on the consumer side and most listed REITS earn income from other businesses, but the premise is the same. Inflation is not bad news for listed property. Then the next question is whether rising interest rates in response to higher inflation can hurt the sector. This is a risk, but yields in the listed property space are already much higher than bond yields and should therefore be able to withstand increases in the latter. Finally, debt levels in the sector are not excessive, and therefore rising interest rates pose less of a risk. Remember that global property had weak fundamentals going into the 2008 Financial Crisis with weak balance sheets excess capacity.
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Busi Ngqondoyi
The years following the Crisis were spent cleaning house, which means that global REITS generally entered the pandemic in good shape. Unfortunately, this wasn’t the case in South African listed property. Many local firms went into the COVID shock with overextended balance sheets. There are global exceptions, such as we’ve seen with the likes of Evergrande and other Chinese developers, but these companies typically fall outside of the listed property universe, which is dominated by landlords. Andreea, you mentioned ‘growth’ companies earlier, and of course these shares have far outperformed ‘value’ shares. How should investors think about styles or themes? Andreea: Growth companies have massively outperformed value companies since the global financial crisis, partly because of low rates, and partly because of technological advances, such as the fact that smartphones are ubiquitous today. The tepid economic growth environment after 2008 favoured growth companies, as investors were willing to pay up for scarce earnings growth. As a result, the valuation spreads between value and growth companies have once again reached close to extreme levels. In contrast, value companies outperformed their growth counterparts before the 2008 crisis; when the global economy was booming, growth stocks
Andreea Bunea
were de-rating levels of the late 1990s dot. com bubble. In other words, we probably need strong global economic recovery and better fundamentals for value companies to outperform. In contrast, soggy growth and low rates could enable the continued outperformance of growth companies. This is difficult to predict. Within this long outperformance of growth over value, there have been mini cycles. Markets never move in a straight line. This is why diversification across investment styles is so important, particularly in the global equity universe, where these factors are much more prevalent than locally. I don’t think one can successfully time when a particular investment style will come into favour or fall out of favour, as these shifts in performance trends tend to only become apparent with the benefit of hindsight. Moreover, being caught on the wrong side of that trend could be detrimental to relative performance, given the length of such cycles. Therefore, our approach is to combine fund managers whose investment philosophies and processes tend to be broadly underpinned by different investment styles. Ultimately, we spend most of our time making sure our portfolios are properly diversified and balanced so that we are not dependent on the performance of any one style or particular market trend.
"Our approach is to combine fund managers whose investment philosophies and processes tend to be broadly underpinned by different investment styles"
30 November 2021
Listed property obviously took a knock from COVID as people started working and shopping from home in greater numbers, but it bounced back quite strongly. Were you surprised by the sector’s resilience? Busi: Yes and no. Our global property benchmark, the FTSE EPRA/Nareit Developed index, fell 42% when the crisis hit, while global equities ‘only’ fell 33%. It also took longer to recover those losses than global equities, which makes sense. However, in the year to end September, property has actually outperformed equities, so it has been catching up of late. The big jump in optimism came in November 2020 when news of successful vaccines first broke. Obviously vaccination is key to allowing people to gather in offices, resorts and malls. But the key thing that drives this performance is the diversification of listed property, which is why I’m not completely surprised. In South Africa we tend to think of retail, office and industrial – in that order – but globally there are several other sectors that have done well. Obviously lodging (hotels) and retail (shopping malls) fell sharply when the pandemic broke out, but data centres rallied. The Internet is not quite as virtual as people think. It is made possible by physical things, like servers, that have to go somewhere. Similarly, the growth of ecommerce means demand for warehouse and logistics space has shot up. Healthcare is also a big sector globally, where hospitals, doctors and even laboratories rent space from landlords. Finally, the global residential boom also shows up in the listed space where companies own blocks of flats (or what Americans call multi-family housing) or trailer parks.
How do you go about selecting asset managers to include in your global funds? Andreea: We determine the asset allocation of our funds and choose specialist managers for each asset class. So there will be equity managers, fixed income managers and property managers. The universe is massive. There are hundreds of global listed property managers, and even more when it comes to global equity and fixed income. We start by doing a quantitative screen, using the global databases that we have access to. Here we look for some basic characteristics like track record, size, domicile, benchmark, etc. From this screen, we can do more qualitative research on a short list of managers. The final step is to spend time with managers to find out what makes them tick. We really want to understand their philosophy and process. We want to know who the key people are and how they interact. How do they generate
"The debate shouldn’t be about active versus passive, but rather about whether investors are getting value for money" ideas? How do these ideas end up in a portfolio? When do they buy and when do they sell? How is risk managed? Once a manager is appointed, we have regular engagements with them to monitor performance, but mostly to make sure we still understand what is behind the performance and whether it ties back to their stated philosophy and process. We certainly don’t want to chop and change managers. We launched the dollar-based OMMM global UCITS fund range* in March 2020,
but we have been working with the same managers in our domestic funds for a very long time, in some cases more than a decade. So we have considerable experience in doing manager research, selection and ongoing monitoring in the global market. I take it you prefer using active managers? Busi: We prefer active managers if we are confident that they will deliver over time, but we also use index funds where appropriate. Ultimately, the debate shouldn’t be about active versus passive, but rather about whether investors are getting value for money. It is important to remember that even the best active managers won’t outperform their benchmark every day or even every year. Outperformance tends to be lumpy and you need to be patient and stay invested with the manager to benefit from those bursts of alpha. Too many people chase performance. They see a fund shooting the lights out, and decide to invest in it after the fact. However, alpha is usually cyclical. There’s a risk that you sell a manager just as their performance cycle is about to turn, and invest with one who has just peaked. This destroys value over time. Diversification goes a long way to avoiding these behavioural pitfalls, and therefore we always include more than one manager in each asset class. The urge to ‘do something’ is often an investor’s worst enemy. By being appropriately diversified, investors can really save themselves from themselves. That is at the heart of what we do: build portfolios that are suitably diversified across regions, across asset classes and across the best fund managers. *The funds are available on Old Mutual International.
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30 November 2021
OFFSHORE SUPPLEMENT
What the data tells us about the next phase of the pandemic The Delta variant of COVID-19 is key to understanding the current trends around the reopening of the global economy, and what we can expect in the next phase of the pandemic. Schroders’ Data Insights Unit, composed of more than 20 data scientists, has been assessing multiple sources of data to reach the views espoused by Mark Ainsworth herein. BY MARK AINSWORTH Head: Data Insights and Analytics, Schroders What is the risk of further mutations of the virus as we saw with Alpha and Delta? This risk is very hard to quantify but all infectious diseases mutate when they are inside your body. This is a risk of having high levels of infection in a population: there are more opportunities for any virus to evolve. We can’t know if there is another variant down the road with the scale of advantage that Delta has over previous variants, but it is absolutely a risk. Can we look to the UK as a precursor of what we might expect locally? The UK was the first developed economy to be hit hard by the Delta variant, and this gave other countries an idea of
what Delta becoming prevalent would do in the middle of a vaccination programme. A useful area of comparison is the regional differences in the UK. The UK saw increased infection levels peak in mid-July as a result of people meeting up during the Euro 2020 football matches in pubs and private homes. Meanwhile, Scotland saw something similar – but earlier – when its national team was knocked out of the tournament in the first stage. Will booster jabs be necessary to get back to normal? Although there is evidence that immunity does eventually wane after being fully vaccinated, that is in the antibodies that are the ‘frontline’ of immune defence. At the same time, there are T-cells and B-cells in the background that remember how to make those antibodies, which is why protection against death is still strong a long time after vaccination for most people. There is a useful comparison with Hepatitis-B, where it has been clearly established that three doses of the vaccine are needed to have full immunity against that virus. The Delta variant does appear to be a virus that, like
Hepatitis-B, needs a third dose in order to give enduring protection. However, pursuing this approach does present an ethical dilemma. Most developing nations, such as South Africa, have had a slower roll-out of the immunisation programme and thus vaccination rates are still lower than that of first-world countries. This presents an argument that those third doses should go to those who have yet to have a first vaccination.
“Countries that pursued zero COVID are in for a difficult time, both culturally and administratively” Nonetheless, to provide their populations with the best protection against Delta, governments will probably need to provide a third dose. What will happen to the countries who pursued a zero-COVID strategy? Countries that pursued zero-COVID are in for a difficult time, both culturally and administratively, as they attempt to reopen to the rest of the world, as they will have no naturally acquired immunity and will be solely reliant on vaccines. To view the full version of this article, please visit Schroders’ website at https://bit.ly/3p2C0j1.
Accessing great investment opportunities post unexpected market events BY CHRISTO LINEVELDT Investment Specialist, Coronation
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ince the market crash in March 2020, equity markets have gone on to achieve successive record highs. But these have been off the foundations of shifts into and out of defensive and then cyclical recovery sectors, based on changing investor confidence in the global economic outlook. Fundamentals and valuation come first Identifying investment opportunities during unexpected market events requires rigorous research, a deep understanding of risk-reward trade-offs, and patience. Deciding to invest when the immediate future is uncertain takes considerable experience and a willingness to step in when others may be fearful of doing so, instead finding comfort in holding cash until uncertainty passes. Accessing these great opportunities We have invested in some exciting long-term investment opportunities at compelling valuations that investors can access through our global multi-asset class and equity-only funds (Coronation Global Capital Plus, Coronation Global Managed, Coronation Global Optimum Growth and Coronation Global Equity Select). Many of these businesses are recovery stocks that have proven their mettle during COVID-19 and we are very excited by the potential they offer long-term investors. See adjacent table for more detail. Coronation is an authorised financial services provider.
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From Sydney to Shanghai. For more than two decades, Coronation’s offshore investments have given you access to the world’s leading growth opportunities. Today, we see that opportunity in the post-pandemic recovery sectors, such as travel, brewing and luxury goods. To invest offshore with Coronation, ask your financial adviser or search ‘Coronation offshore’.
coronation.com Coronation is an auth o r ised fi n an c ial ser v ices p rov id e r.
30 November 2021
INVESTING
Why gold glitters during times of crisis I n times of economic uncertainty, many investors will seek out safe haven assets – investments that are expected to increase (or at least retain) value through market turbulence. Invariably, gold will come up in the conversation. “Gold is known for being an effective investment tool in terms of risk management,” says Michael Mgwaba, Head of Exchange Traded Products at Absa CIB. “It is both pro-cyclical and counter-cyclical, which means its price performance often rallies during periods of uncertainty. But while many investors think you only need gold if you fear a crisis, there’s much more to it than that.”
Gold as an investment asset “Gold is not a speculative asset, but rather an investment asset,” Mgwaba says. “It is a tool generally used by strategic investors who want to achieve medium- to long-term investment goals.” He points to the precious metal’s 30year track record between 1987 and 2019 to underline his point. At key moments during that period – events like 1987’s Black Monday, 2008/09’s global financial crisis, Europe’s sovereign debt crises of 2010 and 2012 – gold delivered returns above 5%. In some cases, like the spread of negative rates in 2016, the returns exceeded 30%.
“Gold tends to have a low or negative correlation to traditional asset classes (like equities or bonds), especially during times of market turmoil,” he says. “While most assets tend to lose value during systematic risk events, gold normally does the opposite. This was also evidenced during 2020, when the COVID-19 crisis caused financial market turmoil, yet gold remained a star performer. The current low-interest environment will continue to support investment in gold, given that gold tends to perform well in a low-yield environment.” Gold as an inflation hedge There’s another reason for gold’s reappearance in the investment spotlight: its reputation as an effective hedge against inflation. “A lot of money is being pumped into the world’s major economies, and there’s a fear that that these types of economic responses by government and central banks may lead to inflation in the long term,” says Mgwaba. “Inflation is a key concern for many large investors, particularly pension funds that are also long-term investors. Their view is that the value of assets under management will be eroded by inflation, and they’re looking for tools that are effective as a hedge against inflation, and to achieve long-term sustainability.”
Mgwaba highlights various pieces of research indicating that during periods when inflation was above 3%, the returns on gold exceeded that. “In other words, gold helped investors to earn a return and protect themselves from inflation – a best storage of value,” he says.
“Gold is not a speculative asset, but rather an investment asset" As with any investment, opinions on gold are split. One school of thought insists that the yellow metal should be in everyone’s portfolio, irrespective of market conditions; another opinion is that gold, to quote Warren Buffet, is of “no utility”. Mgwaba falls into the former camp. “The fact that central banks and large institutions have grown to
utility companies. In other words, with cloud computing, organisations get the value of IT without having to own it.
Not all clouds bring rain BY FRANK PIAZZA Fundamental Equities Team, BlackRock
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loud computing is among the most disruptive technologies to emerge over the past 30 years, representing a fundamental shift in how IT is procured, delivered and consumed. The legacy approach to IT revolves around on-premises infrastructure and software, with each enterprise investing in its own servers, software and IT professionals. Cloud computing, on the other hand, is remote, with the delivery of IT resources – like business applications and systems infrastructure – over the Internet. The legacy IT stack is a bit like each company having its own power plant to generate electricity, while cloud computing is akin to having that electricity delivered by
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In the cloud In our view, cloud computing will continue to be adopted for five primary reasons: 1. The cloud helps organisations reduce costs associated with on-premises IT 2. The cloud is quicker than on-premises IT to deploy 3. The cloud simplifies running IT 4. Flexible licensing allows usage-based pricing and subscription models, which shifts spend from capital expenditure to operating expenditure 5. The continued momentum from the COVID pandemic. COVID – and the subsequent social distancing and lockdown measures enacted in the face of the pandemic – forced many enterprises to transition to remote work operations. This, in turn, accelerated the adoption of cloud-computing solutions. It also illuminated the fragility and limitations that legacy on-premises IT stacks pose for companies. We believe this will lead to an accelerated and continued adoption from enterprises as they look to modernise their IT infrastructures. Stacking up The cloud IT stack has three components: Infrastructureas-a-Service, Platform-as-a-Service, and Software-as-aService. These can be used independently or combined as part of a comprehensive cloud computing IT strategy. Though still in the early phases of this transition, cloud computing is well positioned to displace much
become the biggest consumers of gold through direct acquisition or through gold exchange-traded funds (ETFs) tells us something,” he says. “We need to consider having gold in our portfolio as insurance and to improve our riskreward profile.” Or as he puts it: There’s no reason why you should not have gold in your portfolio.
Michael Mgwaba, Head: Exchange Traded Products, Absa CIB
of the legacy IT stack that has been built over the prior 20 years – and one we believe can deliver continued growth for technology strategies over the long term.
Risk Warnings Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time. ESG Investment Statements This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator. Important Information This material is for distribution to Professional Clients (as defined by the Financial Conduct Authority or MiFID Rules) only and should not be relied upon by any other persons. In the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. South Africa Please be advised that BlackRock Investment Management (UK) Limited is an authorised Financial Services provider with the South African Financial Services Conduct
30 November 2021
INVESTING
It’s not news that drives stock prices, but cashflows BY KIM ZIETSMAN Head: Business Development and Marketing, Laurium Capital
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espite the many negative news headlines and dramatic television footage streamed around the world of the unrest in South Africa, the local market has continued to power ahead this year. Laurium Capital constructs a proprietary index of companies listed on the JSE that are fundamentally driven by South Africa; we refer to this index as the SA Inc Index. Against the negative news flow, this index is up an astounding 29% year-to-date as
of end September 2021 – a performance in excess of a number of developed market indices, that have a far healthier news-flow backdrop. This demonstrates once again that what drives stock prices over time is not news flow but cashflow, and short periods of negative sentiment usually provide the patient investor with wonderful investment opportunities. After all, the most precious resource we have is time – and, if used wisely, this can provide us with the independence to decide how we would like to spend it. Laurium Capital was fortunate to benefit from this strong performance of SA Inc Post this strong performance we are, however, seeing less of a margin of safety in many local SA Inc. stocks and, while still identifying attractive opportunities, we are finding that we have to be far more selective. One such opportunity that we think looks attractive are SA healthcare stocks. They have not rerated to the same extent as the rest of SA Inc and offer value at present. Concerns that COVID-19 would and did impact hospitals’ profitability have depressed hospital share prices, which are now trading at 7x normalised EV/EBITDA, well below their historical trading range and that of their peers. This has provided Laurium
Maximising the benefit of tax-free investments BY HUGO MALHERBE Executive Product Development, PPS Investments
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outh Africa has one of the lowest household savings rates in the world. To encourage the culture of savings, the government introduced tax-free investment and tax-free savings accounts in 2015 to incentivise good savings habits. Today, tax-free investments appear to be a popular choice but still remain an underutilised opportunity. Let’s unpack the ways in which tax-free investments can benefit an investor’s portfolio. Contribute wisely and within the limits With tax-free investments, an individual can contribute up to R36 000 per tax year and up to R500 000 over their lifetime, where the interest, dividends and capital gains are earned tax free. It’s important to note that any amount exceeding the annual or lifetime contribution limit will be subject to significant tax penalties (taxed at 40%), that could erode the value of their investment. The contribution limit applies to all the tax-free accounts held in the individual’s name. Even though your clients can access their tax-free investment at any time, withdrawals cannot be replenished. Tax-free investments are best positioned for building wealth over the long term.
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Capital with what we believe to be a good buying opportunity; we are able to purchase these shares at attractive valuations. These valuations take into account the long-term cashflow and earnings generation ability of these businesses, and not merely the short-term depressed earnings base. For the most part, their balance sheets are strong and have been able to withstand this lowcapacity utilisation. Medical aid membership has been resilient and stable, which means that the insured population will continue to be able to afford private medical care through their medical aids. While we have no idea when
society will return to the normal world we knew before the onset of COVID, we believe that in the new normal of a world where COVID is likely to be present for some time, healthcare usage will increase as people start returning to hospitals for elective surgeries, which have been delayed for many months during the early phases of COVID. In addition to the return of elective procedures, anecdotal evidence points to an additional potential source of revenue with patients suffering ‘long COVID’ potentially requiring more acute care. We expect hospitals to get back to their pre-COVID levels of earnings within the next 12-24 months.
Figure 1: South Africa: Number of beneficiaries
Source: RMB Morgan Stanley, Council for Medical Schemes and Discovery Health
Using tax-free investments as part of a retirement savings plan Due to the long-term nature of tax-free savings, the tax benefits, accessibility and flexibility, it is often considered as part of a retirement savings plan. While a tax-free investment is not designed to be your client’s sole source of retirement savings, when coupled with retirement fund savings, it presents an opportunity to boost their nest egg with a taxfree lump sum at retirement, along with the retirement fund savings that secures a regular annuity income. The tax-free investment is also not subject to Regulation 28 (part of the Pension Funds Act), which limits the percentage allocated to certain asset classes. Thus, the tax-free investment offers more freedom around choosing investment options that align to an individual’s retirement savings goals and plan. With no restrictions in terms of asset allocation on tax-free investments, one could invest 100% in any asset class, for example global or SA equity, depending on one’s needs and ensuring adequate diversification across one’s portfolio. Even though the contributions into the tax-free investment account are not tax deductible like retirement savings contributions, what makes the tax-free investment account a powerful investment vehicle is the compounding effect of the tax savings over time, coupled with the investment growth. With retirement savings contributions into a retirement annuity fund, a pension fund or a provident fund, your client can claim back up to 27.5% of remuneration, or taxable income up to R350 000, in a tax year. While both options present tax-efficient ways to save towards retirement, it is
essential that your client view these investments within the context of their holistic financial plan. Invest early and stay the course When it comes to investing, it’s best for your clients to start early and remain invested for the long term, as this offers more potential for boosting their wealth in the future. Even though the tax-free investment limits the contribution to R36 000 per year, the principle of a little can go a long way applies here. To demonstrate this, consider the example below that illustrates the net worth of two people after 40 years with one in a tax-free investment account and one in an investment account: • Investor A contributes R1 000 per month, from the age of 20 until retirement at 60, into a tax-free investment account. • Investor B contributes R1 000 per month, from the age of 20 until retirement at 60, into an investment account. After 40 years, both investors contributed a total of R480 000 but the total investment value of investor A was R3.491m and investor B was R3.130m. This demonstrates the power of saving money in a tax-free investment account. (Assumptions: annual growth of 8%, marginal tax rate of 30%, investor B used CGT exemption). Augment a portfolio with tax-free investments Tax-free investments should be part of any financial portfolio. They can be used as a strategic part of your client’s financial, retirement and estate planning. Furthermore, this affords them the opportunity to diversify their portfolio exposure across asset classes (bonds, cash, equities, etc.) with no limits or restrictions, suited to their unique financial needs. Speak to PPS Investments about how we are taking investing to new heights and helping your clients reap rewards simply by being with PPS Investments and maximising the benefits we offer.
Imbi Evenhuis 22 years with PPS PR and Communications Manager
YEARS OF SHARING SUCCESS
R27.7BN TOTAL CUMULATIVE PROFIT-SHARE ALLOCATION TO MEMBERS WITH QUALIFYING PRODUCTS OVER THE LAST 10 YEARS. In a year as challenging as 2020, we are pleased to say that our unwavering commitment to our members and our operating model has resulted in a considerably positive financial year. This feat has enabled us to allocate R2.2bn in Profit-Share to those who matter most to us — our members. Here’s to 80 more years of life-long relationships and shared success.
PPS is a Licensed Insurer and FSP
30 November 2021
INVESTING
Establishing your own funds is easy through 27four Platform Services BY LAMEEZ AMLAY Managing Director, 27four Platform Services
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ith 27four Platform services, you are able to create your own branded portfolios to market. Using our Manco licence to create unit trust portfolios and our investment-linked life licence to create life-pooled portfolios is quick and easy. Our core business is to support third party partners in growing their assets under management. With that aim, we provide flexible solutions to cater to the evolving financial services industry needs such as: risk management, governance and compliance, additional reporting capabilities, settlement, and safekeeping of securities. Who we are? 27four Platform Services forms part of the 27four Group and is designed by asset managers who understand the needs and complexity of entering the market.
5365 unitholders
52 managers
25 billion
169 portfolios
Creating a unit trust portfolio Applying for your own Collective Investment Scheme ‘CIS’ manager licence from the FSCA is a costly and onerous exercise. Through white labelling, you are able to partner with us to create and manage your own unit trust portfolios. In addition to providing a branded platform for our partners, we also provide a full range of administration services. What is portfolio white labelling? White labelling is when a product provided by a licenced product provider is rebranded and sold by a partnering provider. This process creates custom branded portfolios for you to market, while ensuring the required licensing and regulatory requirements are met by the product provider. The benefits of white labelling include: • Reducing resource requirements for our partners • Benefitting from experienced life and CIS licence managers • Getting custom branded products to market faster. Creating a life-pooled portfolio A life-pooled portfolio is a unitised pool of assets, created on our life licence, into which multiple policyholders can choose to invest. An investment-linked licence allows us to issue policies to policyholders whereby the value of the liability is directly linked to the underlying assets held in respect of those policies.
Life-pooled portfolios are not governed by CISCA, which govern CIS portfolios, therefore pooled portfolios do not require FSCA approval. These benefits allow for the turnaround time for the setup of the portfolios to be fairly quick and can be completed within a matter of weeks. Pooled portfolios can hold multiple asset classes, which include listed, unlisted, property, infrastructure, development, and socially responsible investments. Life-pooled portfolios for private equity As private markets investments become more mainstream in South Africa, the use of life-pooled portfolios to facilitate such investments is becoming more common. 27four Life has several private markets fund managers on our licence and expect this to grow with increased market demand in the coming years. A life-pooled portfolio is an attractive alternative to a traditional partnership structure. It is well understood by South African institutional investors and is used across many asset classes. It also allows for longerterm investments where the parties do not want to set a time limit for the portfolio. For more information contact us at info@27four.com.
The truth about hedge funds BY JACOBUS BRINK Head of Investments, Novare Investment Solutions
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s investment vehicles go, hedge funds generally endure a great many more misconceptions than the ‘traditional’ investment offering. Unfairly so, as year-on-year, hedge funds continue to prove themselves as the quintessential investment alternative – particularly in South Africa, where the industry has experienced remarkable 91.6% growth in assets since 2010. So, what are some of the biggest myths? And what is the reality on the ground? Hedge funds are riskier Hedge funds are not, by definition, any riskier than the more familiar investment vehicles, like unit trusts. It remains all about strategy – balancing risk against return. Hedge funds rely on the same assets and securities as other investments to
KAGISO MATHOLE Portfolio Manager, Novare Investment Solutions
generate returns. Only hedge funds can draw on a broader, more diverse set of financial tools and tactics to make the most of virtually every kind of market, be it rising or falling. This can include the use of derivatives, short selling, and leveraging, among others. SA-based funds are, in fact, quite conservative. Moreover, one can employ a fund of hedge funds approach to reduce risk exposure even further, as each underlying strategy is managed at portfolio level. This ability to master the best of both worlds by extracting positive performance out of either upward or downward trends is increasingly popular with the modern investor. Hedge funds are unregulated Hedge funds are, indeed, regulated. In
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terms of the Financial Advisory and Intermediary Services Act (FAIS), hedge fund asset managers have operated under a designated license category, CATIIA, since October 2007. In 2015, hedge funds were included under the regulation of the local Collective Investment Schemes Control Act (CISCA). As a result, hedge funds offer a high level of security and transparency to the prospective investor. Hedge funds aren’t managed by qualified specialists Hedge funds are managed by highly qualified specialists. Currently, 58.3% of industry assets are managed within hedge funds with a track record of more than eight years. Among those hedge funds, there are some that have been in operation for up to 23 years. This is usually on top of years of hands-on experience in traditional fund management – those specialists who have already devoted the bulk of their careers to investment strategy. Hedge funds are ‘boutique’ Hedge funds form a cornerstone in the offerings of SA’s most recognised financial services providers. Today, a welldiversified asset management business with a broad range of investment offerings cannot afford to be without hedge fund portfolios. Asset managers that manage total assets exceeding R2bn translate into 79.6% of hedge fund assets. The industry has grown in leaps and bounds over the years, reaching maturity with operational
sophistication and efficiency that brings it to the forefront of the market. Hedge funds are expensive South African hedge fund managers employ a flexible fee structure, some with 0% management fee. Our surveys indicate that while a typical South African hedge fund would charge 1% of management fees, the data revealed a decrease in this fees category, whereas managers charging lesser fees increased over the years. The hedge fund industry is not exempt from consumer expectations nor competition. In fact, these incentive structures ensure that the interests of managers and investors are aligned. Hedge funds are only for the rich Hedge funds are not only for high-flyers and big corporates. Under the new regulations, CISCA now classifies hedge funds into two categories: Retail investor hedge funds (RIHFs) and qualified investor hedge funds (QIHFs). This means that the hedge fund industry can be accessed by anyone through investing in a RIHF, with the benefit of increased oversight and regulation from the Financial Sector Conduct Authority (FSCA). Moving beyond the limitations of traditional vehicles, hedge funds are now at every investor’s fingertips. As a premier African investment solutions provider that has won a multitude of investment awards over the past decade, Novare has conducted local hedge fund industry research for more than 15 years – having published the Annual Novare Hedge Fund Survey since 2004. Our fund managers are purposefully selected to drive a multidisciplinary, multistrategy investment offering that invests in various asset classes. Novare Investments, a subsidiary of Novare Holdings, most recently won the coveted Fund of Hedge Funds (FoHF) category at the annual HedgeNews Africa Awards 2020.
It’s not only about taking care of billions of rands. It’s also about taking care of millions of lives. The success of your clients and their employees is our business. That’s why we work with you to offer a suite of benefits that best suits the unique needs of your clients’ employees. That’s also why we make our solutions as flexible as possible, so that when life changes, employees can change their plans along with it. When you partner with the right employee benefits provider, your advice helps employers put solutions in place for their employees to feel appreciated, protected and invested in the success of their business. #AdviceForSuccess Talk to your Momentum Corporate Specialist momentum.co.za | move to Momentum Here for your journey to success. Momentum Corporate is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider.
BRAVE/7350/MOM/E
EMPLOYEE BENEFITS
Does your employee benefits advice consider the evolving needs of employees? BY NASHALIN PORTRAG Head, FundsAtWork, Momentum Corporate
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espite the disruptions caused by COVID-19 – or perhaps because of them – now more than ever, financial advisers are using technology in every aspect of their practice and in their dealings with clients. Is an essential human connection getting lost, and has the time come to restore the human touch? A greater need for human connection Although the pandemic and lockdown have accelerated the pace of digital adoption and seamless access to upto-date, real-time information in a digital format, the need for human interaction hasn’t reduced. In fact, in times of great change and uncertainty, there’s a greater need for human connection. Momentum Corporate experienced this first-hand last year when demand for benefit counselling and financial coaching increased significantly. This need was particularly evident where people were worried about their retirement savings, with many facing retrenchment or nearing retirement at a time when markets were highly volatile. Digital engagement complements rather than replaces the need for human interaction Digital platforms such as digital benefit statements play a key role in increasing members’ understanding of their benefits and financial literacy. Whether digitally driven or through human interaction, effective engagement and communication helps members become more financially empowered, and this helps them to know when to turn to a financial adviser and what to ask them. It results in better planning, more informed decisionmaking, and better financial outcomes. What worked in the past doesn’t necessarily work in this evolving landscape Our recent research confirmed that traditional employee benefits remain core to the employee value proposition, but there’s a growing need for a more
30 November 2021
RETIREMENT FEATURE
holistic approach that addresses needs and stressors that impact not only work engagement levels, but overall wellness for employees. There is a need to evaluate and potentially redefine employee value propositions, which includes the employee benefit offering. The employee value proposition and employee benefits mix must become more integrated and holistic, considering the evolving needs of employees and their families. It’s no longer simply about offering a competitive remuneration and benefits package, but rather a proposition that considers work-life balance, work-life fusion, and the health and well-being of employees and their families. Understanding that people are facing these challenges, an employee assistance programme, which traditionally operated outside of employee benefits, should be integrated into employee benefits solutions. This helps employees cope with physical, financial and emotional stress. This integration creates a range of synergistic benefits; for example, employees at risk of a disability related to mental illness can be identified early and offered support through the programme to prevent the disability. Financial advisers should partner with a group employee benefits provider that will work with them to offer a suite of benefits that best suits the unique needs of their clients’ employees. When you partner with the right employee benefits provider, your advice helps employers put solutions in place that will address the holistic needs of employees for them to feel appreciated, protected and invested in the success of their business.
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South Africa ranks 31st in the Global Pension Index
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celand’s retirement income system has been named the world’s best in its debut in the 13th annual Mercer CFA Institute Global Pension Index (MCGPI). The Netherlands and Denmark have taken second and third places respectively in the rankings, after a decade of competing for the top spot. The study also reveals that there is much that pension systems can do to reduce the gender pension gap – an issue inherent in every system. The MCGPI is a comprehensive study of global pension systems, accounting for two-thirds (65%) of the world’s population. It benchmarks retirement income systems around the world, highlighting some shortcomings in each system, and suggests possible areas of reform that would provide more adequate and sustainable retirement benefits. The top three systems, all receiving an A-grade, were sustainable and well-governed systems, providing strong benefits to individuals. In comparison, South Africa received a C-grade, indicating that the system has some good features, but also has major risks and/or shortcomings that should be addressed. President of CFA Society South Africa, Jennifer Henry, said that the MCGPI benchmarking and insights provide South Africa with tangible objectives that will help improve the pension system, key being that increasing coverage of employees, particularly self-employed or entrepreneurs, into private pensions will positively contribute to the system’s sustainability. “Pension funds should aim to improve governance and increase transparency so that members’ knowledge and confidence in their retirement savings improves. The special chapter on gender differences in pension outcomes is a strong reminder that unequal pay and lack of job opportunities for women has ramifications over many years, resulting in sub-par pension outcomes; and therefore we need to continuously look to close the gender gap,” Henry said. Senior Partner at Mercer and lead author of the study, Dr David Knox, added that governments the world over have responded to COVID-19 with significant levels of economic stimulus, which has added to government debt, reducing the future opportunity for governments to support their aged population. “Retirement schemes globally are tipping further towards accumulation-style plans, away from traditional defined benefit plans. Despite the challenges, now is not the time to put the brakes on pension reform – in fact, it’s time to accelerate it. Individuals are having to take more and more responsibility for their own retirement income, and they need strong regulation and governance to be supported and protected.” Vickie Lange, CFA, Head of Best Practice at Alexander Forbes, Mercer’s strategic partner in Africa, said that South Africans have generally needed to take responsibility for their own retirement income, as their private pension system is largely on a defined contribution basis. “Several reforms have been implemented over the last few years, and there’s likely to be an even stronger focus on governance, with further reforms expected in the near future,” she added. Gender differences in pension outcomes The MCGPI’s analysis highlighted that there was no single cause of the gender pension gap, despite all regions having significant differences in the level of retirement income across genders. “The causes of the gender pension gap are mixed and varied. Every country and region has employment-related, pension-design and socio-cultural issues contributing to women being far more disadvantaged than men when it comes to retirement income,” Dr Knox said. While employment issues are major contributors and are well known – more female part-time workers, periods out of the workforce for caring responsibilities and lower average salaries, for example – the study found that pension design flaws were aggravating the issue. This includes non-mandatory accrual of pension benefits during parental leave, absence of pension credits while caring for young children or elderly parents in most systems, and the lack of indexation of pensions during retirement, which have a larger impact on women due to longer life expectancy. “We know that closing the gender pension gap is an enormous challenge, given the close link of the pension to employment and income patterns. But, with poverty among the aged more common for women, we can’t afford to sit idle,” said Dr Knox. “There are a number of actions that pension industries can take. As a start, they must remove eligibility restrictions for individuals to join employment-related pension arrangements. Regardless of how much you earn, how much you work or how long you’ve been working for, every individual should have the ability to participate in a pension scheme that provides adequate benefits. “Pension funds can also introduce credits for those caring for the young and old. Carers provide a valuable service to the community and shouldn’t be penalised in their retirement years for taking time out of the formal workforce,” he said. Jennifer Henry, President: CFA Society South Africa
30 November 2021
RETIREMENT FEATURE
Not all annuities are the same BY RYAN HULTZER Pricing Actuary, Just SA
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o start drawing an income at retirement, retirees have one very important decision to make: should they purchase a living annuity or a life annuity with their hard-earned retirement fund savings? Where traditional life annuities are designed to offer security by providing a guaranteed income for life, they lack flexibility. Living annuities, on the other hand, allow annual drawdown rate adjustments to match income needs, but run the risk of running out of money later in life. One way to overcome the disadvantages of living annuities and life annuities is to use both. At retirement, current regulations allow retirees to split part of their preretirement savings between multiple living annuity and/or life annuity products, with one or multiple insurers. However, after retirement, a retiree’s freedom of choice reduces dramatically, as they are no longer able to transfer part of a living annuity to another insurer or to a life
annuity at another insurer. The good news is that the South African annuity market has evolved, and new-generation products are now available that allow retirees to receive the benefits of both living and life annuities in a single blended product. Where confusion may arise is the common use of the term ‘hybrid’ – whereas, in reality, the implications are quite different. Blended annuities A unique legal structure, a blended annuity is a way for retirees to improve their retirement outcomes by combining life annuity and living annuity features in one product. A blended annuity allows members to include a guaranteed lifetime income as one of the investment portfolios within a living annuity. Blending enables annuitants to switch additional tranches into the guaranteed lifetime income component when required. This effectively reduces some of the market risk within the living annuity and shifts the longevity risk to the insurer, rather than the retiree. Hybrid annuities A hybrid annuity typically refers to a product wrapper that an insurer offers to a retiree, where both products are ‘wrapped’ together with the same provider. In this case, the wrapper is a guaranteed annuity with a component that
looks like a living annuity, but the living annuity cannot be separated from this wrapper and does not technically have to comply with living annuity regulations. Let’s talk tax differences Hybrid annuities pay two streams of income out to a retiree, and both streams are taxable. By contrast, in blended annuities the guaranteed component does not pay directly to the client, it pays into the living annuity component. This means that retirees are not taxed on that component until they draw it from the blended living annuity. There is also the flexibility to draw as low as 2,5% of the investment as an annuity. This key feature enables retirees to manage their tax liability early on in retirement while still benefiting from longevity protection. It also helps to build a capital legacy for their beneficiaries. Ultimately, the approach to retirement should be the same regardless of market conditions – to improve the sustainability of retirement income for life.
"One way to overcome the disadvantages of living annuities and life annuities is to use both"
Retirement fund members require meaningful connections
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ccording to the latest Alexander Forbes Member Insights survey, working South Africans are projected to retire on only 40% of their final salary. Current retirees’ starting pensions amounted to 31% in 2020, an improvement from the previous year’s 28%. This is still a long way off from what is considered ideal. Member Insights also found that only around 6% of retirement fund members can expect an income in retirement above 75% of their pensionable salaries. However, retirement funding stakeholders, including employers, trustees and advisers, can improve this by forming more meaningful connections with members. “This year, data beyond the traditional retirement data was linked to provide more thorough insight. The results of Member Insights serve to amplify our collective responsibility to better connect with members via access to information, education, counselling and advice. We have hard evidence of the impact on decisions when such connections are improved and are convinced that this will make a positive impact on people’s lives,” says John Anderson, executive of investments, products and enablement at Alexander Forbes. COVID-19 The implications of COVID-19 on retirement outcomes are evident in the research, which found that about 30% of retirement
funds implemented contribution holidays or reduced contributions. Many of the funds have since recovered and only 5% of funds still have these relief measures in place. Average contribution rates reduced slightly from 14.18% to 14.10%. Reforms to address lack of savings Alexander Forbes supports proposed reforms to address the lack of savings in SA in a two-bucket proposal that will allow for greater preservation with limited preretirement withdrawals from retirement. Approximately 90% of members do not preserve when changing employers, largely as a result of a lack of financial literacy or the need for immediate access to cashflow. Alexander Forbes has evidence of substantial increases in preservation when the appropriate engagement mechanisms are introduced through the employer and fund to enable better connections with members. The two-bucket proposal provides an additional pragmatic response to meet both the short-term and long-term needs of members. “It is important for members to have full access to professionalised retirement benefit counselling and for the two-bucket solution to balance the trade-offs between long-term retirement savings goals and short-term financial needs,” says Ntsheki Molefe, Regional Executive of Retirements at Alexander Forbes.
Interventions that can improve outcomes Member Insights proposes solutions to improve retirement outcomes: • Integrated advice frameworks across retirement funding, investments, life insurance, healthcare and personal financial planning that enable a coherent response to meet the financial needs of members • Monitoring the real impact that interventions are having in improving outcomes • Mature and robust retirement benefit counselling available across multiple channels to make it easy for members to access appropriate information • Financial literacy training geared for the both the physical and virtual workplace to equip members to make better decisions • Inclusive financial advice to ensure that members across the economic spectrum are supported through their lifetimes • Use of technology to connect members with their decisions, such as the Alexander Forbes My Retirement Picture. Millennials are hardest hit by COVID-19 Member Insights also says millennials have been hardest hit financially by COVID-19 and are at the highest risk of loan defaults. The analysis found that at least 14.11% of loans taken by Early Millennials were in default, followed by Late Millennials at 4.79%, Generation X at 2.27% and Baby Boomers at just 0.94%.
John Anderson, Executive: Investments, Products and Enablement, Alexander Forbes
Ntsheki Molefe, Regional Executive: Retirement, Alexander Forbes
Gender inequality When it comes to financial risk, females have lower risk than males, with the debt-to-income ratio of females at 74% compared with 80%% for males, while 48% of females had overdue loans compared with 51% for their male counterparts. At least 41% of females had taken unsecured credit compared with 49% of males, while 51% of females had secured credit compared to 54% of males.
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30 November 2021
RETIREMENT FEATURE
Certainty of retirement income in an uncertain world
BY JOHAN GOUWS Head: Advice, Sasfin Wealth
BY FAREEYA ADAM Head: Retail Product Solutions, Momentum Investments
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he main challenge at retirement is to convert savings into a stream of reliable income that will last a lifetime. People who retire have to consider an income level that will cover their immediate income needs, maintain their current standard of living and, also, last for as long as they live. It has been challenging to achieve inflation-beating returns in recent years and this has resulted in a lot of anxiety among retirees. Volatility in investment markets has highlighted the value of certainty. With the element of certainty as the major benefit of traditional guaranteed annuities, these products have come firmly into the spotlight. It isn’t surprising, since this product line is the ultimate outcome-based solution: the income profile that a client is shown when she invests into a guaranteed annuity is exactly what she will get for the rest of her life.
"It has been challenging to achieve inflationbeating returns in recent years" Aside from the guaranteed income for life, other features are becoming increasingly important in the advice process. Financial advisers know that nothing is more personal than the need of clients to take care of dependants or to leave a legacy. Historically, this has been the area of living annuities, but
Will lower service fees provide a better outcome for fund members at retirement?
now the use of guaranteed terms and joint life options are better understood, and can be used in the advice process to address those needs. A 20-year guarantee term is a common choice for clients. It provides comfort to know that even if you do not live for as long as expected, your dependants will continue to benefit from the income for a minimum term. With joint life annuities, clients can provide for their partners because the income is paid for as long as at least one of them is alive. Another popular option is a product that protects the purchase amount of the annuity, like the Capital Protector from Momentum Investments. With this structured product, the client gets a guaranteed income together with life cover that pays out the initial purchase amount on the client’s death. It is a low-risk way of securing income but also leaving a legacy. Since there are no underwriting requirements, clients’ health status do not affect whether or not they qualify for the life cover. Inflation and its effect on the purchasing power of income is well known. Adding either a fixed growth rate or an inflation-linked growth rate can go a long way to protect the real value of a retiree’s income. We offer among the highest incomes for all types of annuities. If your clients need certainty of retirement income in an uncertain world, consider our guaranteed life annuity. With our long history of offering longevity benefits, we are your expert partner to take on the risk – so that your clients don’t have to. Because with us, investing is personal. The information in this editorial is for general information purposes and not intended to be an invitation to invest, professional advice or financial services under the Financial Advisory and Intermediary Services Act, 2002. Momentum Investments does not make any express or implied warranty about the accuracy of the information herein. The Capital Protector and Momentum Annuities are life insurance products, underwritten by Momentum Metropolitan Life Limited, a licensed life insurer under the Insurance Act and administered by Momentum Wealth (Pty) Ltd. Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406). Momentum Wealth (Pty) Ltd (FSP 657) is an authorised financial services providers and part of Momentum Metropolitan Life Limited.
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perfect storm has been created for the local retirement fund industry from a fiduciary responsibility and financial service provider perspective, due to South Africa’s stagnant retirement fund industry, low investment returns, increasingly demanding regulatory requirements and the need to maintain or grow profits. One of the few ways for service providers to achieve their business goals and financial objectives is to try and obtain a bigger slice of the stagnant retirement fund industry pie. This has resulted in the industry rapidly moving towards a more vertically integrated service model based on a one-stop investment service offering. If structured correctly, the model of an implemented one-stop offering approach should not be a concern as it can still be delivered with the necessary level of independence. It is, however, the way in which critical elements of the value chain are being devalued in the interest of gaining a competitive advantage that should have the alarm bells ringing. An increasing trend is one where retirement funds are being approached with the proposition of providing critical services, such as investment administration and advisory services, at low or no fees, as if these do not require the necessary financial support to maintain and develop them. The risks related to a model based on cross-subsidisation, and a single-minded focus by retirement funds and service providers on lower fees, determines the ability or inability of trustees or management committees to properly perform their fiduciary duties over the long term. Unsustainable business and funding models, as well as non-transparent fee structures, could result in retirement funds and their members being left severely exposed from a regulatory, economic, governance, cybersecurity, or investment market perspective over time. If investment administration services are provided at no cost, one would be concerned about the future ability of the service provider to not only maintain but also to enhance the necessary human capital, system functionality, service levels and security service elements a retirement fund requires. Not charging for investment advice raises questions about the ability of the investment advisory service provider to attract the best experience and skills, as well as best-of-breed advice tools and methodologies in order to maximise investment returns for members up to and during retirement. The retirement fund could possibly find a saving on the service fees of an investment adviser or asset consultant attractive in the short term. However, this would ignore the risk of a less effective life stage and pre or post default investment strategy being implemented by the fund. Due to a lack of the critical thinking required to manage the various risks, the strategy could be found wanting during times of market stress. The retirement fund industry still has much work to do in becoming more transparent in terms of the various service fees being charged and who the real beneficiaries are. The ASISA Retirement Savings Cost Disclosure Standard should assist the participating employers of umbrella retirement funds to get a better understanding of what their members are paying for when it comes to each service being provided. The King IV Code of governance principles as they relate to retirement funds speak to specific principles when it comes to the fiduciary duties of boards of trustees and management committees. This includes the responsibility to ensure that the fund has access to the necessary skills and expertise to ensure that the objectives of the retirement fund and its members are met in a sustainable manner. Service provider fees should always be an important focus for the board of trustees or management committees of retirement funds to consider as part of their fiduciary duty towards all fund members. However, they should have a balanced approach when it comes to finding the most appropriate solution, as the service provider value chain is only as strong as the weakest link. Paying an appropriate fee for the critical service elements should be viewed as an ‘insurance premium’ to protect a retirement fund against potential risks related to members’ personal information, weak governance or poor investment performance. A more suitable approach would be for retirement funds to focus less on the cost and more on ensuring that the best value is obtained for the service offerings being paid for. This will result in a more secure, sustainable and quality retirement savings solution.
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Momentum Investments provides a multitude of investment businesses, tools, solutions and capabilities to financial advisers and their clients. We have a diverse set of investment options to suit each client’s individual needs. Together we then manage it systematically so that they have the best chance of achieving their goals. All thanks to our people – a team of passionate experts who understand that it’s not just about the investments they’re managing, but also the people investing their money. That’s why we say that with us, investing is personal. Speak to your Momentum Consultant or visit momentum.co.za @MomentumINV_ZA
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Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.
30 November 2021
RETIREMENT FEATURE
Retiring comfortably: How living annuities can withstand risks A new approach to portfolio construction Burns believes that the traditional approach to portfolio construction doesn’t offer income-drawing retirees enough protection from these risks. This has led to the development of the Glacier Invest Real Income Solutions – a new approach to living annuity portfolio construction, using tools that pursue an asymmetrical distribution of returns. These tools are hedge funds, smoothing techniques and alternative assets. While traditionally hedge funds have been available only to big institutional investors, retail hedge funds are on the rise. “Our investment philosophy doesn’t involve picking the actual assets themselves, it’s rather about choosing the best managers. So, we decided to choose the best hedge fund managers to include in our portfolio.” He adds that, initially, allocations were made to only fixed income hedge funds, but recently an allocation to an equity hedge fund was made in the higher risk Real Income Solutions. To diversify even further, smoothing techniques are being used to create more income stability by holding back excess returns in good years and releasing them back to investors in years when markets perform poorly, providing a more stable return experience on a year-by-year basis. Including alternative assets in Glacier Invest’s Real Income Solutions was tricky from an administrative, legal and compliance perspective. “I don’t think this has been offered by any other discretionary fund manager in this country. We’re already investing in hedge funds as an asset class on their own, but here we are looking at private markets including private equity, private real estate and mezzanine debt, amongst others – the asset classes that are traditionally only available to institutional investors with
sufficient capital who can tolerate illiquidity, which of course doesn’t really benefit a living annuity client who needs to take drawdowns.” The structure of these solutions, however, allows for the provision of daily liquidity and pricing, despite the fact that some of the underlying private market instruments may not provide it. In addition, clients invested in these solutions immediately receive an illiquidity premium. “By investing in something that is illiquid, you should be paid a 2 to 3% premium, which means a 2 to 3% higher return guaranteed – because you’re taking on that illiquidity risk. Including these assets into a retail portfolio was a challenge, but we have finally achieved the objective we set over two years ago. And as of the end of September, alternative assets were finally incorporated into our retail solutions.” Glacier Invest has created a similar product, the Glacier Invest Real Growth Solutions – available within an endowment – for those drawing an income from their discretionary portfolios. “Ultimately, they face the exact same risks as living annuity clients: volatility in the markets, living too long and outliving their capital,” Burns says. These solutions, therefore, have the same aim as the Real Income Solutions: to reduce volatility and manage a more consistent sequence of returns, and to mitigate the risk of one’s capital running out over one’s lifetime. Darren Burns, Head: Investment Solutions, Glacier Invest
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any South Africans choose to invest their retirement savings in a living annuity to provide them with an income during retirement. While there are advantages to this kind of investment, such as making provision for a financial legacy for beneficiaries, there are also disadvantages, such as the risk that returns from an underlying investment portfolio may be worse than expected, and negatively affect income and capital. Another risk is that of longevity. “People are generally living to an older age,” says Darren Burns, Head of Investment Solutions at Glacier Invest. “The issue is that people, when planning for their retirement, are saving for ten or 15 or 20 years, when they may be living 30 or 40 years after they retire, given the rapid pace of medical advancements and overall healthier lifestyles.” To mitigate this risk, the focus is placed on preserving and growing capital within the living annuity portfolio at a rate that can at least keep up with inflation. Sequence risk is another possible pitfall. “If you retire when the markets are experiencing excessive volatility, or they’re not doing too well, you’re going to be far worse off in the long term than someone that retired at the exact same age, with the exact same capital, with the exact same liquidity requirements – but with the markets going through a much better period,” Burns says. “Over the long term, both these investors could achieve the same average return, but when they retired – whether it was when markets were at highs or at lows – will have an effect on their capital, because they are starting to draw down either off a high base or off a low base.”
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Glacier Financial Solutions (Pty) Ltd is a licensed discretionary financial services provider, trading as Glacier Invest FSP 770. Sanlam Multi-Manager International (Pty) Ltd FSP 845 is a licensed discretionary financial services provider, acting as Juristic Representative under Glacier Invest. Glacier Invest is the discretionary fund management offering of Glacier Financial Solutions (Pty) Ltd (“Glacier’’). Glacier has partnered with Sanlam Multi-Manager International (Pty) Ltd, part of the Sanlam Investments Group, to optimise the investment management responsibilities.
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30 November 2021
RETIREMENT FEATURE
Choosing the right retirement savings vehicle for your clients BY STEPHAN LE ROUX Financial Planning Coach, Old Mutual Wealth
Scenario 3: Adding a linked investment of R5 000 per month until retirement with no escalation
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ne of the most important decisions for most clients is which investment strategy will be the most effective when planning for their retirement. The default is often to merely increase contributions to a retirement annuity to the maximum. This, unfortunately, quite often results in a massive liquidity problem at retirement. It is very important to distinguish between both the client’s income and capital needs. While the approved savings may be enough to cover income needs at retirement, there may be a shortfall for capital needs like holidays, purchasing a new car, or even just an emergency fund, which is often not taken into consideration. I would like to demonstrate the importance of this by using the Old Mutual Wealth Integrator tool, which helps facilitate and illustrate the effect of the different savings vehicles. For this case study I have made the following assumptions: • The client is a male aged 40 and would like to retire at age 65. • He has a current pension fund valued at R1 000 000 and contributes R7 500 per month escalating at 5%. • He would like to provide for living expenses of R30 000, and a holiday of R50 000 every two years, starting at retirement and ending at age 75. • The client is taking the R500 000 tax-free lump sum from his pension fund. • All approved savings will be transferred to a living annuity at retirement. • The client has an average tax rate of 26%. • All amounts are displayed in today’s value. I have created six scenarios for the client in which I used different savings vehicles: Scenario 1: Adding a retirement annuity of R5 000 per month until retirement with no escalation
In this scenario, the client is not able to sustain his desired lifestyle beyond age 67 because there is not enough liquidity. The living annuity will, however, cover the client’s living expenses until age 79, when the 17.5% cap is reached. Scenario 2: Adding an endowment of R5 000 per month until retirement with no escalation
In this scenario the client is not able to sustain his desired lifestyle beyond age 80, when all discretionary money will be depleted and the cap of 17.5% on the living annuity drawdown has been reached. Scenario 4: Adding a tax-free savings investment of R2 750 per month and a linked investment of R2 250 per month until retirement with no escalation
In this scenario the client is not able to sustain his desired lifestyle beyond age 80, when all discretionary money will be depleted and the cap of 17.5% on the living annuity drawdown has been reached. Keep in mind that after 15 years, the tax-free contribution reverts to a linked investment contribution not to exceed the R500 000 allowable contribution. Scenario 5: Adding a retirement annuity of R5 000 per month and then investing the tax savings in a linked investment.
In this scenario the client is not able to sustain his desired lifestyle beyond age 71 because there is not enough liquidity. The living annuity will, however, cover the client’s living expenses until age 81, when the 17.5% cap is reached. Scenario 6: Adding a retirement annuity of R5 000 per month and then investing the tax savings in a tax-free plan.
In this scenario the client is not able to sustain his desired lifestyle beyond age 79, when all discretionary money will be depleted and the cap of 17.5% on the living annuity drawdown has been reached.
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In this scenario the client is not able to sustain his desired lifestyle beyond age 73 because there is not enough liquidity. The living annuity will, however, cover the client’s living expenses until age 81 when the 17.5% cap will be reached. Key take-outs from this case study: • Retirement annuity can be a liquidity risk • While a retirement annuity is a good investment vehicle for tax-savings purposes, it can cause significant liquidity problems at retirement. The tax payable on the larger lump sum needed for liquidity might not be worth it. It is, however, a very powerful investment vehicle if you invest the tax savings in a discretionary product. Using the tax-free savings as that discretionary product, the client was able to sustain his desired lifestyle for two years longer compared to saving it in a linked investment. • Tax-free account to boost savings • A tax-free savings account is a great vehicle to supplement retirement savings and assist with liquidity in retirement. The client’s average tax rate will have a big impact on the proposed investment vehicle. • Endowments were not effective • In this case study, the endowment option proved to be the least favourable. • Over a longer investment period, the gaps between the ages of sustainability become even more substantial because of how the tax differs on the respective investment vehicles. • Wealth Integrator – your tool to success • The Wealth Integrator tool is a great visual aid and enables the conversation with clients regarding investment vehicles and the effects of tax on a very interactive level. • A key characteristic of the Integrated Wealth planning process is goal setting, which is critical for proper retirement planning. Traditionally, planners worked with clients to get an understanding of their financial objectives, e.g. how much they will need per month in retirement and then what lump sum this equates to. • Setting goals with your clients • However, clients can relate more to the life they want during retirement than to the actual amount they need. Their dreams, goals and aspirations give meaning to their lives and a sense of purpose. Your role is to help them unpack those goals in detail. Distinguish between expenses and goals so that clients can be clear on what they need for the must-haves and the nice-to-haves. It’s easier to relate to and remain focused on goals if they know what the desired amount needed for retirement can afford them. We need to help our clients picture the life they want to live and then help them get there through goal setting. The next step is to determine the return a client requires to achieve these goals. Helping them understand which personal investment target will provide a suitable level of risk and return to meet their goals allows us to match their investments to the required return. This changes the conversation from investing for the highest return to targeting the return the client requires – in other words, targeting only what is required at the minimum risk. With retirement annuity season approaching, let’s relook our clients’ goals, investment vehicles and personal investment targets, helping them achieve the life they desire.
WEALTH IS ABOUT MUCH MORE THAN MONEY It’s about how you see yourself, the impact you want to make, the legacy you want to leave, your priorities for today and tomorrow. Together with your financial planner, our team of experienced specialists go to great lengths to understand what really drives you. Then we offer you a range of specialist wealth management solutions to help you grow, protect, leverage and ultimately, transfer your wealth for generations to come.
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30 November 2021
INCOME PROTECTION FEATURE
Temporary income protection just the tip of the iceberg BY ELMARIE SAMUEL Technical Marketing Specialist, FMI
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MI recently released its 2020 Claims Report, with the statistics clearly demonstrating the integral role income protection plays in ensuring your clients remain financially secure during uncertain times. FMI experienced its highest number of overall claims to date in 2020, with a 17% increase in claims compared to the year before, primarily due to COVID-19. The pandemic arguably hit business owners and non-traditional income-earning occupations hardest, such as the self-employed, contract workers, or those who rely on multiple income streams. Business owners remain the top claiming occupation. Interestingly, 5% of FMI’s income protection claims were for traditionally uninsurable occupations, such as homemakers, students, fitness professionals, and sports coaches. While this figure may appear low, it’s substantial considering this segment makes up the smallest percentage of FMI’s policyholder base, likely due to market perception that these occupations don’t qualify for cover. Considering the financial impact for these individuals should they be unable to work due to injury or illness, there is a clear gap that requires attention to get
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them covered. This is why FMI consistently advocates for income protection for all working South Africans. However, a risk plan that encompasses only temporary income protection that lasts up to 24 months, and assumes lumpsum benefits will take care of the rest, may not be sufficient. Fluctuating interest and inflation rates make it difficult to predict future investment returns from a once-off lumpsum to produce a stable and growing income. So, when you can instead choose an income benefit in the event of long-term injury or illness, critical illness, and even death, why would you choose a lumpsum for the purpose of converting it at some later unknown date into an income? Long-term income protection: Long-term income protection typically covers injuries and illnesses that last longer than two years; paying a monthly income until your clients’ retirement age or even for the rest of their life, should they experience a long-term injury or illness. Without this cover, your clients’ income protection payments would stop when they reach the end of their temporary incomeprotection benefit term. Selecting a long-term income protection policy that pays 100% of the insured amount is essential. Some policies only pay 75%, assuming all long-term injuries or illnesses are permanent and lumpsum disability cover would take care of settling debt and paying once-off expenses. However, FMI’s stats show this isn’t always the case – four out of 10 claims that last longer than a year are not permanent and would therefore not qualify for a disability lumpsum claim. Critical Illness Income: Cancer continues to be the
leading cause of critical illness claims paid in the industry, and it was the third most common claim event at FMI. Traditional temporary income protection doesn’t adequately address the impact of the intermittent nature of treatment. The claims experience can be onerous as most policies would only pay a portion of your clients’ income if they continued to work parttime while undergoing chemotherapy, for example. While a lumpsum may be a suitable solution to pay for once-off additional costs, it falls short in addressing the daily reality and monthly expenses of those living with a critical illness. Critical Illness Income boosts your clients’ income protection benefit by an extra 30% and pays out for up to 12 months*, whether they work or not. Life income: While a lumpsum pay-out is a sound solution for once-off expenses like paying off debt and estate duty, it’s difficult to know how much a client will need to leave their family when they pass away. Life cover that pays as a monthly income provides your clients’ beneficiaries with the certainty of a monthly income for as long as they need. For example, they can leave a monthly payment to their spouse to pay the household bills for the rest of their life, or they can select an income amount for a specified period to ensure their children’s education costs are covered. At the end of the day, what makes income protection really powerful is when it’s used as a holistic solution to protect your clients’ income against all risk events. *Subject to the waiting period and benefit term selected.
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30 November 2021
INCOME PROTECTION FEATURE
Why severe illness cover has never been more vital
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he COVID-19 pandemic has wrought a heavy toll – both emotionally and financially – on South Africans, but according to the 2021 Old Mutual Savings and Investment Monitor, it has had the welcome effect of making many revise their attitude towards money. 87% of respondents said that COVID-19 has made them rethink the way they think about and manage their finances, while 68% have started saving on a regular basis in the last year. “Old Mutual’s claims stats reflect that the Big Four illnesses (cancer, heart attacks, strokes and coronary artery bypass grafts) contributed to 70% of the illness claims paid in 2020, with cancer still reflecting the largest proportion,” says Lizl Budhram, Head of Advice at Old Mutual Personal Finance. “This simply highlights the extreme relevance of severe illness cover in the current climate – and the truth is, many clients are reassessing their level of risk cover.” She notes that the risk landscape has shifted. “When you look at risk cover, you have life insurance and funeral insurance on the one hand, both of which take effect after your customer passes away. On the other hand, the customer has medical scheme membership, gap cover, disability insurance and severe illness cover, which make up a suite of solutions that can address any medical condition occurring during your customer’s lifetime.” A quantitative survey by Digital Insights South Africa in July 2021 revealed that severe illness product ownership has the lowest take-up out of the various personal risk products. Consumers who typically have severe illness cover appear to be more mature financially. They are also more likely to be 30- to 50-yearold males, earning R60 000 to R79 999. However, since the start of the lockdown there has been increased ownership for severe illness cover (15%), driven largely by 25- to 29-year-old black consumers in the R40 000 to R59 999 income bracket. “There is also a large portion of the market that earn a significant income, for example the self-employed bracket, who may not have severe illness cover, although they may have an increased need for it as they don’t have any sick-leave benefits,” Budhram says.
complicated and daunting than life insurance. Now is the time to really explain to clients how these benefits fit into their personal financial plan,” she says. Typically, when clients have a severe illness, there are four stages with different cost implications, and different risk cover kicks in at different stages: • Diagnosis: This stage is typically covered by your medical scheme. “There is a sliver of costs that most customers plan to cover themselves and they can generally afford that.” • Treatment: At this stage the medical scheme starts to play a more significant role and, however, there is usually a bigger out-of-pocket aspect, which can be addressed with gap cover. • Recovery: “This is when severe illness cover comes to the fore. During the recovery phase, customers may be looking at making changes to their home and car, plus other lifestyle adjustments like full-time childcare, out-of-hospital therapy, a qualified healthcarer for yourself, etc. These expenses may not be underestimated. Your customer may find that they are covered adequately during diagnosis and treatment, but it’s the tail-end of the process where severe illness comes to the fore,” Budhram cautions. • Unexpected costs: It is typically only when a person has completed treatment that longer-term implications may set in, such as being unable to return to work in the short to medium term, depression, ongoing medical costs, and possibly having to go into early retirement.
Where does severe illness cover fit in? She adds that now is the ideal opportunity for advisers to help customers understand the relevance of severe illness and disability cover. “To customers, severe illness cover can be a bit more
Budhram adds that severe illness cover is a critical aspect of income protection. “Going forward post recovery, it is not uncommon to find that customers really need income protection to keep their regular expenses covered, particularly if they are further away from retirement.”
Lizl Budhram, Head: Advice, Old Mutual
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Reinventing income protection
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The goal of income protection is to ensure that your clients continue to receive a monthly income should they become temporarily or permanently disabled; with the objective that their financial position remains the same before and after an event.” This is according to Sibusiso Khumalo, technical marketing manager at Momentum Retail Life Insurance. He adds, “Clients’ income must therefore be protected by offering them unique income protection that is specifically designed with claims certainty in mind. This is exactly what Momentum Myriad’s Complete Income Protector benefit offers: bespoke features that will adapt to clients’ changing needs. This benefit, in combination with our Permanent Disability Enhancer rider benefit, provides a flexible, simplified but comprehensive solution to address income disability, lumpsum disability and impairment needs in a single cost-effective solution.” Momentum Myriad’s Permanent Disability Enhancer rider benefit was designed to provide the best features of both income disability and lumpsum disability at an affordable price. When selecting this rider benefit, clients have the flexibility to commute a part, or all, of their future monthly income protection pay-outs to a lumpsum pay-out, whenever they choose to, once a permanent disability or impairment claim was assessed and approved. Clients will also have the following choices when it is determined that they are permanently disabled:
“Clients’ financial needs can change in a heartbeat, especially if they become disabled”
Option 1 They can select to receive the regular income up to their benefit expiry date. However, should they pass away before the benefit expiry date, the outstanding monthly pay-outs will be converted to a lumpsum and paid to their beneficiaries, or into their estate. Option 2 They have the option to convert the full, or part of, their future income protection pay-outs into a lumpsum pay-out. In addition, clients can exercise this option at claims stage or any time thereafter. They can even exercise the option multiple times, for as long as they have not yet converted 100% of their future disability income. Giving new meaning to the concept of flexibility “This solution empowers clients to insure themselves against a loss of income with the claim certainty of having access to a regular income, with no exposure to investment risk – and with the comfort that pay-outs are guaranteed until the selected benefit expiry date,” says Khumalo. Furthermore, if a client qualifies for a lumpsum pay-out, but decides to receive a monthly pay-out instead, the monthly pay-out will not be subject to any financial reassessment against active income or other income disability benefit pay-outs. Clients’ financial needs can change in a heartbeat, especially if they become disabled. When the Complete Income Protector Benefit is combined with the Permanent Disability Enhancer rider benefit, clients have the ultimate flexibility when replacing their income as it combines the best features of income disability and lumpsum disability. They will have the advantage of cover for temporary and partial disability that is not provided by lumpsum benefits, while also having the option of lumpsum pay-outs if they qualify for a claim on the Permanent Disability Enhancer benefit criteria; something that is not normally available on income protection benefits. Sibusiso Khumalo, Technical Marketing Manager, Momentum Retail Life Insurance
30 November 2021
RISK
Professional advice is not a ‘nice to have’ – especially in insurance BY SANKOFA INSURANCE BROKERS
T
echnology has practically taken over in most spheres of existence – from business transacting to personal and everyday activities like shopping, staying in touch, as well as education – and insurance is definitely a sector that is not exempt from this ‘technological takeover’. However, as much as customers may prefer conducting their affairs technologically, one thing has remained constant: the need for good and reliable professional advice. Companies like Sankofa Insurance Brokers still prides itself in offering reliable brokerage services, ensuring clients get the best advice to make the best choices for their risk covers. Like many other business sectors, insurance as well as laws and regulations covering it, are subject to changes. Customers can easily access such information on the Internet; however, the language may not be easy to digest. At Sankofa, we offer customers a service
that is enshrined in our values of trust, respect and honesty; excellence and integrity; customer focus; and people and the community. Why use a broker when you can just ‘search on Google’? Digitisation has made accessing certain services as easy as having a username and password, which means cutting out any middleman all together. However, making use of an insurance broker has many benefits that can surpass transacting technologically, especially for small businesses and individuals. • Apart from providing human interaction, brokers have experience of a wide range of products and services that can offer clients comparisons, without them having to shop around themselves. Brokers are qualified to analyse your risks and to advise you accordingly, which means receiving a personalised service to help determine the best possible risk cover. • Deciding on insurance cover is not
very simple, especially considering the language used in the documentation. A broker can simplify and assess your situation and also help shop around for the right insurance product that meets your specific needs. • Brokers assist you with your claims preparation and claims settlements – they advocate for their clients and ensure they get the best possible settlement because they act on behalf of the client. • Insurance brokers are required to register with the FIA (Financial Intermediaries Association of Southern Africa) and FSCA (Financial Sector Conduct Authority) . This means that brokers are constantly subjected to audits and checks throughout the year to ensure they remain accountable for their actions. • With technology comes cybersecurity,
which is not always guaranteed, especially with the growth in cybercrime. This poses a risk of hacking and having clients’ personal information and documents exposed to criminal interference. However, having a broker comes with the safety of knowing that there is someone guarding your personal information. Brokers are always on hand to offer professional advice, therefore it is always advisable that customers, including big business, SMEs, government and individuals, make use of their services in order to reap the full benefit of insurance products, including any clarifications on any changes that may affect the customers’ insurance needs. An Authorised Financial Services Provider - FSP 44269
Putting excellence first.
SANKOFA Insurance Expertise. www.sankofaib.co.za EI7766
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30 November 2021
RISK
The role of the consumer in the creation of insurance products BY GREG GATHERER Account Manager, Liferay Africa
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raditional insurers are under greater pressure today than ever before. Even before the pandemic, South African insurers were facing a whirlwind of claims, raising questions about the long-term viability of the industry. COVID-19 only exacerbated that, as did the unrest which rocked the country in July. Additionally, a slew of upstart insurtechs are coming for the traditional insurer’s lunch.
Combined, those factors mean that business as usual simply isn’t an option. Insurance is a grudge purchase at the best of times and if an insurer isn’t meeting a customer’s expectations, they’ll very quickly jump ship. If they have any chance of meeting – or preferably beating – those expectations, they don’t just need to innovate and adapt. Instead, they need to actively involve consumers in the creation of their products. The power of CX Most industries today understand the importance of good customer experience. It’s worth pointing out, however, that 73% of customers expect companies to understand their needs and expectations. That’s as true for insurance customers as it is for any other industry. And yet insurers have been historically poor when it comes to engaging with their customers. Stats show that more than 90% of insurers worldwide do not communicate with their customers even once a year, and that 20 to 40% of their customer base will not receive a single communication all year. And while the rapid pace of digital transformation over the past 18 months or so may have improved that, the fact remains that no insurer can be certain that it’s giving its customers what they need if it’s not engaging with them.
Digital and adaptability Fortunately, digitalisation has made it increasingly easy and lucrative to do so. According to Deloitte research, the likelihood of a prospect buying a policy once they apply increases from 70% to nearly 90% when digitalisation speeds up the underwriting and application process to approximately real-time. But simply using digitalisation to speed up the application process isn’t enough to differentiate one insurer from another.
“You need to make it just as easy to update details and, especially, to file and follow up on claims” In order for that to happen, they have to take digitalisation and adaptability a step further by bringing the consumer into the product-creation process. Even though some insurers might find that concept radical, it really isn’t. Many mobile network operators already allow people to customise their plans according to how
Ma-Afrika Hotels wins final business interruption insurance battle
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he Supreme Court of Appeal last month dismissed Santam’s appeal and upheld the Western Cape High Court’s finding in favour of Ma-Afrika Hotels and Stellenbosch Kitchen in the final stretch of the battle to hold Santam liable for COVID-19 Business Interruption claims in the tourism and hospitality industry. The decision means that Santam is obligated to pay MaAfrika Hotels and Stellenbosch Kitchen for the full 18-month period of its policies. André Pieterse, Chairman and CEO of Ma-Afrika Hotels, says, “We are most grateful to the honourable judges of the SCA, since originally Santam had argued that they had no obligation in terms of the policy. However, following the judgment in the Cape High Court in November 2020, Santam acknowledged their liability, but argued that it was only liable for three months, despite the full bench of the Western Cape High Court having rejected their argument.” Ryan Woolley, CEO of ICA, adds that the decision provides much-needed certainty for the finalisation of outstanding claims for businesses in the tourism and hospitality sector, who have had to wait more than 18 months for valid claims to be settled. “The Court’s decision in this matter is crucial for thousands of Santam’s Hospitality & Leisure division’s Business Interruption policyholders, and once the claims are settled by insurers, funds will flow to assist a desperate sector of the economy. “We all know that the endless litigation and slow progress on payment of claims by certain insurers has had a devastating
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impact on businesses in a sector that remains severely challenged by the pandemic, affecting the lives of thousands of employees and their dependents. “The behaviour of insurers throughout this debacle has been a travesty. In essence, Ryan Woolley, they chose to abandon CEO, ICA their customers in their darkest time of need. This has impacted not only the reputations of short-term insurance companies, but also on insurance as an overall category. Their Stalingrad strategy of deny, delay and defend has eroded the public’s trust in insurance and we anticipate that it will take significant effort, commitment and time to restore customers’ faith in the sector.” Woolley extended his gratitude and congratulations to the entire legal team, and to André Pieterse and his colleagues at Ma-Afrika. ICA and Ma-Afrika Hotel’s legal team is led by advocates Jeremy Gauntlett QC SC, Mike van der Nest SC, Sean Rosenberg SC, Guy Elliott SC, and Porchia Long and Jason Mitchell. They are instructed by attorneys Anel Bestbier of Thomson Wilks, and David Bayliss.
much data or airtime they need. While insurance is heavily regulated, there’s no reason that it shouldn’t offer similar levels of flexibility. A good place to start is by allowing consumers to choose what they can afford. Rather than trying to upsell a customer on something we already know to be a grudge purchase, let the customer personalise a product according to their budgets. Some innovators in the insurance space are already doing this. Still others have gone a step further and allow customers to only activate insurance when they need it. An example of this is allowing customers to turn parts of their car insurance off when they’re not driving. Seamless digital experience None of these changes, however, will matter if the insurer doesn’t offer a seamless digital experience for its customers throughout their customer journeys. So, even if you’ve made it easy to sign up and switch to you from another insurer, you’ve only gone part of the way. You need to make it just as easy to update details and, especially, to file and follow up on claims. The situations in which people make insurance claims are almost always emotive and sometimes traumatic. Whether it’s an automotive accident, weather damage to a home or business, or a major health crisis, the last thing you want is to make your customer’s life more difficult. Even forcing them from one digital channel to another, or not allowing them to seamlessly move between channels, can result in a negative customer experience. Instead, you should aim to engender a sense of trust so they know they’re being supported and guided through every interaction they have with you. Engagement and evolution Having this level of choice on an ongoing basis also encourages consumers to engage with the product. That’s important because they know when their circumstances change. If you give them control, they’re more likely to view your brand favourably and engage with you more frequently. Critically, these engagements also act as datapoints, meaning that consumer choices become a part of the algorithm. This, in turn, allows insurers to offer better products and services to their customers. In effect, it creates a virtuous cycle that benefits both the customer and the insurers. If insurers are going to survive and thrive going forward, they need to understand and embrace this. Doing so can only bring success. Failure to do so, meanwhile, means running the risk of becoming obsolete.
EDITOR’S
30 November 2021
BOOKS ETCETERA
BOOKSHELF
History of South Africa By Thula Simpson South Africa was born in war, its growth has been marked by crises and ruptures, and it once again stands on a precipice. History of South Africa explores the country’s tumultuous journey from the aftermath of the Second Anglo-Boer War to the COVID-19 pandemic. Drawing on never-before-published documentary evidence – including diaries, letters, eyewitness testimony and diplomatic reports – the book follows the South African people through the battles, elections, repression, resistance, strikes, insurrections, massacres, economic crashes, and health crises that have shaped the nation’s character. Tracking South Africa’s path from colony to Union and from apartheid to democracy, the book documents the influence of key figures, including Pixley Seme, Jan Smuts, Lilian Ngoyi, HF Verwoerd, Nelson Mandela, Steve Biko, PW Botha, Thabo Mbeki, Jacob Zuma and Cyril Ramaphosa. Detailed accounts of definitive events are given, such as the 1922 Rand Revolt, the Defiance Campaign, Sharpeville, the Soweto uprising and the Marikana massacre. Looking beyond the country’s borders, History of South Africa sheds light on the role of people such as Mohandas Gandhi, Winston Churchill, Fidel Castro and Margaret Thatcher, and unpacks military conflicts such as the World Wars, the armed struggle and the Border War. The book explores the transition to democracy and traces the phases of ANC rule – from the Rainbow Nation to transformation, state capture to ‘New Dawn’. It examines the divisive and unifying role of sport, the ups and downs of the economy, and the impact of pandemics, from the Spanish flu to AIDS and COVID-19. With South Africa currently facing a crisis as severe as any in its history, Simpson’s work shows that these challenges are neither unprecedented nor insurmountable, and that there are principles to be found in history that may lead us safely into the future.
Black Consciousness: A Love Story By Hlumelo Biko In 1968, two young medical students, Steve Biko and Mamphela Ramphele, fell in love while dreaming of a life free from oppression and racial discrimination. Their love story is also the story of the founding of the Black Consciousness Movement (BCM) by a group of 15 principled and ambitious students at the University of Natal in Durban in the early 1970s. In this deeply personal book, Hlumelo Biko, who was born of Steve and Mamphela’s union, movingly recounts his parents’ love story and how the BCM’s message of black self-love and self-reliance helped to change the course of South African history. Based on interviews with some of the BCM’s founding members, Black Consciousness describes the early years of the movement in vivid detail and sets out its guiding principles around a positive black identity, black theology, and the practice of Ubuntu through community-based programmes. In spiritual conversation with his father, Hlumelo re-examines what it takes to live a Black Consciousness life in today’s South Africa. He also explains why he believes his father – who was brutally murdered by the apartheid police in 1977 – would have supported true radical economic transformation if he were alive today.
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Labour Law in Practice By Andrew Levy Now in its second revised edition, Labour Law in Practice has sold over 10 000 copies and has helped numerous South African managers and business owners navigate their way safely through what sometimes seems to be an impenetrable maze of labour law and practice. Andrew Levy, arguably South Africa’s best-known labour resource, has over 50 years’ experience in the field, and has taught and trained thousands of students and managers. In the author’s opinion, labour relations are not difficult – it is really a matter of common sense and being able to judge an issue based on the facts. His teaching method is to reduce complex issues into simple and logical steps, and then to show how these can be taken with confidence. Written in an easy-to-understand style and laid out in an accessible format, the book covers all essential labour law areas, including hiring new staff, terminating employment contracts, handling poor performance and misconduct, and managing staff attendance, leave and remuneration. The new edition has been updated to include topics such as minimum wage, the use of short-term contracts and labour brokers, up-to-the-minute labour law amendments, and strike handling. It’s an essential read for any employer or business owner.
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