MoneyMarketing November 2018

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30 November 2018 | www.moneymarketing.co.za

First for the professional personal financial adviser

WHAT’S INSIDE

YOUR NOVEMBER ISSUE

HOW TO PROTECT VULNERABLE EMPLOYEES’ RETIREMENT SAVINGS

FIVE SIMPLE WAYS TO GET YOUR CLIENTS TO TAKE ACTION

CONSTRUCTION AND ENGINEERING: MANAGING THE RISKS OF CATASTROPHES

Financially vulnerable employees tend to be more risk averse

Make product benefits as clear as possible to assist in decision-making

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Page 23

What professionals can do to mitigate the risk of being held liable for natural or manmade catastrophes Page 29

Mboweni’s appointment seen as positive for SA economy

S

outh Africa’s sixth finance minister in the last five years was appointed last month when former SA Reserve Bank (SARB) Governor Tito Mboweni was sworn in. This followed President Cyril Ramaphosa’s acceptance of Nhlanhla Nene’s request to step down.

Citadel Director and Chief Investment Officer George Herman believes that Nene deserves enormous respect for taking this decision after failing to disclose private meetings with the controversial Gupta family.

“Whatever one’s personal opinion of him may be, he should be applauded as the first South African politician to have apologised and fallen on his sword for having played a role in State Capture, without having been found guilty of any transgressions in a court of law,” he says.

fight against corruption. This may go down in history as the beginning of South Africa’s political cleansing, and hopefully Nene’s example will encourage other implicated politicians to do the same.”

Mboweni’s appointment has been seen as very favourable for the South African market, boosting confidence both locally and abroad – although it HIS APPOINTMENT was, for many, unexpected.

WAS SOMEWHAT “His appointment was somewhat of a surprise OF A SURPRISE given that he had taken himself out of the running when the post was vacant in February, advocating for more of an advisory role,” says Nema Ramkhelawan-Bhana of RMB Global Markets Research.

She adds that Mboweni’s selection is considered a strategic one, “given that he has been removed from the executive for many years, sheltering him from political divisiveness both within the ANC and the government”.

Political cleansing “Furthermore, the fact that President Ramaphosa specifically cited governance as his reason for accepting the resignation represents a huge step forward in his administration’s

Continued on page 3

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ALSI TR (Equity) Laurium Long Short Prescient (RI) Hedge Fund (LS)

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NEWS & OPINION

Analysts at Barclays Global Economic Research see the appointment as constructive, given their view that “the country needs to implement what could be rather painful macro reforms in education, labour, the public sector, SOEs, infrastructure and energy to reverse the structural damage that many years of active apartheid policy and post-apartheid policy paralysis have wreaked on the country”.

They believe that Mboweni is in a good position to lead such a reform programme, given his demonstrated ability “to hold the line where it matters, together with his technical skill set”.

Overwhelmingly positive appointment CEO of Cannon Asset Managers, Dr Adrian Saville, also welcomes Mboweni’s appointment.

“It comes at a time when South Africa needs to restore domestic investor confidence and assure foreign investors of economic stability, after a decade of directionless growth and increasingly compromised institutional capacity under the Zuma administration.”

He adds that President Cyril Ramaphosa has gone a long way already in getting the country onto a higher path and “although the circumstances surrounding Nhlanhla Nene’s being replaced are unfortunate, the appointment of Tito Mboweni as Minister of Finance is overwhelmingly positive.”

MBOWENI WAS PART OF THE SO-CALLED ‘TM TRIUMVIRATE’

Saville points out that Mboweni was part of the so-called ‘TM Triumvirate’ – along with former president Thabo Mbeki and former finance minister Trevor Manuel – that oversaw the ‘Mbeki Miracle’ of “a period of rapid growth, low inflation and rising prosperity that South Africa enjoyed over most of the noughties decade”.

NWU economist Professor Raymond Parsons is also optimistic about Mboweni’s appointment as he sees it as “a confidencebuilding and reassuring step for the economy”.

“The latest change at the top of the National Treasury comes especially at a time when policy uncertainty remains in negative territory and when plans, policies and new initiatives to promote economic recovery and reform need high credibility,” Parsons says.

“Reducing policy uncertainty and boosting investor confidence are still high priorities.”

Tendencies towards outspokenness But the question remains: What about Mboweni’s tendencies towards outspokenness?

“This has caused him problems in the past – when at the SARB – for things he has said to journalists on the record that should not have been; in one famous case about what would happen at an MPC meeting the following week,” says Peter Attard Montalto, Head of Capital Markets Research at Intellidex.

“He has already – from his interactions with investors in recent years and his active Twitter posts – shifted quite far to the left on issues like mine ownership (advocating that the state should have 40% stake in all mines in one tweet), a sovereign wealth fund, a state bank and radical economic transformation,” Attard Montalto adds.

“As such we are cautious for now on exactly what role he will take on macroeconomic policy – whatever it will be, will be forceful and public, but National Treasury staff may well be able to ‘wrestle’ him back to a more orthodox view.”

EDITOR’S NOTE

I

am the owner of a T-shirt bearing the slogan ‘Viva inflation targeting’. It was given to all attendees at SA Reserve Bank Governor Tito Mboweni’s farewell party for journalists that took place nine years ago at a restaurant in Illovo.

I recall how jovial the Governor was that evening, how the pudding served was the Governor’s favourite jelly and custard – and how sad we journos were that we were saying goodbye to him. For while Governor Mboweni may have disliked press photographers (and perhaps with good reason!), he always treated journalists well and in return was held by them in high regard.

Most of the journalists put their T-shirts on that evening and it was amusing to see so many ‘Viva inflation targeting’ slogans in the room.

As Governor of the SARB, Tito Mboweni was responsible for promoting inflation targeting – a practice that broke down double-digit inflation that had plagued the country for many years.

And so it was inevitable that the former SARB Governor’s appointment as the country’s Minister of Finance was greeted with a great deal of cheer from business organisations – and even Cosatu ( the minister was a former labour minister in the Mandela administration).

Mboweni is respected by the markets, something that is critical at a time when political uncertainty clouds South Africa’s image.

I think one must commend former Finance Minister Nhlanhla Nene for resigning and I think it’s only fair that he be remembered for opposing former President Jacob Zuma’s plans for the controversial nuclear deal. As the civil action organisation, OUTA, said in a statement, “Offering to resign is a testament of Nene’s character, despite errors of judgement during his tenure. By doing so, Mr Nene has set a new benchmark of what society expects from Government leadership.”

I think I speak for most South Africans when I say, “Welcome, Minister Mboweni. We wish you every success in your new role.”

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

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NEWS & OPINION

Continued from page 1

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PROFILE

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NEWS & OPINION

30 November 2018

SANGEETH SEWNATH DEPUTY MD, INVESTEC ASSET MANAGEMENT

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

As a child, it is very difficult to aspire to a career that you are not exposed to. I come from a family that worked with their hands. My dad and uncles were builders. I guess I aspired to someday be like them.

My career in financial services is very much by accident. The story goes back to my days in high school. I started a maths club with my girlfriend (now my wife), probably as a means to spend more time together! One of the things we did was publish a maths digest containing maths problems and puzzles to foster interest in maths at school. A lot of the inspiration came from a maths digest published by Old Mutual at the time.

At the back of every one of these Old Mutual maths digests was a column posing the questions: “Do you like maths? Have you considered a career as an actuary?”

I took two key insights from that article – the first was that it was a career that paid really good money and the second was that it would be a perfect choice given my love for maths. It was a no-brainer! I went on to study actuarial science, which led me here. I have left behind my skills in hanging doors, but you will frequently still find me tinkering in my own home.

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

I think a good investment is one in which you stay invested for a long time. People have very shortterm time horizons and I believe the biggest value destruction is as a result of investors churning their investments too often. I recently read a research paper that revealed that the unit trust industry average holding period for investments in South Africa has reduced from 3.5 years to 2.5 years over the last ten years – a reduction in the holding period of almost a third in just a decade!

Investors have become increasingly obsessed by short-term performance rather than staying the course and allowing their investments to benefit from compound growth.

VERY BRIEFLY

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

My first investment was Steinhoff! It was 2004, and I was super excited to buy my first share.

I was getting ideas from portfolio managers about what to buy and Steinhoff, at around R22 a share, came highly recommended.

Like many other people who buy shares on a whim, I bought it and then did very little about it. I have neither the time nor the skill set to trade individual shares.

I am embarrassed to admit that I still hold it!

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

Best: Buying my first home in Johannesburg in 2000 when interest rates were 18%! I had no idea about affordability or interest rate cycles. Fortunately, interest rates reduced from those levels and I sold that property for more than double what I paid for it less than four years later. It was my first big windfall, until I saw property prices in Cape Town!

Worst: Being told by ABSA that my three-year actuarial degree was not professional enough for them to give me a credit card!

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

I read books on investing but given how much investment material I read during the course of my work, I prefer to read books that aren’t related to investment in my leisure time. I have just finished Homo Deus – A Brief History of Tomorrow by Yuval Noah Harari. It is an incredible book that opened my mind to the possibilities of what humankind could achieve in the future. It’s a tough read because it challenges everything we take for granted.

UPS & DOWNS

A deal between government, labour and business at last month’s Jobs Summit in Midrand could see the creation of another 275 000 jobs per year. Presently, 9.6 million people in South Africa are unable to find work.

The framework agreement of around

80 pages contains interventions that will hopefully help boost the economy. President Cyril Ramaphosa says he will meet every three months with business and labour in a presidential committee to monitor the unemployment crisis.

The International Monetary Fund (IMF) has cut its forecasts of South Africa’s economic growth for both this year and 2019, according to its latest World Economic Outlook Report.

The IMF now sees the country’s economy as expanding 0.8% in 2018, down from a previous forecast of 1.5%. The economy is forecast to grow 1.4% in 2019, down

from a previous projection of 1.7%.

According to the IMF, “Recent reforms in South Africa, such as measures adopted to tackle corruption, to strengthen procurement, and the intention to eliminate wasteful expenditure, are welcome.”

Garth Napier has been appointed MD of Old Mutual Insure, pending regulatory approval.

“Napier’s extensive experience in retail strategy formulation and execution, as well as his solid business management credentials, make him the ideal candidate to lead the continued turnaround of Old Mutual Insure,” the company said in a statement. Napier holds a Bachelor of Commerce (Honours) from the University of KwaZulu-Natal and a Masters in Business Administration from Harvard University. As the MD of Pep Africa, he was responsible for over 330 stores operating across seven countries. Prior to this role, Napier was the MD for the Edcon Speciality Division, comprising five chains with Garth Napier, MD, over 700 stores in total.

Old Mutual insure

René Kotzé of PSG Wealth in Pretoria recently received the Top FPSA® Candidate Award 2017 at the 8th Annual FISA Conference in Sandton.

The award is made annually to the candidate who achieves the highest average marks for three required modules during the previous year’s FPSA® examinations. Kotzé scored an average of 88% for Law and Ethics in Fiduciary Services, Wills Consultation and Drafting, and Estate Administration. The award consists of a trophy and certificate, a R10 000 cash prize, and registration free of charge to attend the FISA conference at which the award is handed over.

From left to right: René Kotzé, Angélique Visser (FISA Councillor), Eben Nel (FISA Chairperson)

BDO Wealth Advisers have acquired Lepar Financial Services, an independent financial services provider based in Cape Town.

Lepar was established in October 2006 by David Lepar, who has been in the financial services industry since 1987. The business advises more than 230 families about 20 retirement funds and a further 100 medical aid members. Lepar says, “For the past seven years, I attempted to find a suitable succession plan that would satisfy the needs of all my clients in the event of my untimely demise. I realised my client base is so diversified that my search for an individual or small operation was not a correct fit. I needed a diverse operation that could not only look after the day-to-day needs of clients but also provide other services, like estate planning and tax advice, under one roof.”

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NEWS & OPINION

30 November 2018

ASABA honours Old Mutual’s Karabo Morule

T

he Association of South African Black it previously. As a qualified actuary, I’ve been Actuarial Professionals (ASABA) has fortunate to enjoy the support of many of my recognised Karabo Morule, MD of Old peers and colleagues in my career and am proud Mutual Personal Finance, with the Inkanyezi Award to be giving back to a profession that plays such an for her valuable contributions to the actuarial important role in the South African insurance and profession. finance landscape.”

Morule, who is the second black female actuary She adds: “It’s truly an exciting time to be part to qualify in South Africa, the first black woman to of the actuarial profession and we have a valuable head up the Old Mutual Personal contribution to make to the dialogue Finance division and the first black around access to financial services, IT’S TRULY AN female actuary to serve on Old new legislation such as the retail Mutual’s executive committee, distribution review, the development EXCITING TIME was commended by the Actuarial of infrastructure taking mobility into TO BE PART OF Women’s Committee (AWC) for account, and long-term thinking in THE ACTUARIAL her personal and professional the context of SA Inc. We have a role success, mentorship to other to play in the public sector as well, PROFESSION women in financial services, and at national and even municipal level. leadership in business and the greater community.

Through coaching and development, we are making Morule says she is grateful for the opportunity to the industry more accessible and inclusive of all contribute and takes great pride in being a member South Africans.” of the actuarial profession in South Africa.

The award, presented at ASABA’s Annual “It’s an honour to be recognised by the AWC Conference Gala Dinner, follows on Morule’s of ASABA, an association working to promote selection earlier this year as a 2018 World actuarial science as a career to many black Economic Forum Young Global Leader.

South Africans who may not have considered According to Memory Zimba, Chairperson of

the AWC and President Elect of ASABA, Morule easily met the criteria for the award: “Karabo was awarded the Inkanyezi Award not only for her many accomplishments, but for always availing herself to the AWC and her continued support of ASABA. To me personally, she is a role model and mentor. She creates time despite her busy schedule to provide guidance and challenge my thinking, echoing the saying that ‘an actuary who is just an actuary is not an actuary’.”

“There is much to be done to bring more previously disadvantaged South Africans, especially women, into the actuarial profession. I believe I have much more to contribute and feel very privileged to be honoured by ASABA in this way,” says Morule.

Karabo Morule, Managing Director, Old Mutual Personal Finance

The future of automated advice in SA While many traditional FSPs in South Africa make use of computer algorithms to automate their financial advice process and to embed this into their overall digital strategy, the degree to which the automation has been implemented differs among providers.

This is according to the recent report

by Deloitte entitled SA’s readiness for automated financial advice.

“Most providers have put digital tools into the hands of their advisers to empower them to serve clients more efficiently,” the report says. “Initial concerns that sophisticated algorithms might crowd out human advisers seem to be unfounded.”

On the contrary, in an environment where margins of FSPs have come under pressure due to factors such as changing regulation, the report finds that these powerful tools enable human advisers to serve a larger client base at lower cost.

“Leveraging technology also enables advisers to be better informed about a broader range of products, serve more clients than normal, and decrease their own business overheads – thereby mitigating against margin pressures.

“Better-informed advisers are an important step towards customercentric advice.”

The report points out that some advisers have started to put digital tools directly into the hands of their clients through online platforms or mobile applications.

“These tools provide FSPs with new ways to engage their customers and, by cutting out face-to-face interaction, financial advice is becoming more affordable and accessible, even for lower-income earners.”

While acceptance of digital tools has increased, fully automated advice still has certain limitations and is usually only used for single-goal or simplistic investments.

“Given the novelty of fully automated advice, market players have observed that most clients still require a human ‘nudge’ such as a phone call or webchat with an adviser to complete an investment decision online.”

According to the report, the introduction of automation in the financial advice space affects the relationships between various industry players.

“Fintech companies are often seen as agile and innovative players that have spearheaded the disruption in the industry. However, due to factors such as scalability, trust and brand recognition, some fintechs find themselves stretched

to their limits and have to consider forging new alliances and partnerships to become or stay viable.”

Partnerships between fintechs and FSPs are usually mutually beneficial.

The report finds that fintechs are able to leverage the brand power of traditional FSPs – an important advantage in a trust-based industry – and therefore are able to reduce customer acquisition costs and scale their operations faster compared to a stand-alone offering.

On the other hand, by collaborating with fintechs, traditional FSPs can implement automated advice platforms faster and at a lower cost.

The report also finds that while only 2% of South Africans have an annual income of more than R400 000, most people in this pool have purchased

a financial product in the last three years, reflecting the huge appetite for these products.

The clear majority (more than 90%) sought advice – professional or informal – prior to purchasing a financial product and it is common for consumers to pay for this advice. This indicates that South Africans rely on advice and are prepared to pay for it.

Among the consumers that had bought a product during the last three years, professional financial advice was used to confirm that the choice of product was correct or to identify the right product once the type of product had been chosen.

The affirmation from a financial adviser is especially important for consumers over the age of 55, affluent or high-income South Africans.

COMPLIANCE FEATURE

30 November 2018

I

t has become increasingly clear that the underlying technology of cryptocurrencies, namely Blockchain, has some powerful applications that will pioneer new ways of working in many industries, and financial services is no exception.

The attraction of Blockchain is that a transaction can be completed more quickly and more securely than with current traditional systems. It has significant disruptive appeal and the potential to cut out intermediaries and costs, although the full potential has yet to be realised.

There is much to be said about financial services and the impact of Blockchain, and how this technology could potentially unleash itself on the South African insurance industry that has, in many ways, been immune to significant disruption.

Despite the rise of online brokers, most consumers still call their insurance broker by phone to purchase new policies, which in turn are processed in a paper chase and in many instances, a digitally unsecured environment.

This scenario is changing and the rise of the

millennials as a significant marketing group will no doubt see a further lurch away from physical intermediaries into the online space.

To further narrow the field of observation, we look more specifically at the compliance side of Blockchain for insurance. The eventual adoption of Blockchain by the larger insurance companies is not a question of if, but rather when, more specifically linked to the regulatory status of this technology (which on a sidebar is currently being reviewed by both a regulatory and industry task force grouping).

In the same way that insurance brokers who have been used to dealing with paper contracts will find their times changed, the compliance officer who has been ticking paper boxes will see a seismic shift in the landscape that will require a potentially altered set of skills.

A primary area of risk and compliance upside relates to the potential of Blockchain to improve fraud detection and increase risk prevention primarily by moving insurance claims and policies onto a secure ledger basis.

As such, Blockchain can help eliminate the common sources of fraud and mis-selling in

It pays to be working with a prepared team.

FINANCIAL SERVICES PROFESSIONALS www.compliserve.co.za / 087 897 6970 / info@compliserve.co.za

the insurance industry. Compliance is looking to ensure that the risks to a firm are minimised by an adherence to both principles and rules laid down by the firm and/or the Regulator.

Blockchain and equivalent technology offers the ability to hardcode processes and to insert smart documents/smart contracts into the insurance process, which allow for a far more secure and potentially error-free interaction with the policyholder.

The combination of big data and Blockchain has real potential to make significant changes and bring material efficiency to the monitoring regime of the compliance officer, who will be able to cast a net far wider than has previously been the case, simply due to the ability of a machine to do more.

It’s prudent to grasp the fact that technology is inevitably disrupting industries. I would encourage compliance officers to stay up to speed with Blockchain and proactively position themselves, so that when this technology inevitably hits their firm, they are able to advise business proactively rather than retrospectively.

COMPLIANCE

RICHARD RATTUE MD, Compli-Serve SA

Compliance considerations for Blockchain technology in insurance

7

COMPLIANCE FEATURE

8

30 November 2018

KERRI CRAWFORD Senior Associate, Norton Rose Fulbright

DR DES LEATT Skills Specialist at Compli-Serve SA

Fit and Proper competence requirements

B

oard Notice 194 introduces important new competence requirements for Class of Business Training and Product Specific Training and Tier 1 and Tier 2 financial products.

Who is exempt?

Product Specific Training does not apply to: • A Category II, Category IIA or a Category III FSP or its representatives; • Key individuals of all categories of FSPs, provided they comply with section 12, which mean they have adequate, appropriate and relevant skills, knowledge and expertise in respect of the financial services, financial products and functions they perform, as well as compliance with the minimum requirements set out in BN194. They will also have to maintain their competence.

It’s important to note that a representative rendering financial services in both Cat I and Cat II arenas will be required to complete the applicable Cat I Product Specific Training.

New and important requirements that now apply An FSP must ensure that prior to the rendering of any financial service, the FSP and its representatives are proficient and have completed and been assessed on their applicable product specific training, including any amendments (as of 1 May 2018).

According to the Authority, the requirements do not prohibit an FSP from appointing a representative who has not completed the Product Specific Training. However, such a person may not start rendering financial services unless all applicable training has been completed.

What should Product Specific Training cover?

According to the Authority, this must include training on the product’s specific characteristics, terms and features. This should include: • Any flexible benefit or service options • The nature and complexity of the product • The accessibility of benefits or funds and any restrictions or limitations structure, including underlying aspects of the product • The level of liquidity of the product and its underlying components fee structure, charges and other costs • The lock-in periods and relevant termination conditions • Guarantees and associated costs • The risks associated with particular investment strategies • Risks associated with investing and transacting • The expected outcomes that will be achieved by the client • The impact of tax on benefits • The intended target markets and intended outcomes • The impact of abnormal economic or market conditions • The identity of the product supplier • Any investment options or strategies • Any disclosures applicable to the product.

Who provides the training?

Product Specific Training must also be assessed, but this can be provided by any person, including the FSP or a product supplier. The Authority notes that some FSPs are also accredited training providers and would be able to provide both types of training.

Keep in mind Compulsory record keeping and reporting requirements are the same as was described previously for Class of Business training. It’s important for representatives to keep their own records of Product Specific Training completed. Finally, and most importantly, Product Specific Training must include any amendments to the financial product in question.

POPI and the cloud

T

he Protection of Personal Information Act, 2013 (POPI) is inching towards commencement. Once it commences, organisations that store personal information in the cloud will need to ensure that their arrangements with third party cloud providers are compliant.

Third party clouds If the cloud is hosted by a third party – whether a service provider or a group company – there must be a written contract between the organisation and the cloud provider, which requires it to take appropriate and reasonable measures to secure the stored information. Although this is the only requirement under POPI for these contracts, organisations must consider other risks, like the following: • Data breaches are everincreasing and POPI requires prompt notification to both the Information Regulator and affected data subjects. Cloud providers must immediately inform the organisation of suspected data breaches to enable these notifications to take place. This obligation should be expressly included in the contract so that organisations have contractual remedies (such as termination or damages) if the cloud provider fails to comply.

• POPI gives data subjects the right to access their personal information or request that it be corrected or deleted. The organisation will need the cloud provider’s cooperation to facilitate the request, so this should be included in the contract as well.

Offshore clouds Organisations can only store personal information on cloud servers located outside of South Africa in the circumstances set out in POPI. The data subject’s consent can be sought, but because consent can be refused or withdrawn and must meet specific requirements to be valid, it is typically not practical to rely solely on a cloud storage context.

POPI allows for transfer of personal information outside of South Africa where it is not reasonably possible to obtain the data subject’s consent, but they would be likely to give

consent because the transfer is for their benefit. This is unlikely to apply in a cloud storage context unless the contract with the data subject makes this benefit clear.

Personal information can be sent outside of South Africa if necessary to conclude or perform a contract, either with the data subject or in their interests. This will only apply in a cloud storage context if the contract makes it clear that cloud storage, possibly offshore, is necessary.

The last circumstance is where the personal information will be adequately protected outside of South Africa. The South African Reserve Bank has specifically referred to this in its recent Guidance Note 5/2018, that banks must now comply with when making use of cloud services or storing data outside of South Africa (together with Directive 3/2018). There are three ways banks can ensure adequate protection of personal information: 1. In terms of the law of the receiving country: The Information Regulator may follow the approach of the European Commission and publish a list of countries that are considered to have adequately protective laws for the purposes of POPI. 2. Under binding corporate rules: These are data sharing policies between companies in a multinational group, so are appropriate where the cloud provider is an affiliate.

3. In terms of a binding agreement with the cloud provider: This is generally the most practical option where the cloud provider is an unrelated third party, particularly as the organisation will already have to have a written contract, as mentioned above.

These three ways can be adopted by organisations other than banks.

If the cloud provider’s terms are non-negotiable, the organisation will need to make careful assessment as to whether they are adequately protective before accepting them.

Remember that personal information also includes information relating to juristic persons. These requirements are therefore not limited to storing personal information of employees and other individuals in the cloud.

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R9 780 16.4%

Prudential Dividend Maximiser Fund A

FTSE/JSE All Share Index Total Return

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R7 840 14.7%

Feb-05

Beware of focusing only on dividend yield Dividend yield (dividend per share ÷ share price) shouldn’t be the sole measure to use when building a dividend-focused portfolio – sustainability is equally important. A company’s share price may be cheap for a reason, giving it a high dividend yield. For example, when Anglo American stopped its dividend during 2016, its share price had already been underperforming the broader JSE. Passive ETF-type funds tracking high dividend-yield shares had consequently been increasing their exposure to the share, blindly following its rising dividend yield, and even bought more shares just before the dividend was cut to zero.

When Anglo American stopped its dividend, passive funds were forced to sell all their shares. Then, when the company resumed its dividend

R12 616 18.4%

Aug-05

This equation, from The Theory of Investment Value by John Burr Williams, the father of dividend investing, shows just how significant dividends are in deriving a company’s total return. One of Williams’ key insights was to ignore the market ‘buzz’ – such as that created by short-term earnings reports – and focus on both a company’s actual dividend payments and dividend paying potential.

To understand the dividendgenerating capacity of a company, you must look at three main indicators: its current dividends, its earnings and its book value. Ideally, for us to consider including a share in the Prudential Dividend Maximiser Fund, a company should score highly in its growth of all three of these, and the company’s share price should also look cheap relative to all three.

Consistent outperformance over the last 15 years R1 000 invested 15 years ago, cumulative returns 14 000 13 000 12 000 11 000 10 000 9 000 8 000 7 000 6 000 5 000 4 000 3 000 2 000 1 000 0 Feb-04

Total return of company = (Dividend ÷ Share price) + Dividend growth

Steinhoff is an excellent example of a group that had good earnings but persistently negative cash flow. It was paying dividends, but these were financed largely through borrowing and share issuance. So, these were essentially ‘trick’ dividends, paid to trick investors into thinking the company had cash flow.

Aug-04

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lthough dividends don’t make headlines compared to the latest company earnings reports, they are exceptionally important when valuing a share and when investing.

A dividend focus pays off

Aug-03

ROSS BIGGS Portfolio Manager, Prudential Investment Managers

R1 000 initial investment

INVESTING

10

ASISA Gen Equity category mean

Source: Morningstar, Iress

payment 12 months later at a much higher share price, these funds had never bought back the share and so completely missed out on the strong rally in its share price – and the attractive dividend. However, some active managers, like Prudential, were able to capitalise by cutting exposure to Anglo American early and buying it back again while the share price was still cheap, subsequently benefitting investors with both share price outperformance and attractive reinstated dividends.

Proof that dividends do matter The performance of the Prudential Dividend Maximiser Fund (shown in the graph) demonstrates how

investors benefit from an investment approach that focuses on companies offering both a sustainable dividend yield and long-term growth in dividends. Over the 15 years to 31 August 2018, the fund ranks #3 out of the 35 funds in the ASISA General Equity category, and has returned 18.4% p.a. after fees, strongly outperforming the category average of 14.7% p.a. over the same period.

The graph also highlights how the Dividend Maximiser Fund has beaten by 2% p.a. the FTSE/JSE All Share Index return over the same period.

So, when the headlines scream “Earnings skyrocket!” be sure to consider another critical dimension by asking yourself: “But what about the dividends?”

The downside of looking on the bright side of investment So how do you reckon your life is going to turn evidence to the contrary, people consistently but out over the coming years? Would you predict, irrationally predict they will be better off five years for example, you are going to be better off in five from now”. years’ time than you are today?

That said, the paper does find the gap between If you think, “Yes, I probably will be”, then – with future and current wellbeing expectations does a caveat we will come to shortly – you are by no diminish with age – and, in rich countries, is actually means alone, for it turns out human beings are negative among the elderly – perhaps suggesting you innately optimistic creatures. grow less optimistic (or more realistic) the Intuitively, of course, that longer you live. does make sense – after all, While that in itself is interesting – HUMAN BEINGS the instinct that things will be especially given how, on average, people ARE INNATELY better this time next year is a are increasingly living longer – two OPTIMISTIC pretty powerful motivation to aspects of the paper really stood out for keep on keeping on. us here in the Schroders Value Team.

CREATURES Still, the idea of humans as The first of these is the extremely eternal optimists also has strong academic backing strong data set on which the research is based – using from a paper published earlier this year by Nobel as it does more than 1.7 million Gallup World Poll prize-winning economist Sir Angus Deaton. observations gathered from 166 countries between As its title perhaps hints, What do Self-reports 2006 and 2016. of Wellbeing Say about Life-cycle Theory and Policy, The second aspect is the paper’s assertion that is not the lightest of reads. Here we are going all this data reveals the pattern of human overto focus on its more general conclusions on optimism is consistent across all regions of the “worldwide optimism about the future”. world. The reason that particularly catches our This is, in a nutshell, that “in spite of repeated attention is value investing is specifically designed

to take advantage of extremes of investor emotion, including over-optimism – and that very quality is apparently to be found in spades in every market across the globe.

Continued on page 12

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Continued from page 10

That is not to suggest value investors are not optimistic – obviously every investor has high hopes the stocks they buy will ultimately make them money – it is just that our high hopes tend to differ from everyone else’s.

Thus, the wider market may focus on, say, technology companies with exciting (if perhaps unproven) growth stories or so-called bond proxies with attractive (if perhaps unsustainable) yields.

And their natural, inbuilt optimism for the prospects of these businesses may lead people to pay over the odds to own them.

While it may be intuitive to feel optimistic about such companies’ prospects, however, value investors know from more than a century of data that, over the longer term, the more profitable route is the counterintuitive one – that is, buying financially strong businesses that have fallen on hard times. It is important to remember, of course, that past performance should not be used as a crystal ball for the future.

As a rule, the wider market’s natural optimism tends to fail when faced with such prospects, but that is what allows value investors to buy them more cheaply than we otherwise would.

And it is this margin of safety – in effect, paying a price that should be cheap enough to allow for a range of unexpected adverse outcomes – that is the basis for our own, admittedly counterintuitive, brand of optimism here in the Value Team.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

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

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Sculpture by Beth Diane Armstrong

Simon Adler, Value Fund Manager, Prescient Money Mktg 1-4 Tortoise Ad_r3.pdf Schroders

30 November 2018

The psychology of investing The brain’s response to markets is not always conducive to making sensible investment decisions, explains Jean-Jacques Duyvené de Wit, Portfolio Manager at Prescient Investment Management

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he average person’s emotional response to making or losing money is bigger than they think.

Two interesting findings from recent research can help us better understand investment decisionmaking. The first is that the brain activity of a person who is making money on their investments is indistinguishable from a person who is high on cocaine or morphine.

This helps explain why gambling can be so addictive.

We also understand why many investors may yearn for that ‘cocaine high’ of making money – and take risks that they wouldn’t take had they remained calculated and rational. Related to this is the flipside of the coin: Financial losses are processed in the same area of the brain that responds to mortal danger.

Experiencing mortal danger is the feeling of turning a corner and standing face-to-face with a hungry lion. Many people will identify with that feeling when they realise they’ve lost money in a transaction.

When an investor goes through a volatile period of winning and losing money, they can be taken on an emotional rollercoaster – experiencing cocaine highs and mortal danger lows in quick succession as their investments make and lose money.

It is during times like these that investors can make overly-emotional decisions that may detract from long-term performance. And it is for this reason that the stock market is such a challenging place – it demands an investor’s rational decision-making skills while eliciting strong emotional responses from them.

When it comes to the innate characteristics of the stock market, the environment in which investors operate, as with many endeavours in life, luck and skill, play some role in the outcome.

In games of chance, for example, calling heads or tails on a coin-toss, luck plays more of a role than skill. In running or chess, skill plays a larger role in understanding the outcome. It shouldn’t take very many races to distinguish 7/19/17 10:29:17 AM a lucky participant from a skilful

one, or to choose the more skilled of two participants.

Thinking along these lines, we see that there is a component of the outcome over which we exert influence and have some control – one can think of it as skill. There is also a component over which we have little control – call it luck.

As much as many might like to disagree, the day-to-day movements of the stock market incorporate a large component of randomness.

On the continuum between luck and skill, investing sits more toward the luck side. In the short-term.

In activities where skill exerts a greater influence over the outcome, cause and effect are closely linked, even in the short-term. But in activities where luck (or something outside of our control) has greater influence, cause and effect are only loosely linked in the short-term. One would, however, expect skill to shine through over time.

Fortunately, there are strategies to deal with emotional responses to market variability: Think long-term, avoid irrational decisions based on short-term market variations, and stay true to your investment plan.

In the highly variable stock market environment, a team approach focused on methods rather than individuals increases certainty. We think of skill as a process for making decisions that deliver over time.

The value of financial planning lies in helping investors understand their savings goals and the risks they need to accept to achieve them. Inflation is the enemy and investors need to avoid actions that compromise inflation-beating returns over the long term.

Jean-Jacques Duyvené de Wit, Portfolio Manager, Prescient Investment Management

SLOW AND STEADY WINS, CONSISTENTLY.

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At Prescient, we’re in it for the long run. In fact, our first clients are still

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our clients. They trust our proven, pragmatic approach; something we call

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QuantPlus ® . It’s how we invest – in the past, today, and in the future.

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T o k n ow m or e a b o u t a n y of o u r p r od u c t s a n d s e r v i c e s , visit www.prescient.co.za

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INVESTING 13

30 November 2018

PETER ARMITAGE CEO, Anchor Capital

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ach quarter we publish the Anchor Strategy and Asset Allocation report. Our private client business is responsible for ensuring that our clients’ experience of this is pertinent to them – meeting their specific investment needs, objectives and constraints in much the same way as a financial adviser would. While it is important that everyone’s personal quantitative asset allocation falls in line with a general strategy, it is also critical that it suits their individual return and risk profile from a qualitative perspective.

But, how is this behavioural personal profile determined?

Financial behaviour tends to be more emotional than rational and, as with the rest of an individual’s actions, is a deep-rooted expression of internal psychology. So, get to know your client’s psychology, especially around money. As a start to this conversation, questions about their childhood are very useful. Ask, “What is your earliest memory of money?”

Money memories It might sound like a strange question but as acclaimed personal financial expert, Suze Orman, says, “It’s amazing how much the mind can play a role in creating or destroying financial freedom. These money memories have such a hold on our lives – they directly impact how we deal with our money or we don’t deal with our money.” How we consciously or subconsciously behave is thus significantly impacted by our childhood or our memories thereof.

We find this question and the varied answers particularly interesting and thought-provoking – maybe since we spend all day, every day, surrounded by money and its impact on the world around us.

As an example, one of Anchor’s portfolio managers recollected the following as one of her earliest money memories: “Just before my 10th birthday, our family went to Disney World, Orlando.

Obviously, I have so many memories of this trip, but one of my favourites is

of us sitting in a supermarket parking lot, breaking bread. For lunch daily, we would enjoy fresh chip rolls washed down with a cold Game sports drink.

My mom had packed Game sachets in our suitcases and would prepare and freeze bottles of juice every evening for the next day. We did not buy the overpriced food and drink in the parks, but we still experienced the Disney magic (and the occasional ice-cream or treat) thanks to months of planning. This experience was repeated in my adult life last year with an unforgettable three weeks in Scandinavia with my family. It was only made possible thanks to extensive planning, detailed budgeting and, true to tradition, packing snacks in suitcases and surviving on squashed rolls wrapped in serviettes.”

The importance of money in our lives is true for everyone, the reason for it being so is different. Reflecting on money memories often helps people understand their relationship with money – from both a positive and

negative perspective. Relating this back to the example, my colleague learnt that if something is important to her (such as travel) she is happy to budget and sacrifice non-essentials for the overall experience. On the negative side, she often restricts herself completely by budgets and, if any unexpected expense must be incurred, she panics and is many times unable to enjoy an experience for what it is or to live in the moment.

Financial integrity encompasses understanding why people manage money in the way they do, and feel competent to either continue in that manner or make the necessary changes.

We have found it’s worthwhile taking a trip down your clients’ money memory lane – exploring their earliest money memories and then linking these memories back to current behaviour.

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PIETER KOEKEMOER Head of Personal Investing, Coronation

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30 November 2018

Higher expectations for SA equities

here are ‘higher expectations’ for South African equities over the next several years because the market is now far cheaper than previously, the earnings base for many domestic stocks is low, and South African-listed global stocks offer significant upside. This is the view of Pieter Koekemoer, Head of Personal Investing at Coronation “In short, the South African equity market has derated. We believe equity returns in the region of 8% to 12% per annum are feasible and the probability of achieving our performance targets within our income and growth funds (of 3% and 4% above inflation respectively) over the next several years has increased markedly,” Koekemoer says.

Global economic growth remains healthy, having plateaued at 3.5% - 4% in 2018, helped by the extremely aggressive monetary policies adopted since the global financial crisis, he adds.

Inflation has been well contained against many predictions, although it has edged up to around 2% in the US. Monetary policy in the US has started to normalise and the Fed has hiked interest rates a number of times and is expected to continue the hiking cycle further during 2019. The two-year US Treasury bill rate has reached 2%, which is in line with the dividend yield of the S&P. Monetary policy in Europe is expected to follow suit, with the European Central Bank likely to start hiking interest rates during 2019.

But not everything is positive.

“A stronger dollar, rising global bond yields, trade wars and some self-inflicted injuries – such as uncertainty about land reform in South Africa and

Turkey’s president showing dictator-like tendencies – have negatively affected emerging markets,” Koekemoer says.

“Turkey, Argentina, Brazil and South Africa have borne the brunt of the contagion. Brexit is another major global uncertainty, affecting not only the UK and Europe but also all the UK’s trading partners, of which South Africa is one. The possibility is increasing that the UK will leave the European Union without a deal.”

South African macro environment In South Africa, the short-lived ‘Ramaphoria’ phase following the ANC elective conference in December is over and has been overtaken by ‘Ramarealism’, he notes.

“JSE-listed shares that make their earnings in the domestic economy have given up most of the gains that followed on the election of Cyril Ramaphosa as ANC president, as the economy has slipped into recession. The emerging market crisis has put the rand under pressure that, together with a higher oil price, has caused fuel prices to rise. Fortunately, the Reserve Bank chose not to raise interest rates at its September Monetary Policy Committee meeting.”

However, not all is negative, Koekemoer believes.

The Zondo commission is investigating state capture, Zuma acolytes such as National Prosecuting Authority head Shaun Abrahams and head of SARS Tom Moyane have been removed, and some of the boards of stateowned enterprises have been reconstituted.

“We also have a revised Mining Charter and the nuclear deal is off the table. These are steps in the

right direction, but unfortunately years of corruption and poor governance are not remedied overnight. On the positive side, we think the current period of rand weakness is overdone and would not be surprised to see the currency recover some of its losses.”

Navigating the low-return world However, when it comes to investments, it remains a low-return world. “This is a scenario we warned against some years ago and the subsequent performance by the respective asset classes were much in line with our predictions,” Koekemoer points out.

Investors have taken fright and some have moved their capital from low- or medium-risk equity funds into fixed income funds. However, he sees this as the wrong time to flee to income-only funds as it expects future returns to improve and the additional exposure to risk assets have the potential of lifting the funds’ returns as it has done in the past.

“For example, if you invested R1m in an income fund when Capital Plus started in 2001, and had taken a drawdown of 2.5%, you would have just under R3m by now. Had you done the same in Capital Plus, your capital would now be around R5m. The same principle applies to a larger drawdown, obviously with a smaller terminal value.

“So, the fund with inherent growth potential would have protected your purchasing power far better than the fund without growth potential.

Capital Plus will provide a bumpier ride than a straight income fund but will have fewer highs and lows than an aggressive equity-only fund or a traditional high-equity balanced fund.”

No-deal Brexit contingency plans being prepared UK business advisory firm, FTI Consulting, has published its second Brexit in the Boardroom survey of over 2 000 leaders from large businesses across four major European economies. With under six months to go to the March 29th 2019 deadline, the survey analyses the responses from executives in France, Germany, Spain and the United Kingdom, providing a comprehensive overview of Brexit attitudes and how prepared their companies really are, comparing how these may have changed since the last survey in 2017.

In summary, business confidence remains robust. A total of 59% of business leaders still expect turnover to increase in the year following Brexit, but this confidence has dropped from a high of 66% last year. Expected growth in the number of employees has also taken a dip, falling from 64% to 56% in the same period.

Last December, 84% of businesses said they would be making irreversible decisions by the end of

September 2018. This survey shows that only 19% have actually done so.

Per market, French companies have done the most with 28% reporting they now have plans in place, compared to 17% in the UK. Clearly many large businesses have put off critical decisions they previously expected to have already made by now. It can only be assumed they have had to build multiple options internally to deal with a range of possible outcomes.

A dichotomy exists. Business leaders are becoming more certain that Brexit is coming (those saying it is more likely than unlikely is up this year from 76% to 78%), while remaining hesitant in how to prepare as the final deadline looms ever closer.

A lack of clarity in the political process is the underlining cause of hesitancy to act. It would appear that long-term planning has been replaced with more immediate contingency plans, with 76% of companies preparing for a no-deal scenario.

Whatever concern this raises is further compounded by how many respondents remain confident that a softer Brexit will be delivered, despite this crossing many of the red lines that the UK Government has clarified since last year.

“Business has clearly decided it will not get the clarity or the certainty it needs to enable it to prepare for the longer term,” says John Maloney, Head of FTI Consulting’s Brexit taskforce.

“The impact on individual businesses could be huge, suggesting R&D, jobs and commercial investment will be affected. Company boards are taking the appropriate action to mitigate the risk. How disruptive this will be will only become apparent in the coming months as we all wait to see if the political process can deliver an agreeable deal for both sides.”

Hans Hack, FTI Consulting Brexit taskforce member and former Dutch diplomat, says the UK looks most exposed, but it would be wrong to assume that European business is

immune from the consequences of a no-deal scenario.

“Relative optimism in France contrasts with significant drops in Germany and Spain. A wait-and-see approach isn’t an option anymore.

While it’s not too late for companies to influence what remains a fluid political process, preparation is now key. Companies will need help as they begin to adjust to the new commercial landscape,” he adds.

John Maloney, Head: Brexit Taskforce, FTI Consulting

Hans Hack, Brexit Taskforce Member, FTI Consulting

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INSIDER CHRONICLES

TIM HUGHES Corporate Affairs Director, Warwick

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30 November 2018

Adapt or die from climate change

e have been on climate change to craft the global picture. In warned! First, October this year, they released their findings. former US We have just 12 years (until 2030) to bring about Vice President Al Gore the required emission changes to contain global confronted the world with warming to a manageable 1.5 centigrade increase. the inconvenient truth that The major reason given for the 12-year window is the earth was warming at the lead time required to build major infrastructural such a pace that a two-degree projects to mitigate the already inevitable impacts centigrade increase would of climate change. This is not enough, however. The bring about unprecedented required changes are deep, profound and would climate change. require economic and social behavioural change Central to the graphic with such rapidity that there is no precedent in brilliance of Gore’s presentation history, resulting in a net zero carbon emission was a controversial claim that, position by 2050. unlike previous waves of extreme The threat to South Africa of climate change is warming and cooling, recent particularly acute and indeed structural. Firstly, climate change is historically while post-industrial global warming has been abnormal and can be ascribed measured at 0.8 centigrade, southern Africa has in part to human factors such as warmed at twice this rate. By extension, if the IPCC industrialisation and, in particular, is urging that global warming should be capped at the impact of vast quantities of carbon 1.5 centigrade by 2030, this will result in southern emissions spewed out from developed Africa warming by an alarming three degrees and industrialising countries. Thus, centigrade. In other words, we are geographically recent global configured to warm at a factor of two warming and times the global average. climate change The second structural challenge RECENT GLOBAL are anthropogenic confronting South Africa is that, as a WARMING in nature; they are country, we are relatively energy scarce AND CLIMATE man- made. and yet carbon resource rich in the The second major form of coal. This has resulted in the CHANGE ARE wake-up call was heralded costly option of building ANTHROPOGENIC climatically in 2007 by the awarding of two more massive coal-fired power IN NATURE the Nobel Prize to the United stations in Medupi and Kusile.

Nations Intergovernmental At the local level, our coastal cities Panel on Climate Change (IPCC) comprising many such as Cape Town, Port Elizabeth and Durban are of the world’s leading climatologists. Rather than facing the threat of a significant rise in sea levels. simply pointing out the alarming truth of climate Global warming will result in significant changes change, the IPCC Fourth Report contained results in land use patterns across the country, particularly aimed at helping policy makers to take concrete at a time when land reform is a key issue. In the steps. That anthropogenic climate change was agriculture sector, maize production, a staple occurring was no longer in serious doubt, the for millions, is highly climate sensitive and any challenge now was to tackle it, mediate and adapt. disruption could leave vast swathes of our people The third and arguably final warning has now food insecure. been delivered. In 2015, the IPCC pulled together Thus, the message is clear: To avoid the ravages of over 6 000 scientific reports from leading experts climate change, South Africa has to adapt or die.

Jack Ma is China’s richest man The Hurun Research Institute recently released the 2018 Lexus Hurun China Rich List. This is the 20th annual ranking of the richest individuals in China, with a wealth cut-off of CNY 2bn (equivalent this year to US$290m).

Jack Ma Yun, 54, shot back to Number 1 in China for the second time in four years. Ma’s wealth increased by US$10bn to US$39bn on the back of a hike in the valuation of Alipay mothership Ant Financial.

Real Estate tycoon Xu Jiayin, 60, of Evergrande and last year’s richest person, claimed second place, followed by Pony Ma Huateng of Tencent.

Sixty percent of the list made their wealth from the ‘Big Four’ industries of manufacturing, real estate, investments and IT. Manufacturing has been the main source of wealth for the past five years, although the number of individuals from this sector dropped slightly to 26.1% from last year’s 27.9%, on the back of the US-China trade war. Real estate, which used to be the top wealth creator for the first 15 years of the list, came in second, edging up from 14.6% to 14.9%. Finance and investments overtook IT, with investments up from 10.9% to 11.6%, and IT down from 11.8% to 10.3%. New energy, food, clothing and apparel, as well as retail, all edged up, while natural resources, culture and entertainment, as well as agriculture edged down.

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

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

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

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RETIREMENT PLANNING FEATURE

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2019 RETIREMENT PLANNING FEATURE

30 November 2018

Spend the income, not the capital, for a long-lasting retirement

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etirement can be a daunting prospect. Not only is it a time of personal adjustment but it is also a time to make financial decisions that will impact your lifestyle for the rest of your life. Retired investors commonly face the dilemma of either maintaining a certain lifestyle or adjusting it to preserve their savings. Typically, the more income one draws and spends today, the less income one can draw in the future.

When inflation is added to this quandary, it becomes important to also grow that income over time to retain one’s buying power.

A drawdown rate of 6% is common in the marketplace but Marriott’s research* shows that at that rate, almost half of retirees would have depleted their capital within 30 years. The concern for retired investors today is that markets are volatile, and returns are expected to be below average for the foreseeable future. This suggests many living annuities will come under pressure in the years ahead.

Marriott has two suggestions for retired investors:

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Match the income drawn with the income produced Investors should be aware of how much income their portfolio is generating and try to draw no more than the income produced – thus avoiding capital erosion.

Investments that produce reliable and consistent income streams assist investors in matching income drawn with income produced.

If an investor can avoid drawing more than what their investment produces, they can secure their future income – this is especially important in the early stages of retirement. If investors wish to draw more income than what their investment is producing, it should be with the knowledge that they are eroding their capital.

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Choose investments that produce consistent income streams that grow over time Investors also need to ensure they protect themselves against the impact of rising living costs over time. Investments that produce reliable income streams that also grow over time, like equities, are critical for a successful retirement.

By including the right equities, those that have a reliable growing,

inflation-hedged income stream, investors will be able to ensure growth in their investment income over time. The trade-off of including equities, however, is that initially an investor’s portfolio will produce less income. Investors need to find the appropriate level of exposure to the different asset classes that will give them enough income and income growth over time.

A DRAWDOWN RATE OF 6% IS COMMON IN THE MARKET PLACE Marriott’s investment portfolios are managed with an income focus – to produce a certain amount of income as well as income and capital growth. This investment style contrasts with many others where the investments are managed with a capital growth objective. The basis of a capital growth objective is that investment growth will offset the income withdrawals.

This appears to work well when capital values are increasing because capital erosion is masked by the market rise. When markets decline, however, the value of the investment will decrease sharply due to the twin effects of capital erosion and lower market values.

At Marriott, we suggest that investors examine their situation carefully when considering using capital to supplement their income. We recommend investors match the income drawn with the income produced by their investment until they reach a stage in their retirement years when it may become safer to drawdown on capital. While investors may find it challenging initially to restrict their annuity income to the income produced in the current economic environment, this is preferable to running out of capital. Rather be conservative now than risk having to find another source of income, such as going back to work or having to reduce one’s standard of living at some point in the future. * Research Source: Marriott, I-Net and Professor C. Firer’s Studies on the History of Capital Markets

Brian Vambe, Investment Professional, Marriott

Marriott’s Living Annuity Creating financial peace of mind by providing income certainty in retirement.

Perpetual Annuity For more information call 0800 336 555 or visit www.marriott.co.za

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2019 RETIREMENT PLANNING FEATURE

30 November 2018

How to protect vulnerable employees’ retirement savings It was estimated by National Treasury in 2014 that as few as 6% of South Africans were able to retire comfortably without having to sacrifice their standard of living.

Today, considering the significantly more challenging economic environment that we find ourselves in – given record-high fuel prices, the first VAT hike in 25 years, and a heightened sense of political

uncertainty that continues to drive market volatility – South Africans are more strapped for cash than ever before. According to Pavit Ramnarain, Actuary at Momentum Corporate, this could lead to significantly fewer employees being able to contribute sufficiently to secure a comfortable retirement.

The results from the latest Momentum/UNISA Consumer Financial Vulnerability Index (CFVI) reveal a worsening trend across all indicators of financial vulnerability.

When it comes to consumers in general, a mixture of low financial literacy and capability levels, as well as bad consumer financial behaviour, are the underlying reasons for consumers being financially vulnerable.

“Given the increasingly challenging local economic environment, it is

understandable that saving for retirement can often be pushed out as a last priority for many. It is therefore crucial that all retirement fund members, especially those who are particularly vulnerable, be given the best possible chance of achieving their retirement and investment outcomes,” says Ramnarain.

This belief is aligned with the intentions of the new retirement fund default regulations, which aim to steer retirement outcomes in the right direction.

“By requiring trustees to offer members a default investment portfolio that is not excessively complex or unreasonably expensive, these new regulations should assist in providing cost-effective and value-formoney investment solutions to fund members,” continues Ramnarain.

“Financially vulnerable employees tend to be more risk averse, largely as a result of financial insecurity and distrust. It is crucial that a default investment portfolio for these

members provides an opportunity to generate inflation-beating returns to maintain the purchasing power of their savings while at the same time offering at least a capital guarantee to protect them against adverse market movements. An investment portfolio that is able to offer both at a lower cost than other solutions will mean that more money can be channeled towards members’ accumulated retirement benefit,” adds Ramnarain.

“A solution that offers both inflation-beating return prospects and a full capital guarantee on benefit payments at a very competitive fee level will be an ideal candidate for trustees to consider as their default investment portfolio,” he says.

Pavit Ramnarain, Actuary, Momentum Corporate

Retirement and ever-increasing life expectancy

A

ccording to popular adverts making the rounds on TV and radio, the first person to live to 200 has already been born. While this may seem a bit unbelievable, the advances seen in medicine and diet, plus the adoption of much healthier pastimes and exercise regimes, have definitely led to longer life expectancies.

Added to this is the fact that socio-economic conditions have also changed, says Wealth Manager at Private Client Holdings, Jacques Brown.

“People are getting married and having children later than the previous generation. Children are staying dependants for longer than before as entry into the job market has become increasingly difficult. Day-to-day living expenses have escalated.”

Brown says all this puts strain on the average person’s ability to save. “Costs associated with retirement, such as retirement homes, electricity and groceries, have also escalated, and of course medical expenses climb as we age.”

Brown adds that furthermore, returns on investments have decreased. “We do not see the same returns on the average balanced fund as before due to tepid returns on the local and world markets, as well as low returns on property investments. This would mean that people saving for retirement have to save more capital in an environment where there is less surplus income. This also means that people in retirement have to tighten their belts.”

Doing the maths In the financial planning industry there are algorithms, formulae and electronic tools that are

used to help people plan their finances so that they can save for retirement, with the aim of not running out of money.

“We ask them at what age they would like to retire, what their savings amounts are and what income is needed in retirement, says Brown. “We then use certain assumptions, such as inflation and growth rates, to work out whether the client will have enough to retire or not, and manage expectations.”

However, Brown adds, the challenge is factoring in ever-increasing life expectancies. From a financial standpoint, people will have to work for longer in order to save for a longer retirement I’M REMINDED OF – the 70s are the new 60s.

SOME CLIENTS “I would OF MINE YEARS imagine that AGO, WHO WERE future generations IN THEIR 90s AND would then have to work into their DOWN TO THEIR 80s to save for LAST SAVINGS their retirement.”

The answer is no Take a typical professional person who leaves school at 18, studies, takes a gap year, starts earning enough money at age 28 to start saving and has a new life expectancy of 108. If they were to retire at age 63, that means they only have 35 years to save for 45 years of retirement.

“It does not matter what formulae or assumptions

you’re using in the planning, it may be an impossible task to save to that extent,” cautions Brown.

“I’m reminded of some clients of mine, years ago, who were in their 90s and down to their last savings.

They were being supported by their grandchildren who were young professionals in their 30s. The client never thought he would live into his 90s.”

The importance of goals-based investing From a planning for ‘eventual’ retirement perspective, it is important to focus on quantifiable goals, Brown says. “PCH follows a goals-based investment philosophy where our clients determine clear lifestyle goals that they want to reach and afford during their working years; like a comfortable retirement, international holidays, second homes, private school fees, a legacy, etc. This allows for focused investment planning, and to clearly lay out the order of prioritised goals and bespoke investment strategies to guide clients on a journey to achieve those goals.”

Jacques Brown, Wealth Manager, Private Client Holdings

You’d recommend it to your mother.

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

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

THAT’S WHY WE’RE HERE FOR YOU

22

2019 RETIREMENT PLANNING FEATURE

MICHAEL SUMMERTON Head of Proposition, INN8

30 November 2018

SANGEETH SEWNATH Deputy MD, Investec Asset Management

New ways of approaching the living annuity conundrum Investment platforms are changing the way wealth managers do business

I

nvestment platforms are an optimal way to access a broad array of savings options to diversify your clients’ investments.

This is particularly relevant for most ordinary South Africans who have tended to concentrate their long-term savings in a far more limited way; the single largest asset they own, next to the family home, is their pension fund.

Historically, pension funds have been limited in the percentage of foreign assets that one has been allowed to hold. So, most South Africans were, almost by default, compelled to have most of their assets in the country – either in the form of their property or shares and bonds in their pension fund.

On the most part, this has been positive as we have seen good returns across most domestic asset classes over the past 15 years. However, this has led to a natural bias toward South African assets and a ‘fear of the unknown’ when it comes to investing offshore.

This story has changed.

There are still restrictions on how much money South Africans can invest offshore, but for most of us these restrictions don’t impact our investment choices nearly as much as they used to. South African investors can now manage their offshore exposure across all their assets.

From owning property in foreign countries, shares on global stock exchanges or unit trusts denominated in foreign currency that may invest in global markets, the available choices are more accessible than ever before.

Financial advisers can work with their clients to select the most appropriate level of exposure to different foreign assets that best suit their personal circumstances.

In this process, they will be able to

move beyond the relatively narrow confines of South African assets to the much broader spectrum available in developed markets, including bonds, listed property or shares in, for example, biotech, big technology, renewable energy and large-scale oil and gas.

Another thing to consider when thinking about retirement planning and offshore investment is asset and liability matching.

For example, we live and work in South Africa, but the price of much of what we consume is determined in offshore markets and by the ZAR/ USD exchange rate – including the oil price, imported cars, smartphones and computers.

So, when preparing for retirement, financial advisers see merit in planning accordingly for the portion of the saver’s future spending that is effectively going to be priced in foreign currency.

In establishing optimal levels of diversification for clients, today’s advisers have the benefit of investment platforms that employ the latest technology to make the process of investing as seamless and user-friendly as possible.

Aside from the wide range of available fund and currency options, wealth managers use platforms to build model portfolios using seamless technology that’s fully digital.

In short, investment platforms are changing the way wealth managers do business – and how South Africans save for retirement.

They provide the opportunity to diversify savings strategy by facilitating access to a range of offshore assets that go way beyond traditional options.

And, for wealth managers, platform technology incorporates the tools they need to capitalise on their clients’ newfound diversification opportunities.

Pensioners face a unique investment challenge. On retirement, they still have a high probability of living another 25 to 30 years. This makes them long-term investors. Traditional investment theory tells us that the longer we have to invest, the more risk we can take in generating higher returns.

However, a conventional investor, prepared to wait for a single payoff in the future, is able to take much higher risk in the form of volatility of returns and hence should probably invest in the region of 75% to 100% in risky assets.

Pensioners have different needs and risks, which make a different approach imperative.

IN TERMS OF In terms of their needs, they would draw a regular income that will increase by at least THE RISKS inflation. Adding complexity to this, there PENSIONERS is a growing body of international evidence FACE, THE supporting the idea that retirement income BIGGEST IS THE requirements are actually U-shaped in real terms i.e. they are high immediately post retirement, PROBABILITY then drop off, only to rise again in advanced age.

OF RUNNING In terms of the risks pensioners face, the biggest is the probability of running out of OUT OF MONEY money. They are unlikely to be able to go back to work to make more money later on in life and the risk of making a mistake in their income drawdown is unacceptable. And while a combination of state safety nets, family support structures and cutting back on lifestyles are ways to protect retirees against adverse investment outcomes in their pension pots, most pensioners prefer to avoid such situations. Avoiding an income catastrophe then becomes another dimension to the drawdown portfolio puzzle, in addition to the conventional dimensions of risk and return.

How then should pensioners invest their capital and what level of income can pensioners afford to draw?

We have approached the problem mathematically - and while our findings are consistent with previous research, they introduce some new ways to approach this age-old problem.

• 117 years of passive index data supports the theory that pensioners should invest around 45-50% in equities when drawing an income level of up to 4 % p.a. (after allowing for manager fees and a product/advice charge of 1% p.a.).

• Allowing for an acceptable level of not meeting your income objective, the 4% level can be increased to between 4% and 5% p.a. as absolute maximum.

However, the equity allocation needs to rise up to 70% to minimise the risk of failure in these high-income scenarios.

• Pensioners’ requirements for their income level to grow by inflation each year, irrespective of investment market performance, is a constraint that significantly reduces their starting income level. If they allow income to vary with market returns, within an acceptable real return range, they are able to increase their sustainable starting income rate by about 0.5% (i.e. the maximum safe withdrawal increases from 4% to 4.5%).

• Active management can impact outcomes significantly. Whilst active managers are considered for their outperformance above the relevant index, they aren’t considered for better risk characteristics, which have a positive effect.

• A 1% investment return ahead of the relevant index portfolio allows the pensioner to increase their starting income level by approximately 0.9%.

• A fund with 1% lower volatility than the relevant index portfolio translates into approximately 0.3% additional income.

• The combined effect of outperformance and lower volatility allows for a significant increase in starting income level. An initial income rate of 4.5% can increase to 6.0% (i.e. a 33% increase in income) if invested in a portfolio that over the long term can add 1% outperformance and 2% lower volatility compared to the reference index portfolios.

• Looking at the last 20 years of investment returns, the Investec Opportunity Fund was one of the only funds to demonstrate significant benefit from both lower volatility and higher active returns.

INCOME PROTECTION FEATURE

30 November 2018

GRACE WINTER Chief Marketing Officer, FMI

Many people find insurance product offerings and the whole decisionmaking process intimidating and complicated. The decisions people make around financial planning will have a lasting and massive impact on their future lives and you, as a financial adviser, have a critical role to play in helping people make the right choices.

But in our increasingly stressful, time-starved lifestyles, where people are bombarded with information at a rapid rate, how do you cut through the clutter to talk to clients in a way that will hold their attention, and create the urgency for them to take action?

Behavioural science – the study of human behaviour and decision making – can prove to be hugely advantageous in this area.

We at FMI hosted Pat Govender, Behaviour Scientist and MD of The Behaviour Change Agency, as our guest speaker at our recent Challenge Change financial adviser events across the country. He shared some

23

Five simple ways to get your clients to take action tips on how advisers can make use of behavioural insights to make better recommendations and improve buy-in from clients around life insurance:

1

KEEP IT SIMPLE AND EASY

• Use pictures, videos or infographics to draw attention.

3

MAKE IT PERSONAL AND DIRECT

• Move away from complex language and use plain language, with a conversational tone. Keep your message brief with a clear call to action.

• Break complex processes into simple, understandable steps – break it down for your clients to follow easily.

• Limit the number of options that are presented, e.g. only propose two or three options that best meet your client’s needs.

• People want to be part of the conversation, and dislike one-way conversations where they feel a product provider is talking at them, rather than with them.

• Customise and personalise your communications by using a person’s name and only send them information that’s relevant to them, or their situation.

• Show empathy by recognising a client’s circumstances, barriers and context when developing solutions.

• Offer products and solutions that address your clients’ specific needs.

2

4

GRAB ATTENTION AND MAKE IT SALIENT

• Information that stands out will attract attention and get people to act.

BE TRANSPARENT AND HONEST

• People are drawn to individuals or companies that are transparent and authentic; this helps to build trust

and credibility.

• Make product benefits as clear as possible to assist in decision-making.

• Highlight the total monthly premiums clearly upfront.

5

START A RELEVANT CONVERSATION

One of the insights from FMI’s recent #RealityCheck consumer survey is that South Africans underestimate how much they’ll earn over their lifetime by up to a massive 79%. More than half of the respondents thought they would earn no more than R10m during their working lifetime, and yet, a 25-year old earning R15 000 a month for the rest of their career will earn R28m over their working lifetime.* If people understood the value of their future income, they’d protect their future income before anything else.

FMI’s simple Future Income Calculator is available at: www.fmi.co.za *6% annual growth, assuming retirement age of 65

24

INCOME PROTECTION FEATURE

30 November 2018

Living life uninterrupted

B

ecoming disabled, either temporarily or permanently, is something that can happen to anyone, anytime and most people’s lifestyles are funded through a regular income stream.

With alarming statistics telling us that, on average, 10 strokes take place every hour in South Africa, it has never been more pertinent to ensure that your clients have adequate income protection cover in place.

“Your clients’ unique income needs must be covered comprehensively to ensure that their overall financial

How to cope with the cost of surviving cancer Critical illness cover provides necessary financial support Globally, more people are surviving cancer than ever before. Jaco Gouws, Protection Product Head at Old Mutual, says that the fear around cancer diagnosis is slowly changing – thanks to numerous medical advances in treatment options and facilities. “The question is less about how to survive cancer – and more about how to ensure you can live your best life when you do.”

Although the prevalence of cancer increases every year in South Africa, it is encouraging to see survival rates

positions remain the same, even after they become disabled, either temporarily or permanently,” says George Kolbe, Head of Marketing for Life Insurance at Momentum.

“This can only be achieved when your clients’ income protection cover is reviewed on a regular basis, as an important component of a holistic financial plan, to ensure that their cover remains relevant to their changing income levels (up or down) and supports their lifestyle needs during different stages of their lives.”

There is nothing more devastating

improving globally. Gouws points out, however, that a positive prognosis does come with strings attached.

“Unfortunately, the costs you need to consider during remission – such as increased out-of-hospital medical and care costs, additional childcare expenses and the move toward a healthier lifestyle and diet – have also increased.”

He adds that this financial pressure can cause overwhelming stress on an individual and their family. “The biggest cause for claims in 2017 were related to cancer and tumours, which accounted for 30% of all underwritten claims. Research shows that in addition to anxiety over treatment side-effects, fear of death or cancer recurrence, many cancer patients list financial stress as one of their top concerns.”

To ensure that getting healthy, staying healthy and making the most of life are your only concerns, it is important to have a holistic financial plan that includes severe illness cover.

“Severe illness cover provides muchneeded relief in the form of a lump sum to ensure that extra medical or lifestyle costs can be covered – especially considering that as a cancer survivor the ability to earn a salary may be impacted

for a client who becomes disabled to find out that their income protection and disability cover can no longer provide for their current lifestyle.

“Therefore, as your client’s trusted financial adviser, it is important to highlight the unforeseen costs associated with a disability, either temporarily or permanently.”

The blow-back associated with disability “Should your client instantly lose a regular stream of income, basic things like school fees and monthly groceries will become unaffordable.

Not to even mention the larger expenses, including bond payments, car payments, medical expenses, etc,” says Kolbe.

Even though a spouse or partner might also earn a monthly salary, all expenses cannot be covered by a single salary.

“Without the protection of their income in this instance, the loss for your client sets in immediately and the blow-back could last for many years to come. Should your client’s disability be permanent, lifestyle changes might include adjustments to their vehicle or house to accommodate their disability.

In some cases, it might even be necessary for your client to hire a nurse on a permanent basis to assist them.”

either in the shorter or longer term.

Disability income can also replace your income if you’re booked off or unable to work during your recovery period.”

Gouws adds that financial advisers are there to guide clients in finding the right solutions for their needs and budget – and also to advise them on how to wisely manage a lump sum payout to further protect their future.

Surviving cancer is physically and emotionally taxing. “The focus should be on redefining and living the best possible life after surviving the disease – rather than on how to make ends meet,” Gouws says.

IT IS IMPORTANT TO HAVE A HOLISTIC FINANCIAL PLAN THAT INCLUDES SEVERE ILLNESS COVER

Putting life into perspective Kolbe says that a steady monthly income provides access to medical care, an education, owning a home, going on holiday and retiring with peace of mind.

“Should this income be interrupted, either permanently or temporarily due to an injury or illness, your clients and their families will probably face extra debt, drastic lifestyle changes or even complete financial ruin if they are not properly prepared.

“Therefore, planning ahead and ensuring that your clients have access to the most complete ‘needs-based’ income protection and impairment cover should be top of mind. We understand that having access to funds in the event of a disability is a fundamental requirement for clients.

This is why we removed the six-month waiting period on our lump sum disability benefits to pay claims as soon as permanency has been established.”

George Kolbe, Head of Marketing, Life Insurance, Momentum

Jaco Gouws, Protection Product Head, Old Mutual

We understand the value of a steady monthly income Especially during an event that could leave your client disabled, either temporarily or permanently.

That is why Myriad offers your clients up to 112.5% of their monthly pre-disability nett income, if they become disabled. This is possible by simply adding a Longevity Protector Benefit™ to their Income Protector Benefit.

For more information, contact your marketing adviser today.

momentum.co.za Terms and conditions apply. Momentum, a division of the MMI Group Limited, is an authorised financial services and credit provider. Reg. No. 1904/002186/06.

RISK

26

RISK

30 November 2018

Life insurers unlikely to see marijuana use as risk free

W

hile South Africans mull over the recent legalisation of marijuana in one’s personal capacity and in private, the South African life insurance industry needs to urgently assess the impact of this ruling – including in terms of group risk products. That’s the word from Elna van Wyk, Head: Underwriting and Disability Management at Momentum Corporate.

Far-reaching effects Van Wyk told MoneyMarketing that the use of marijuana has far-reaching effects not only on the acceptability to treat certain critical illnesses such as cancer, but also on how its use may impact an employee’s readiness to return to work and the subsequent impact on claim payments, costs and ultimately employer rates.

In September, the country’s Constitutional Court ruled that the possession or smoking of marijuana by an adult in private will no longer be a criminal offence. The Court gave parliament two years to amend the relevant legislation on possession of marijuana and police officers may in the meantime not arrest people for the personal, private use and growing of the substance. Buying the substance, however, remains illegal.

In 2016, South Africa’s regulatory body for drugs, the Medicines Control Council, published regulations providing for the use of marijuana for medical reasons, concluding that there was evidence that cannabinoids could be used to treat chronic pain.

While the ConCourt’s decision has been welcomed by some, it has caused uneasiness in both the short-term and long-term insurance industries as not everyone is convinced that marijuana is safe, with several medical professionals warning the public about the potential dangers of its use.

The World Health Organisation lists a variety of health risks associated with marijuana, including bronchitis, other respiratory diseases, cardiovascular issues such as stroke, and many cancers.

More research required “Life insurers are unlikely to agree that marijuana use is a risk-free habit.

More research is required around medicinal use and recreational use,” Steve Piper, Head of Operations at FMI told MoneyMarketing.

When it comes to road safety, one view is that marijuana use should be seen as similar to alcohol consumption, in that the use of both substances leads to intoxication.

However, testing for marijuana intoxication is a lot more complicated than simply doing a breathalyser test.

Some players in the life industry weren’t completely prepared for the change in the marijuana laws.

“Our policies deal with substance abuse as a general point, while the use of marijuana has not been highlighted,” says van Wyk. “Furthermore, insurance companies don’t test for marijuana as they do for nicotine.”

Piper says there are currently no additional tests for marijuana “and we underwrite with the ‘utmost good faith approach’ and expect clients to adequately disclose on the application forms”. He believes that the life insurance underwriting approach/risk assessment remains the same, even with the new legislation change.

“While aware of the legislative discussions on this topic, life insurers have probably not prepared sufficiently for the increase in queries on the topic,” Piper adds.

“The fact that there has been a change in legislation does not necessarily affect the risk profile of prospective policyholders from an insurance perspective, however, we might expect more honest disclosure

or an increase in usage going forward,” he says.

Unchartered territory Van Wyk believes that for the life insurance industry, the change in the law around marijuana is uncharted territory. “Not enough research has been done locally, so we’re going to have to ‘borrow’ research from countries where marijuana has been legalised for some time.”

Furthermore, there are differences between medical and recreational marijuana, as the latter is hallucinogenic. Medicinal marijuana, however, has its own side effects.

“We will have to use insights from the pharmaceutical companies to understand the differences between conventional treatment and cannabis treatment and how they interact with one another,” van Wyk says.

Piper states that the current risk assessment approach will be to differentiate between medical and recreational marijuana use.

“The reason for the use of cannabis oil or other forms of marijuana will be important to understand and for medicinal use the policyholder may pay a higher premium because of the underlying medical condition. There may not necessarily be more loadings for the therapeutic use of marijuana.

However, it may depend on how this is taken, for example, in tablet form or oral spray rather than inhaled or ingested.”

Van Wyk believes that what the life insurance industry needs following the change in the law around marijuana is government day-to-day legislation. “This would be similar to the legislation around alcohol as to when consumption is and isn’t safe and how we’re going to test for it.”

Smoker rates According to Piper, the smoking of marijuana would attract smoker rates, as there are similar medical conditions associated with those of smoking.

“There is currently an approach around this at underwriting stage and where appropriately disclosed, it is factored into the risk assessment of a life applying for insurance according to their risk. Occasional smoking may not attract any loadings for life cover, while more habitual smoking is expected to affect one’s health and will attract loadings, as is the case for tobacco and drinkers.”

He doesn’t expect this approach to all of a sudden change in the industry,

although it is hoped that it will encourage more candid disclosure.

“The industry is trying to assess the risk of the policyholder and charge more appropriate premiums for different groups of people. Currently, where people are not honest about their smoking habits and get offered life insurance at standard rates – this worsens the experience in this pool of lives and ultimately the healthy people are subsidising those that are not honest.”

Employees in group risk schemes may worry about being penalised if they use marijuana, van Wyk points out.

“If they work in an industry with high safety demands, codes of practice will have to be supplied by employers – such as marijuana not being used 24 hours before work starts. These codes could take time to set up.”

It was unlikely that FMI would deny marijuana users life cover unless there were other adverse factors, like other harder substance use or major psychological conditions, Piper says.

“The current approach will not change just because the private use of marijuana has now been legalised. Insurers make a risk assessment on whether the risk is too high for the insurance pool.

Cover may be declined if there is high risk, depending on all the risk factors or the type of cover the person is applying for.

“In the same way cover may be declined for very heavy drinkers with other underlying risk factors – we don’t see that as discriminatory.

“As well as providing cover to as many people as possible, insurers also need to ensure the healthy policyholders are not paying too much for insurance in the insurance pool,” Piper adds.

Elna van Wyk, Head: Underwriting and Disability Management, Momentum Corporate

Steve Piper, Head of Operations, FMI

RISK 27

30 November 2018

Managing multinational construction insurance

M

ajor construction projects are increasingly likely to be found in emerging economies on the African continent, with investment from China and India supporting the trend as governments woo investors to local economic development projects.

“These mega construction projects cost anything from $100m upwards, hence insurance and risk management are crucial components that are factored in right from the planning stages of a project, as these costs will form a significant part of the entire construction budget,” explains Tirelo Tsheoga, Head of Distribution, SubSaharan Africa at Chubb South Africa.

Compiling a well-conceived insurance roadmap for a mega construction project is a complicated undertaking, requiring the input of multiple stakeholders within a complex and disruptive technological and legislative framework.

“The process normally involves the appointment of an Engineering, Procurement and Construction (EPC) contractor who is generally responsible for all the activities from design, procurement and construction, to

commissioning and handover of the project to the project owner. The spectrum of cover required is usually vast, ranging from core lines such as property, general liability, marine, business interruption and directors’ and officers’ insurance, through to specialty lines such as business travel, group personal accident, cyber, environmental liability and terrorism protection,” explains Tsheoga.

In many African countries, such as Nigeria and Kenya, the insurance landscape is also becoming increasingly regulated. “More often the local insurance market requires first option on the placement of insurance, before a portion of the insurance profile can be placed outside of the country borders. In some instances, such as Kenya, the legislation is very specific, dictating that only 65% of the insurance premium may be exported, retaining 35% locally. Managing the local legislative requirements along with project-specific risks and insurer appetites adds to the complexity of construction insurance,” says Tsheoga.

Structuring a multinational insurance programme requires an in-depth understanding of the transactional

The importance of brand perception on social media The enactment of a raft of customer-friendly legislation, coupled with the growing influence and prevalence of social media, has shifted the goal-posts in favour of consumers and has elevated customer experience as a key differentiator that determines consumer expenditure and companies’ share of wallet, says Antonia Oakes, Head: Customer Experience at Old Mutual Insure.

Oakes says that often there is little alignment between claims of customer-centricity and the commercial conduct and ethos of many organisations.

“Customer-centricity has become a catch-all phrase that is seldom matched by meaningful commitment to champion the customer cause. Claims of customercentricity without complementary actions are hollow.

Consumers have become very discerning and can see through meaningless marketing strategies.

Organisations that are serious about improving customer service make a deliberate and concerted effort to ensure that their products, processes and service offerings speak to their customers and reflect their evolving needs.

“The CEO needs to be the sponsor of customer experience in any organisation or else implementation becomes a challenge. To effectively improve customer

elements of cross-border insurance, particularly as this relates to local tax and insurance regulatory requirements.

“There is a great deal of underwriting involved in the compilation of a complex multinational insurance schedule that accounts for the maximum probable loss that could be incurred,” says Tsheoga. “The underwriting decision will set the limits and the value of the policy from where brokers are then able to tender for the business. At this stage, the broker will approach insurers to identify the price, the terms, conditions and exclusions under which cover would be granted and the limit that they are willing to insure the project for,” he explains.

A comprehensive risk management strategy also needs to be in place to support the insurance programme to keep exposures to a minimum. “This is normally achieved by putting proactive processes in place to mitigate risks as far as possible to create an optimal work environment. Increasingly, construction companies face risks from all sides, from site security, weather catastrophes, health and safety, skilled labour shortages, contractual risk, professional

experience, organisations need to have a happy workforce as unhappy employees cannot be good ambassadors of the brand – happy employees equate to happy customers,” says Oakes.

She says organisations cannot afford the luxury of ignoring brand perception on social media platforms, as consumer sentiments and word of mouth can make or destroy a brand. To that end, organisations that are committed to improved customer experience should implement a robust social media policy to proactively monitor consumer sentiment and manage brand perception.

“Social media allows customers to air their views in real-time and enables followers to air their views instantaneously. This creates a viral perception of a brand immediately, in both a negative or positive light. It is critical to allow the conversation to continue for about an hour after the citing and then respond. This allows the brand to capture most of the comments from all followers, and to respond in a non-emotional manner and to not rationalise their behaviour,” Oakes advises.

In line with the insurer’s ongoing quest to improve customer experience, Old Mutual Insure has launched a service promise that commits its brokers and advisers to offer service standards that customers have become accustomed to. The insurer has introduced a solution that allows live tracking of tow trucks until they arrive on the accident scene, and a self-help system that enables brokers to action quotes, renewals and mid-term adjustments at their pace.

In addition, Old Mutual Insure has also appointed an internal arbitrator tasked with reviewing claim rejection disputes independently and fairly.

“The arbitrator will manage Old Mutual Insure’s

liability right through to cyber and terrorism risks.”

Tsheoga adds that the final selection of insurance offerings on the table need to reflect local insurance legislation, adhere to international policy, as well as offer a tax-optimised solution.

“It is a task that requires a great deal of input, not to mention the time spent on finalising it. There needs to be a thorough understanding of all potential risks, who bears or shares it, and mature risk management. Finding a solution that meets such a diversity of construction risks, especially across geographies, is an enormous task that needs early engagement of insurers.

Ultimately, it requires strong and early collaboration between client, broker and insurer to develop the optimum risk management and cover solution,” he says.

Tirelo Tsheoga, Head of Distribution, SubSaharan Africa, Chubb South Africa

reputational risk by ensuring fairness, impartiality and ethical business conduct when resolving disputes between policyholders and Old Mutual Insure. We believe that the appointment of the arbitrator, coupled with the introduction of these customercentric solutions, will enrich customer experience and improve our value proposition,” says Oakes.

Though brand loyalty remains a critical factor in influencing consumer purchasing decisions, Oakes points out that millennials and the newer generation of consumers tend to be more fluid as they are prone to exhibit less brand affinity than the previous generations.

“Research reflects that loyalty in SA has decreased significantly, so yes, there has been a shift in brand loyalty, specifically with the newer generation of customers. The ‘older’ customers remain loyal; however, they too will switch products for a better customer experience, irrespective of price.”

Oakes says the short-term insurer is putting its money where its mouth is when it comes to customer experience. Testimony to this is the latest findings of the South Africa Customer Satisfaction Index (SAcsi) report, which rated Old Mutual Insure as the leading short-term insurer in treating customers fairly, and one of the country’s best short-term insurers in customer satisfaction.

Antonia Oakes, Head: Customer Experience, Old Mutual Insure

28

RISK

30 November 2018

Consumers need financial expertise during an economic downturn

W Risk mitigation: How insurance supports small business resilience It is often said that small businesses are the backbone of the South African economy. It should follow, then, that if the economy is to be safeguarded against the unexpected, it is necessary for individual small business owners to take risk mitigation steps to protect their livelihood and those of their employees.

A closer look by the Small Business Institute reveals the enormous role played by small businesses in South Africa, noting that some 28% of all jobs in the country are created by these businesses. Without this contribution, the economy and the livelihood of millions of people would be imperiled. Yet, at the same time, individual small businesses are often in a precarious state, with even relatively minor ructions holding the FOCUSING potential to close their ON AND doors forever.

MITIGATING According to Small Business Institute THE RISKS Chairman, Bernard A BUSINESS Swanepoel, in a report FACE MAKES to be released in 2019, 98.5% of the economy THE COMPANY is made up of small STRONGER businesses. “Small businesses continue to be as economically fragile as they were over two decades ago, with some 70% of our emerging small businesses failing within their first two years of operation,” he says.

Risk mitigation is a systematic approach to understanding the risks faced by an organisation, the likelihood of any risk actually happening, and the establishment of measures to avoid the risk on the one hand and dealing with the aftermath of an occurrence on the other.

The risks a small business face are multifaceted. Some are generic and common to all businesses, such as credit risk, environmental risks (thunderstorms and other weather events), crime, on-the-job accidents, legal risk and even ‘key man dependency’ where a single staff member might have specific knowledge without

which the company cannot function. Other risks are industry- or even business-specific and can include a wide range of potential scenarios, which can either impact operations severely or close the company.

The first step in a risk mitigation process is documenting and understanding the risks faced. Once the risks are known, measures can be put in place to reduce the possibility of its occurrence and formulate plans to recover from any eventualities.

One of the key tools for risk recovery is insurance. A good insurer will work with business owners to identify the risks faced by their specific operations and provide cover appropriate to their needs. Things like crime and potential accidents on the job are the obvious ones where insurance should be a ‘non-negotiable’; for example, if a business has machinery on which it depends, or it has vehicles out on the road, being uninsured is potentially reckless. If something serious happens – a crash or a fire in a warehouse – it could spell the end.

Focusing on and mitigating the risks a business face, makes the company stronger.

Let’s face it, the unexpected and the unpleasant does happen. Wishing it away is a poor strategy; expecting it and putting in structures to get the best outcomes possible despite even the worst luck means building resilience.

It is not just resilience for the business owner’s livelihood. If a fire sweeps through premises late at night and closes the business down, it will spell the end of employment for staff members, too. With a reliable business insurance policy in place, an unfortunate event of this nature might be a relatively minor setback, rather than a total calamity.

Morné Stoltz, Head, MiWay Business Insurance

ith the economy struggling and the cost of living constantly increasing, consumers are facing a tough time.

Following negative GDP growth of -2.6%, the South African economy dipped into a technical recession (two consecutive quarters of negative growth), adding even more pressure to already tight budgets.

The cost of fuel, VAT and even sugar has resulted in households having to dramatically cut back on spending and restructuring their monthly budgets.

Because of the financial challenges facing households today, Johan Minnie, Liberty group sales director, is concerned that some consumers may cancel their insurance policies. According to Minnie, between 8% and 10% of life policies lapse each year; 90% of these cancellations are the result of affordability issues.

Minnie says, “When consumers face serious financial pressure, they tend to prioritise debt repayments, school fees and other expenses – all of which are important – over life assurance premiums. Unfortunately, you don’t know when you’ll need this cover; that’s why cancelling it is a serious risk.”

Now is the time for consumers to reach out to their financial advisers who have a crucial role to play in helping manage investments, cash flow and risk cover challenges in cash-strapped households.

When the economy is sluggish, consumers need to ensure they have the right insurance cover in place to get through the slump. This is where financial advisers must use their expertise and knowledge to put the correct measures in place to help consumers maintain their long-term financial goals.

Minnie says, “Financial advisers are there to help consumers take control of the things that matter most in their life and to shape solutions that are aligned with their needs and circumstances.”

The reality is, when times are tough, insurance cover can be seen as a grudge purchase. Risk protection such as life, disability and critical illness cover is important; however, it might be wise to include retrenchment and policy protection cover to a portfolio too. The reason for this is that businesses come under pressure and the possibility of retrenchments increase. If this had to happen in a household where budgets were already tight, the fall-out could be severe.

“When the economy throws consumers a financial curveball, they should remain focused and refrain from panicking. Panic can cause one to make serious financial errors,” advises Minnie.

He stresses the necessity of clients playing open cards with their advisers, revealing short-, medium-, and Johan Minnie, long-term goals so Group Sales that a strategy can be Director, implemented.

Liberty

RISK 29

30 November 2018

Political risks ‘increasingly expensive’ Political risks are becoming increasingly expensive for companies, according to global multinational risk management, insurance brokerage and advisory company, Willis Towers Watson.

According to its latest Political Risk Survey Report, increasing geopolitical concerns are causing a rise in political risk exposures, with 55% of global organisations with revenues greater than $1bn experiencing at least one political risk loss exceeding $100m in value.

In addition, the survey shows that the political risk implications of emerging market economic crises are increasing, reflecting the market reaction to a flareup in emerging markets – most notably in places like Turkey and Argentina.

To generate the information for the survey, Willis Towers Watson and Oxford Analytica conducted interviews with senior executives of 40 leading global firms across different industry sectors to determine their response to ongoing global political volatility.

Key survey findings include:

• The most frequently reported political risk-related loss was exchange transfer, which impacted nearly 60%

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of those experiencing losses, followed by political violence (48%) and import/ export embargos (40%) The key geopolitical threats were seen as US sanctions policy, emerging market crises, protectionism/trade wars, and populism and nationalism While Russia and Vietnam were most frequently cited as countries where losses occurred, losses were recognised throughout Europe, Latin America, APAC, Africa and the Middle East 60% reported that political risk levels had increased since last year, and nearly 70% stated that they had scaled back operations in a country because of political risk concerns or losses More than 70% reported holding back from planned investment as a direct result of political risk concerns Larger companies were more likely to report using avoidance strategies – among companies with more than $1bn in revenues, 82% stated that they had scaled back investments, and 86% had avoided future investments. Companies most frequently reported scaling back investments in Nigeria, Iran, Russia and Venezuela.

HANNES MARAIS Norton Rose Fulbright South Africa and CAROLINE THEODOSIOU Norton Rose Fulbright South Africa

W

hilst climate change and extreme weather events are important factors for construction and engineering professionals, the cause of natural or man-made catastrophes is often latent or even patent defects in the design, construction, repair or maintenance of infrastructure. An example is the recent collapse of the suspension bridge in Genoa, Italy, in August 2018.

Designed by an engineering company, the bridge was completed in 1967, with major repairs in the 1990s and restructuring work in 2016. It required continuous maintenance due to erosion caused by the sea air, and there are reports of vehicle damage by falling concrete as far back as the 1980s.

Although the cause of the collapse is unknown, indications are that it was caused by defects in the design, construction, maintenance and/or repair of the bridge. If so, it raises the difficult issue of determining who exactly is liable for the damage, as numerous entities have been involved since its construction more than five decades ago.

This in turn raises the question of what construction and engineering professionals can do to mitigate the risk of being held liable for natural or man-made catastrophes, irrespective of whether it relates to recent or past projects.

One of the most cost-effective, practical and well-known solutions is professional indemnity insurance cover, sufficient to cover the size of the projects that the relevant professional is

“It is clear from our findings that political risk has increased significantly, now becoming a recurring and material cost of doing business,” says Paul Davidson, Chairman and CEO, Willis Towers Watson Financial Solutions. “If these levels remain elevated, companies will fall under increasing pressure from shareholders for greater levels of transparency around the losses actually incurred. Companies will need the ability to monitor, quantify and manage these risks as well as develop strategies to mitigate them.”

Simon Coote, Deputy Director, Oxford Analytica, says companies typically grew up managing cyclical economic risks, not political. “However, with the recognition of rising losses due to political risk, it can no longer be excluded from executive decision-making.”

To better mitigate political risk exposure, companies need to reframe how they operate, he adds. “Taking steps to manage political risk must become a requirement of doing business, not simply regarded as an inevitable cost of operating in challenging environments.”

Construction and engineering: Managing the risks of catastrophes

generally involved in. These policies indemnify professionals from legal liability flowing from the performance of their professional duties, such as designing, constructing, repairing or maintaining infrastructure.

Apart from the size of cover, it is extremely important to determine whether these policies respond on an occurrence or a claims-made basis, and the retroactive date of the policies, if any: • Occurrence-based policies provide cover for insured events that occur during the period of insurance, regardless of when a claim is made.

An occurrence policy will respond to claims even after the policy has terminated, provided the incident or insured event occurred during the period when coverage was in force.

• Claims-made policies provide cover only when the insured event occurred on or after a specified retroactive date, if the claim is made during the period in which the policy is in force.

• The retroactive date (found in claims-made policies) refers to a date specified in the policy and allows claims to be made from events occurring in an earlier period, but after the retroactive date. Its aim is to provide continuity of cover where policies are renewed annually. It effectively excludes cover for claims that result from an insured event that occurred prior to the retroactive date, even if the claim is made while the policy is in force.

To use the bridge as an example, if it is determined that it collapsed because of a defect that occurred at the time of its design and construction, the professionals involved would be entitled to claim under an occurrence-based professional indemnity policy, if such existed at that time.

Alternatively, they may be entitled to claim under their claims-made policy currently in force if the policy has a retroactive date that is prior to the defect, i.e. 1967 or earlier. If, however, there was no occurrence-based policy and there is no current claims-made policy (or the retroactive date on the current policy does not extend far enough back to cater for the claims), there will be no cover available.

These examples show the importance of paying special attention to the differences between occurrence and claims-made policies that could leave a gap in cover. Given the variety of liabilities that can result from natural or man-made catastrophes, standard cover under professional indemnity policies can be extended: • Public liability extension provides cover for accidental death, bodily injury, illness or disease of or to any person.

• Defects in contract works extension provides cover for costs incurred in rectifying the contract works, the design plans or specifications of such work.

• Sub-contractor extension provides cover in respect of activities or duties sub-contracted or sub-let by the professional to third parties.

BOOKS ETCETERA

30

EDITOR’S BOOKSHELF

BOOKS ETCETERA

30 November 2018

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

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