NFB Sensible Finance Magazine Issue 33

A FREE publication distributed by NFB Private Wealth Management

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Eastern Cape's Community...

Issue 33 July 2016

PERSONAL FINANCE Magazine

COM(E)MOTION when it comes to investing be patient when emotions are running high

ROBO-ADVICE is this the end of face-to-face financial planning?

RAND DEPRECIATION how this affects your short term insurance

private wealth management

“Based on my calculations, I can retire about 5 years after I die.”

Anonymous, 2014

Are you this “guy”?

Don’t be. Talk to an NFB Private Wealth Manager today to plan your financial future. fortune favours the well advised

Contact one of NFB’s financial advisors: East London s tel no: (043) 735-2000 or e-mail: info@nfbel.co.za Port Elizabeth s tel no: (041) 582-3990 or e-mail: info@nfbpe.co.za Cape Town s tel no: (021) 202-0001 or e-mail: info@nfbct.co.za

web: www.nfbpwm.co.za NFB is an authorised Financial Services Provider

private wealth management

ED’S LETTER Editor Brendan Connellan bconnellan@nvestholdings.co.za

Contributors Alex Grunewald (NFB Port Elizabeth), Craig Butters (Prudential Investment Managers), Michelle Wolmarans (NFB Insurance Brokers), Phomolo Moreng (NFB East London), Paul Hutchinson (Investec Asset Management), Kim Nel (Klinkradt Murphy), Stephen Katzenellenbogen (NFB Gauteng), Nonnie Canham (NFB East London), Jean Lombard (Glacier by Sanlam), Zukiswa Sonjica (NFB East London), Grant Berndt (Abdo & Abdo), Lydia Byrnes (NFB Gauteng), Xolisa Funani (NFB Port Elizabeth), Liam Graham (NVest Securities), Debi Godwin (IE&T)

layout and design Jacky Horn TA Willow Design jaxx@at-media.co.za

Photos used in this magazine - 123rf.com

Advertising Robyne Moore rmoore@nvestholdings.co.za

Address East London Office NFB House, 42 Beach Road Nahoon, East London, 5241 Tel: (043) 735-2000 Fax: (043) 735-2001 E-mail: info@nfbel.co.za Port Elizabeth Office Ground Floor, Building 6, Ascot Office Park, Cnr. Ascot and Conyngham Roads, Greenacres, 6045 Tel: (041) 582-3990 Fax: (041) 586-0053 Email: info@nfbpe.co.za Web: www.nfbpwm.co.za The views expressed in articles by external columnists are the views of the relevant authors and do not necessarily reflect the views of the editor or the NFB Private Wealth Management. Š2016 All Rights Reserved.

No part of this publication may be reproduced in any form or medium without prior written consent from the Editor.

a sensible read

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here was a great deal of interest and concern at the potential downgrade of South Africa to junk status by major international rating agencies recently.

Fortunately the country managed to avert a downgrade, but it is certainly indicative of the economic crisis that we are in and the need to find a way to manage ourselves out of it.

For several years, South African GDP forecasts have been consistently downgraded by the International Monetary Fund (IMF) and the South African Reserve Bank and there has been a clear downward trend of our economy of the past ten years. The latest year-on-year GDP figure of -0.2% did little to show any reversal thereof.

It was big news when Nigeria, though riddled with socioeconomic and corruption issues, overtook South Africa in terms of the size of their economy. Since then South Africa has slipped yet another place, with Egypt moving into second place.

South Africa is paying the price for its mismanagement. On average over the past three years, sub-Saharan Africa has grown at approximately 4.5% per annum compared to South Africa's 1.3% in 2015 and a projected growth of 0.4% in 2016.

As a result, South Africa has become more vulnerable to capital outflows, deteriorating budget and current account deficits and currency depreciation. We now sit with a Rand at over R15 to the Dollar and R21 to the Pound and national unemployment in excess of 35%! Junk status would mean that the country's borrowing costs would be materially increased for both the public and private sector and would both discourage new investment into the country and result in dumping of existing foreign investment and would push deficits and unemployment even higher.

On a positive note though, although South Africa does rate a bit worse than its foreign peers at the moment, they are nonetheless experiencing similar problems and so this is not necessarily an isolated problem. In addition, downgrades to non-investment (junk) status do not happen overnight and happen over a series of steps, so we still do have some time to remedy the position.

Let us hope that the government does something to reduce the current high levels of labour unrest, starts effectively implementing its National Development Plan reforms and takes a seriously hard and introspective look at itself and its leadership. And let us hope that voters also seriously consider the difference that their votes can make to our future and vote based on potential of candidates to provide quality and effective leadership when they go to municipal election polls in August. Until then, investors should ensure that their investment portfolios are well diversified; not necessarily offshore, but to ensure that they select companies and portfolios that have operated well through various different market cycles in the past and that are well positioned to weather any potential storms ahead.

There is always opportunity - in both good and bad times.

Brendan Connellan - Editor and Director of NFB sensible finance July16

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SENSIBLE CONTENTS JULY 2016

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DON'T FOLLOW THE MOB! Understand that your situation is unique. By Alex Grunewald, MD/Private Wealth Manager - NFB Port Elizabeth.

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BANKS: LONG TERM VALUE OUTWEIGHS THE RISKS By Craig Butters, Equity Portfolio Manager and Banking Sector Analyst - Prudential Investment Managers.

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DEPRECIATION OF THE RAND AND THE AFFECT ON YOUR SHORT TERM INSURANCE. By Michelle Wolmarans, MD - NFB Insurance Brokers.

10 PROVISION FOR YOUR DEPENDANTS WHEN YOU ARE NOT AROUND Discussing the limitations placed by Section 37C of the Pension Funds Act. By Phomolo Moreng, Financial Paraplanner - NFB East London.

11 EMPLOYEE TAX INCENTIVE By Kim Nel, Associate - Klinkradt Murphy.

12 LIABILITY FOR PREVIOUS OWNER'S MUNICIPAL DEBT Beware of charges that are older than 2 years! By Grant Berndt - Abdo & Abdo.

14 COM(E)MOTION Getting proper and well thought out advice when formulating your strategic allocations is critical. By Stephen Katzenellenbogen, Director/Private Wealth Manager - NFB Gauteng.

16 SENSIBLE DISCLOSURES Termination for non-disclosure is standard practice by all

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open medical schemes. By Nonnie Canham, Financial Paraplanner - NFB East London.

17 A SUSTAINABLE RETIREMENT INCOME There is a better way. By Jean Lombard, Head of Business Integration - Glacier by Sanlam.

18 DOES SIZE MATTER? The large versus small asset manager debate continues to rage. By Paul Hutchinson, Sales Manager - Investec Asset Management.

22 RETIREMENT SAVINGS AND DIVORCE Planning adequately in a trying situation.

By Lydia Byrnes, Representative under Supervision - NFB Gauteng.

23 ROBO-ADVICE Is this the end of face-toface financial planning? By Zukiswa Sonjica, Financial Paraplanner - NFB East London.

24 DIVING DEEPER INTO INVESTMENT RESEARCH METHODOLOGY Unpacking the top-down and bottom-up approach. By Xolisa Funani, Financial Paraplanner - NFB Port Elizabeth.

25 THE LAW AND COHABITATION An interesting look at common law marriage. By Debi Godwin, Director Independent Executor & Trust.

26 TEXTON PROPERTY FUND A company in transition and an attractive investment opportunity. By Liam Graham, Portfolio Manager - NVest Securities.

SENSIBLE PLAN

Don't follow the mob!

Understand that your situation is unique. By Alex Grunewald, MD/Private Wealth Manager - NFB Port Elizabeth.

To be nobody but yourself in a world which is doing its best day and night to make you everybody else means to fight the hardest battle which any human being can fight, and never stop fighting. ~ e. e. cummings

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hat on earth would a quote like that from e. e. cummings be doing in a financial magazine you may ask? Well it is really quite simple - be yourself.

In this day and age, with the access we have to technology and the internet, we take everything we read and see as gospel. We formulate our opinions, attitudes and outlooks on what the Kardashians are doing this week. Because Justin Bieber has a new hairstyle we must follow suit, and let us not forget what Victoria Beckham is wearing!

From a financial planning point of view, I am seeing more and more of the same problem: mates standing around a braai after the rugby on a Saturday, a couple of beers under the belt, and the topic of investing comes up and how to make a bucket full of money on a sure thing. NO - giving your money to an individual guaranteeing you 29% over five years with no risk just does not exist!

You need to understand that your situation is unique; you may have factors or situations that may very well differ from your neighbour and you must therefore understand that his financial plan may not work for you. You cannot follow the mob!

It is imperative that in order to put a plan together for your financial future, there is no “one plan fits all” mentality. You need to find an advisor that you can trust to put a financial plan together that meets your and your family's needs.

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Here are a couple of questions you should be asking in order to determine that you are receiving the correct, unique advice: = Is the Brokerage registered as a Financial

Services Provider (FSP) with the Financial Services Board (FSB)? = Is the Financial Advisor licenced and accredited to furnish advice? (a Certified Financial Planner will bear the designation CFP®, and is deemed to be fit and proper) = Is the Financial Advisor accredited to market that specific product to you? = Is the product being recommended registered with the Financial Services Board (FSB)?

A fit and proper, fully accredited financial advisor that ticks all the boxes above should be able to furnish you with the advice needed to put a plan together that suits and meets your specific needs, the plan should not be a “one size fits all” approach, but would be specific to you!

For your benefit and for your family's, please do not take as gospel what is said around the dinner table or at a party. Investigate for yourself; with help, put together a plan that works for you, a plan that is constructed for you personally and not for the masses.

Please try to be nobody but yourself!

Please feel free to pop into our office or give me a call if you would like to chat about your individual, specific plan, and remember..... the coffee is great.

East London 043-735 2000 = Port Elizabeth 041-582 3990 Cape Town 021-202 0001 = Johannesburg 011-895 8000

SENSIBLE RISK-REWARD

BANKS: LONG-TERM VALUE OUTWEIGHS THE RISKS

By Craig Butters, Equity Portfolio Manager and Banking Sector Analyst - Prudential Investment Managers.

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espite the meaningful risks looming over South Africa's banking sector, the current combination of attractive dividend yields and relatively cheap valuations presents attractive, prospective medium-term returns for investors in local bank shares, despite fairly muted earnings growth expectations in the low- to mid-single digits, according to Craig Butters, equity portfolio manager and banking sector analyst at Prudential Investment Managers.

Banking stocks fell sharply in December 2015 on the back of the large jump in bond yields in reaction to the surprise firing of Finance Minister Nene, to levels well below their historic valuations.

Subsequently, share prices have remained under pressure due to the increased risk of a downgrade of South Africa's sovereign foreign currency credit rating to non-investment grade (or “junk”) status.

“Banking shares have been pricing in this downgrade risk, and although the country wasn't downgraded in June, uncertainty is likely to persist until the December round of ratings agency reviews – so we see limited scope for the banks' valuation multiples to rebound back to historical levels any time soon,” says Butters. “At the time of writing, banks are trading at a substantial discount of 35% to the overall SWIX index (on a forward price-earnings basis), compared to an average 13% discount since 1990.”

Depending on the extent of a likely weakening of the rand on news of a downgrade to junk status, the South African Reserve Bank (SARB)'s monetary policy response could have a profound impact on the banking sector, he explains. To the extent that a weaker currency results in increased actual or expected inflation, the response by the Monetary

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Policy Committee in hiking interest rates will be key.

On balance, he explains, gradual and measured interest rate increases are positive for banks since they receive higher interest income – as we have seen so far in the SARB's current rate hiking cycle. The gain in their interest income generally outweighs the rise in bad loans as more people are unable to repay the higher interest.

However, if the SARB responds by implementing large and rapid interest rate hikes, this could increase loan defaults by consumers and impair bank balance sheets.

Another important factor is that South African banks have been much more disciplined in their lending in recent years compared with the 2006-2008 lending spree – and provisions have been far more conservatively struck for potential bad debts. Capital levels are strong, and banks have generally been well managed in the period leading up to a potential sovereign credit rating downgrade.

According to Butters, “On a risk-reward basis, Prudential is overweight bank shares in our equity portfolios, preferring Barclays Africa and FirstRand, followed by Standard Bank. We also have exposure to Nedbank through Old Mutual. It is too easy to come to the conclusion that investors should avoid banking shares based on the potential of a sovereign downgrade. Second-order thinking is required during these challenging times. While bank share prices would almost certainly be hit in the short term in the event of a downgrade to junk status, SA banks offer good long-term value and attractive dividend yields at current levels.”

SENSIBLE INSURANCE

Depreciation of the rand and the affect on your short term insurance

By Michelle Wolmarans, MD - NFB Insurance Brokers.

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he dramatic depreciation of the rand in the last 6 months has negatively impacted on the lives of every South African citizen. And the short term insurance industry is not exempt – the devaluation of the rand has had far reaching consequences on this industry affecting both clients and insurers alike.

An analysis of the impact of the depreciation of the rand on the short term industry reveals the following: Underinsurance in respect of personally owned residential dwellings and household contents Insurance policies require all domestic buildings and personal belongings to be insured for current replacement value. The reality is that due to the depreciation of the rand the majority of policyholders are probably currently underinsured by 20 to 30%. In the event of a claim they will not receive full compensation for their loss as the insurer will calculate the difference between the replacement value of the asset and the insured amount and apply this proportionately to the claim.

In order to avoid being under insured, we would recommend clients take the following preventative measures: = Obtain updated valuations in respect of jewellery and watches. The price of diamonds and gold is linked to the value of the US dollar and if updated valuations are not obtained your jewellery could be under insured by as much as 30%. = Obtain updated quotations to replace all imported electronic equipment such as cellphones, ipads, tablets, televisions, lap tops, sound equipment and computers. = Be aware that the price of any art, designer clothing, footwear and bags will have increased. = If your house is fitted with imported tiles, carpets, bathroom accessories and expensive furniture these items will have to be revalued.

Once updated prices/valuations have been obtained in respect of the abovementioned items contact your insurance broker and instruct them to increase the sums insured on your buildings,

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contents and specified items accordingly.

Underinsurance in respect of business owners If your business is reliant on imported plant and machinery it is imperative that you obtain updated prices from the suppliers to replace these assets. If a fire should occur and destroy all your imported machinery the consequences could be devastating if you have not increased the sums insured of your machinery in light of the devaluation of the rand.

Motor Insurance The motor books of the majority of insurers in South Africa were under pressure and not running profitably prior to the decline of the value of the rand. The depreciation of the rand has given rise to an additional burden to the already troubled motor book. Almost all parts for motor vehicles (even those that are locally assembled) are imported, which means that prices for motor vehicle parts has increased dramatically. The result is that the cost to repair a damaged vehicle has skyrocketed compared to a year ago and insurers cannot afford to absorb this increase in cost. In order to ensure their survival insurers have no choice but to increase motor insurance premiums.

This is a two-edged sword as consumers are already under pressure due to a contracting economy and higher inflation and many may find that insurance is unaffordable. The consequence of not having insurance will mean that consumers are unable to replace their assets in the event of damage or loss and this will have a ripple effect on the economy of the country.

If you find yourself in a position where you are considering cancelling your short term insurance policy, first contact an NFB broker consultant who may be able to assist you in restructuring your portfolio resulting in a more affordable premium.

The long term cost of not insuring your assets is often greater than the short term saving realized by cancelling your policy.

Our contact telephone number is: 043 – 735 2460.

insurance brokers (border)(pty)ltd.

SENSIBLE ESTATE PLANNING

PROVISION FOR YOUR DEPENDANTS WHEN YOU ARE NOT AROUND Discussing the limitations placed by Section 37C of the Pension Funds Act.

By Phomolo Moreng, Financial Paraplanner - NFB East London.

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hether you are starting a family, raising your children or spending time with your grandchildren, it is important to consider their future. Consideration about their future will mean a realisation that you might not be around to take care of them forever. Comfort will lie in the fact that, should this occur there are ways to ensure their financial security.

Whilst a person is still alive, you need a proper estate plan to ensure that provision is made for your loved ones. Creating an estate plan is not only about figuring out how your estate will be taxed at death and how to minimise the taxes, it also takes into consideration ways to ensure your dependants financial stability is determined by means of insurance policies, investment structures, Trust formation and, most importantly, the creation of a valid Will.

During the estate planning stage, it is important to meet up with a fiduciary practitioner to create a Will in order to ensure that your wishes are known and subsequently implemented at the time of your death. As there are limitations that are placed on a person's freedom of testation (the freedom an individual has to make a provision in a will stating how his assets are to be disposed upon death), a fiduciary practitioner will be able to draft your wishes in a manner that takes into consideration these limitations, and ensures that your wishes will be adhered to at death. Should your wishes not be in line with the provisions of the Constitution and should they be considered to be against public policy, then they will not be adhered to.

A piece of legislation which places a limitation on your freedom of testation is Section 37C of the Pension Funds Act. This section regulates the distribution of death benefits held within a retirement investment. The Pension Funds Adjudicator has in a number of determinations gone on further to explain that the aim of this section is to ensure that the dependants of a deceased member are not left destitute upon the death of a deceased. The distribution of the death benefits held within your retirement investment is left to the board of Trustees of your fund.

The duties of the Trustees are to

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identify a member's dependants, determine an equitable distribution of the benefits and to decide on a mode of payment.

According to the Pension Funds Act, a dependant is: a) A person in respect of whom a member is legally liable for maintenance, b) A person who the member was not legally liable to maintain, however, was dependant on the member for maintenance upon his death; was his spouse or a members child (includes an adopted child and a child born out of wedlock) c) A person a member would have been liable to maintain had he not died.

In exercising their duties the board of trustees need to take the following factors into consideration: = The age of the beneficiaries; = The relationship with the deceased; = The extent of dependency; = The financial affairs/ needs of the dependants; = The wishes of the deceased as either expressed in the members Will or the nomination form.

Although Section 37C places a restriction on your freedom of testation, the board of trustees can take your wishes into consideration in making their decision.

Where minor dependants are concerned, the benefit could be paid to a trust selected by a member, therefore, a provision could still be made in a nomination form or Will informing the continued on page 19

SENSIBLE INCENTIVE

EMPLOYEE TAX INCENTIVE Submitted by Kim Nel CA (SA), Associate - Klinkradt Murphy.

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hat is Employee Tax Incentive (ETI)? The ETI is an incentive aimed at encouraging employers to employ young work seekers. This will be done by distributing the employment cost between the government and the employer. The incentive applies only to eligible employers who employ qualifying employees. The incentive runs through the Pay As You Earn (PAYE) system on a monthly basis via the EMP201 returns and the bi-annual EMP501 submissions.

The incentive was brought into effect on 1 January 2014 and was originally scheduled to run for a period of 24 months to end in December 2016. At this stage the incentive will be reviewed with the possibility of extension.

October 2013; and = Is paid the minimum wage applicable to that

employer, or if a minimum wage does not apply, is paid a wage of at least R2 000 and not more than R6 000 per month (for employees working more than 160 hours per month).

How does the ETI advantage the employer? = The cost of hiring young people will be reduced

= =

How do I determine whether I am an eligible employer?

There are three primary criteria which will determine whether you qualify for the incentive as an employer: = The employer must be registered for PAYE or be eligible to register for PAYE; = The employer may not be any form of governmental department or public entity; = The employer may not be a municipality.

Hence the majority of the private sector companies would be eligible employers.

Which of my employees qualify for ETI? An employee who qualifies for the incentive is one which: = Has a valid South African ID, Asylum Seeker permit or an ID issued in terms of the Refugee Act; = Is aged between 18 and 29 years of age; = Is not a domestic worker; = Is not a connected person to the employer (connected person meaning you or your spouse being connected to the employer by blood in the third degree, e.g. great great grandfather) = Was employed by the employer on or after 1

= =

for the employer. The employer will pay over a reduced amount of PAYE without affecting the wage of the employee.

The incentive can be claimed over a 24 month period.

The incentive amount is determined by the salary paid to the employee i.e. not a fixed amount. The basis for the calculation is also dependent on whether the employee is employed in the first or the second 12 month period.

The employer will receive income tax benefits from the incentive.

The incentive can be used in conjunction with most other learnership agreements.

How does the ETI advantage the young workforce?

Employment trends indicate that employers lean toward hiring older, more experienced individuals.

This creates a tremendous challenge for the young, inexperienced youth who are unable to obtain the experience required to get their foot in the door with their first job. The incentive encourages employers to employ exactly this type of individual, thereby creating increased job opportunities for them.

How do I calculate the ETI? = Identify the qualifying employees for the month; = Work out the employment period for each

qualifying employee; continued on page 20

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BUYING SENSIBLY

LIABILITY FOR PREVIOUS OWNER'S MUNICIPAL DEBT Beware of charges that are older than 2 years! By Grant Berndt - Abdo & Abdo.

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hen transferring a property the Seller needs to obtain a rates clearance certificate from the Municipality in terms of Section 118(1) of The Local Government: Municipal Systems Act (referred to as “the Act�).

Without the rates clearance certificate the Registrar of Deeds cannot register the transfer.

Section 118(1), however, only requires that the rates and other Municipal charges for the 2 years preceding the date of application for the certificate have to be fully paid.

Section 118(3) of the Act states that the Municipal charges are charges on the property in connection with which the amount owing enjoys preference even over a Mortgage Bond registered against the property.

In a matter heard by the Supreme Court of Appeal, a property was sold at a Sale in Execution and when the buyer applied for the rates clearance certificate an amount of approximately R232 000 was required. This included debt older than 2 years and so the buyer disputed the correctness of the amount claimed. The Municipality then issued a certificate showing the amount of R126 000 as being outstanding for the past 2 years and against payment issued the clearance certificate. This left an amount of R106 000 as still outstanding against the property.

The buyer then sold the property onwards, but the Municipality would not open an account in the new buyer's name or supply any services to her.

The first buyer then obtained a Court Order from the High Court that the security provided by Section 118(3) of the Act, namely the fact that Municipal charges are a charge against the property, lapsed with the first sale and transfer of the property into the name of the first buyer.

The Municipality took this on appeal to the Supreme Court of Appeal where the majority of the judges found that the charge against the property is not extinguished when transfer is registered. The Court thus held that the Municipality could obtain a Court Order and sell the property at a Sale in

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Execution and use the proceeds from that sale to settle the debt older than 2 years. However, one judge disagreed with the majority of judges and gave a different opinion - that the charge lapsed upon registration of transfer into the first buyer's name.

The right created in Section 118(3) is known as a hypothec/lien and the minority judge maintained that if the holder of that right, in this case the Municipality, keeps silent and does not exercise its rights in recovering any outstanding charges older than 2 years at the time it issues the rates clearance certificate, then the right (hypothec/lien) lapses upon the registration of transfer to the new owner.

Further in terms of the Act, the Municipalities are obliged to collect monies that are due and are to adopt, maintain and implement credit control and debt collection policies and by-laws.

There is thus the question, that if the Municipality has not recovered debt which is older than 2 years, have they implemented adequate debt collecting procedures? In my opinion, based on their rights entrenched in Section 118 of the Act, they should have been able to recover the debt or a portion of it within the 2 year period, or if they receive a request for a rates clearance certificate and there are outstanding charges older than 2 years, they should immediately take legal action against the current owner/seller for recovery, which would entail them securing the outstanding balance from the proceeds of the sale as they enjoy preference even over a bank with a registered bond.

That said, when buying property and you are concerned about the possibility of there being charges older than 2 years, get confirmation from the Municipality.

“Managing success into the future” Our services include: Accounting • Auditing • Taxation Planning Estate Planning • All Statutory Registration • Business Structuring Concessions • Due Diligence • Business Succession Planning

Contact us on 043 726 9555 for all your queries. partners: Gary Klinkradt ca (sa) and Shaun murphy CA (SA)

SENSIBLE ALLOCATIONS Getting proper and well thought out advice when formulating your strategic allocations is critical. By Stephen Katzenellenbogen, Director/Private Wealth Manager NFB Gauteng.

COM(E)MOTION A

little while ago I converted, via my discretionary foreign allowance, some rands into US dollars to ultimately invest in global equity unit trusts. Doing this regularly for my clients, I knew (without having to think too much) which funds I would use, and anticipated converting the currency at whatever the prevailing exchange rate was at the time - all my paperwork was ready. I always tell my clients that they should not get caught up in the exchange rate guessinggame and only in ten years' time would it be appropriate to assess if the decision was reasonable.

Foreign investing should typically have a longterm horizon especially when considering the long duration of currency cycles. What actually happened was that I looked at the exchange rate every five minutes for about three days trying to time the conversion whilst considering Mr Zuma and Co, the EFF, US elections, Russian unrest, Turkish turmoil, growth in China, and where my children would be educated....to name but a few. I spoke to my wife about the aforementioned and she proceeded to ask me how I approach this with my clients. The very next morning I took my own, long–standing advice and converted the currency.

In case you are wondering (I know I would be), I exchanged my funds at R15.31/USD and invested in the Investec Global Franchise Fund and the Nedgroup Global Equity Fund. Please do not take my investment choices as advice as they are particular to my needs, objectives and circumstances.

My personal investment story leads me into two themes I would like to cover in this editorial:

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1. Tactical versus strategic allocations… and emotional investing 2. Long-term investment environments… and emotional investing

Tactical versus strategic allocations A strategic allocation is the long-term core allocation of a portfolio. This encompasses your split between rand and non-rand assets (local versus offshore) as well as your asset allocation: the allocation between cash, bonds, property, shares and alternative assets. These allocations will only vary slightly over time. In getting closer to retirement it may be that your portfolio requires you to start identifying between income and growth assets.

The externalisation of my personal funds was a strategic decision; I needed to increase my nonrand exposure to get to my target rand versus nonrand exposure. When making strategic decisions you need to take emotion out of play and deploy your assets in accordance with your target allocations. Your investment portfolio is a long-term (hopefully 15, 25 or even 50 years) relationship and over that amount of time your entry point should not make much difference. This does not mean you should invest blindly, ignorant of the current economic and political climate. It does mean though that you need to be committed. For example, if you feel that currencies are out of kilter then you could convert in two or three tranches, but you must give yourself a time line to do this in and stick to it. Trying to time markets often just leads to never doing anything and then going

SENSIBLE ALLOCATIONS

backwards in terms of the real value of your funds.

A tactical allocation differs as here you could try and time markets when you believe an asset class is incorrectly priced. A tactical deployment in most instances would not account for much more than a 4-5% shift. An example here, again using currency as it remains topical, would be to have converted US dollars back to rand when the exchange rate was over R16 to a dollar and then back to dollars again at R14.50. If you do ever make changes like this, you may want to reverse the trade later on to bring your portfolio allocations back in line. As an aside you should also consider the tax consequences of these types of changes as they may outweigh any gains.

Getting proper and well thought out advice when formulating your strategic allocations is critical. Current market conditions could quite easily lead even seasoned investors to have a sense of unease and steering towards a portfolio that is inappropriately biased (too cautious? too much offshore?). Rather than doing this you could phase your funds in, to rand-cost-average of a period over time, to get to your target allocations.

Importantly, do not make any major changes to your portfolio due to sentiment; you are likely to get the timing wrong. Rather make changes when there is a fundamental shift in personal or investment circumstances.

A last point is that markets are, as are a lot of things in life, cyclical. The longer you invest for, the smoother these cycles are.

Long-term investment environments Whilst I have spoken a lot around sticking to your guns there are drivers of change. There could be, at times, a number of these drivers and I will touch on but a few.

Oil Oil was around $100 dollars a barrel in late 2014 and since then we have seen prices drop to between $20 and $50. The current environment is one where we could see prices at or below current levels in the not too distant future (what will the impact of Tesla be?). There would be winners and losers if this happens and this could guide where and how we invest i.e. what was appropriate historically may not be in the future. One of the losers is Russia who lose around $2bn for every $1 fall in the oil price; oil and gas account for 70% of its exports. A winner here could be Europe where their

struggling economy could use any help it can get; there are some studies that say for every 10% drop in the oil price there is a 0.1% increase in economic output. A long-term structural change in the price of oil could change the profitability of certain companies, countries and currencies; this could necessitate a look at the inclusion or lack thereof of such counters in your portfolio.

Brexit Until an event occurs almost all discussion around it is speculation. One of the much spoken about impacts of a Brexit is the potential negative impact on London property prices due to the influence of the financial sector which would shrink if it happens. Current or future investment in this sector may need to be addressed and adjusted. The market has already, to a degree, reacted, and whilst some may see this as an exit sign, others may see the 'sale' sign and climb in.

At the moment, there is a lot going on, both locally and internationally, in the political and investment market environments. It is easy, as I did, to get caught up in the hype. The old adage of 'sleep on it' is a good idea; take the time to mull over the persistency of the situation. If there is a shift that will be enduring or at least long-term, then your portfolio may need to be adjusted accordingly. Most of you will invest in some type or types of managed solutions; thankfully in these instances most of the decision making around market shifts is left to the fund managers and their teams, and we in turn, oversee them.

To coincide with my personal long-term strategic rand and non- rand allocation I chose to expose myself to funds that allocate largely to global blue-chip equity, with a conservative bias, as I feel the long-term investment environment for this broad sector is conducive to above inflation growth.

Be patient and try not rush in to any major portfolio adjustments when emotions are running high. Good luck.

Should you require assistance or advice with regards your investment allocations, please contact a Private Wealth Manager at one of our NFB offices in Johannesburg, East London, Port Elizabeth, Stellenbosch or Cape Town.

Please note: This article was written prior to Friday June 24, when the results of the Brexit referendum were announced.

sensible finance July16

15

SENSIBLE DISCLOSURES

SENSIBLE DISCLOSURES Termination for non-disclosure is standard practice by all open medical schemes.

By Nonnie Canham, Financial Paraplanner - NFB East London.

A

large medical scheme recently denied its client authorisation for a surgical procedure and proceeded to terminate her membership due to her non-disclosure of a medical condition from which she suffered. This situation is 100% legal and you need to know how to ensure that it does not happen to you.

Termination for non-disclosure is standard practice by all open medical schemes, and being consistent with the law, it is supported by the CMS (Council for Medical Schemes). Non-disclosure of any information about an applicant's health, symptoms and medication is considered fraudulent and in terms of the regulations of the CMS, allows your medical scheme to immediately terminate your membership. It further places risk on the medical scheme and its existing members. The scheme needs all available information regarding existing conditions in order for them to underwrite in a way that protects the funds that existing members have contributed to the scheme. The access of new members who have not yet been contributing must be 'delayed' where they arrive with an immediate expense that will deplete the contributions of existing members.

The CMS' view on non-disclosure is detailed in CMScript, issue 5 of 2014. Here it is explained that the applicant has the responsibility to disclose information in respect of a condition for which medical advice (received from doctor or pharmacist), diagnosis, care or treatment was recommended or received in the 12 month period ending on the date on which an application form was completed (for the main member and all dependants). The non-disclosure of any material information may lead to termination of the membership of either the main member or the dependent/beneficiary.

Most application forms include a question where the member must indicate if they or any of their dependents had any symptoms or illnesses that were not specifically diagnosed by a doctor or for which no specific treatment was provided.

When a medical scheme receives a request for authorisation of in- or out-of-hospital healthcare services within the first year of membership, they automatically put the request on hold and investigate possible material non-disclosure in the original application. Where there is evidence of material nondisclosure, the scheme will contact its member for further details.

16

sensible finance July16

What constitutes material non-disclosure though?

Put in simple terms, if you just want to buy a horse it does not matter if you receive a brown horse or a black horse. It matters if you receive a mule. The failure to provide a horse vs a mule becomes a material fact that you can use to cancel the contract of sale. If on the other hand you wanted a white horse to ride down the aisle on your wedding day and you have made your required specifications clear, it will be material if you receive a brown horse. A material fact, therefore, is one that will affect your desire to conclude the contract or affect the manner in which the contract is concluded. Non-disclosure of an existing medical condition will consequently be material if it affects whether, and how, the medical scheme activates your membership... if you are already pregnant when you apply, that is material and the scheme has a right to know; if your son fell and scraped his knee, that is less material, unless he broke his leg and required surgery.

With all material information in hand, schemes may enforce the following: = Late joiner penalties: This applies to applicants older than 35 who join a medical scheme for the first time or re-join after an extended gap in membership.

Once applied, this penalty applies for life and results in higher contributions than the standard. = 3 month general waiting period: Prescribed Minimum Benefits may or may not be covered during this time. = A 12-month condition specific waiting period: If for example, you are pregnant at the time of applying, the scheme may exclude the specific condition of pregnancy for 12 months, but cover other new conditions that arise in that time.

Applicants are advised of late-joiner penalties and applicable waiting periods before the membership starts. Non-disclosure undermines the limited ability of schemes to underwrite, and would lead to even greater anti-selection against schemes than is currently the case.

Should you require assistance with your medical scheme application please feel free to contact one of our qualified representatives on one of the following numbers who will ensure that you are not caught in the non-disclosure snare.

East London 043-735 2000 = Port Elizabeth 041-582 3990 Cape Town 021-202 0001 = Johannesburg 011-895 8000

SENSIBLE INCOME

A sustainable retirement income There is a better way. By Jean Lombard, Head of Business Integration - Glacier by Sanlam.

I

nvestors today face many macroenvironmental, as well as personal risks that could pose very real threats to those drawing an income in retirement.

Longevity risk Longevity risk is causing particular concern at present. A study by Allianz Life revealed that more retirees fear outliving their money than those that fear death. This problem is compounded by increasing life expectancy rates across the world, together with a poor retirement savings rate and lack of preservation of savings when changing employment.

Currently, most retirement savings are invested in investment-linked living annuities (ILLAs). This does provide flexibility in terms of income drawn, but retirees are taking on more investment risk in order to sidestep longevity risk.

Asset allocation and investment returns cannot completely manage longevity risk – even if the client takes on more risk. The expected returns may not materialise, leaving the retiree exposed to longevity risk.

Stability versus sustainability Many people arrive at a retirement date without having saved up enough capital – and this means some tough decisions need to be made. In this case they need to take a reduction in income from day one of retirement.

By taking an ILLA income that increases with inflation every year (in real terms), the retiree will often reach the legislated 17.5% income cap within a few years, resulting in capital depletion.

By taking an income that is a fixed percentage of capital from the start, the income will still grow (in nominal terms) but at a sustainable rate. This will, however, leave the investor exposed to market shocks as the capital value could fluctuate during the course of the year.

linked lifetime income plan (ILLI) which combines features of the guaranteed annuity with the flexibility of the ILLA. For many retirees it doesn't have to be an either-or decision between the two products.

Rather, many may benefit by using the ILLI in combination with the ILLA. Example: A 65 year old retiree has capital of R10m at retirement, with an initial income of R700 000 per annum. In this example we compare an investment in a moderate ILLA with that of a combination investment (60% aggressive ILLA and 40% conservative ILLI).

Fifteen years later, at age 80, the retiree would have a real income of R485 000 per annum in the combination investment, against a real income of R378 000 per annum in the moderate ILLA. Assuming a 4% real return every year, the amount of capital (or legacy) remaining in the combination investment at age 80 would still be substantial, at R11 million. The moderate ILLA at this stage would have a capital amount of R15 million, but this needs to be weighed up against the fact that the retiree has achieved a higher real income in the combination investment and has peace of mind that the income received is sustainable.

The combination investment creates a portfolio which is similar in volatility and risk profile to that of the moderate ILLA, but with a higher real income.

New thinking and new solutions required We believe that by combining the ILLA and ILLI, clients receive: = Sustainable income = Maximum growth, but with a safety net = Income that could keep pace with inflation = A legacy to leave their beneficiaries.

The combination investment provides a way for retirees to receive a growing income for life, with moderate volatility, without carrying the longevity risk themselves.

Is there a better way?

Early last year, Glacier launched the investmentsensible finance July16

17

SENSIBLE PERFORMANCE

Does size matter?

The large versus small asset manager debate continues to rage. By Paul Hutchinson, Sales Manager - Investec Asset Management.

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he large versus small asset manager debate continues to rage. More recently, a Moneyweb article used the success of smaller managers at the annual Raging Bull and Morningstar fund awards earlier this year to make the point that 'smaller managers may be rising through the ranks'.

= Large asset managers take materially longer to

build or sell a meaningful stake in a particular asset = The corollary being that smaller managers have a larger universe and more flexibility, which will lead to better performance over time

The arguments for smaller managers

All the above point to size restricting the ability of large asset managers to generate outperformance, or so the argument goes.

Arguments put forward as to why size matters, with the result that smaller asset managers will likely outperform, include:

The evidence in support of large managers

= Large asset managers have become the market

and therefore can only deliver market performance (at higher than passive fees) ¢ And that there is a tacit acknowledgement of this fact by those large managers that have closed parts of their investment business to new flows = Large asset managers have a limited universe of investable companies available to meaningfully contribute to performance

3 years

With the above as a brief introduction, it is instructive to consider the general equity fund performance of the broadly acknowledged / supported large independent asset managers (Allan Gray, Coronation, Foord, Investec and Prudential) and the large life office-aligned asset managers (Old Mutual and Sanlam) to that of the medium-sized and smaller manager universe over meaningful investment periods - 5 years to end March 2016 (I have included the 3, 7 and 10-year periods to provide a more complete analysis).

5 years

PlexCrown Ratings

10 years

7 years

Annualised Peer Peer Annualised Peer Peer Peer Peer Annualised Peer Annualised Peer perforgroup group group group group group perforgroup group perforperformance rank quartile rank quartile rank quartile mance rank quartile mance mance

Fund

Crowns

Allan Gray Equity A

13.48

30

2

14.52

23

2

17.04

29

2

13.64

9

1

4

Coronation Equity A

12.62

43

2

14.50

24

2

19.17

10

1

13.95

6

1

3

Foord Equity R

14.01

19

1

16.91

5

1

20.90

2

1

14.38

3

1

4

Investec Equity A

16.51

6

1

15.95

13

1

17.75

21

2

12.43

19

1

4

Old Mutual Investors A

15.48

12

1

14.70

22

1

18.62

13

1

Prudential Equity A

12.75

40

2

14.15

27

2

17.41

23

2

13.92

6

1

3

SIM General Equity A

13.22

31

2

14.20

26

2

18.40

15

1

13.34

10

1

3

Peer Group Median

11.80

12.58

16.30

11.17

FTSE/JSE All Share Index

12.78

13.57

17.73

13.11

4

Source: Morningstar; 31 March 2016

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sensible finance July16

SENSIBLE PERFORMANCE Over all periods the 7 large asset manager funds ranked either 1st or 2nd quartile, thereby outperforming the peer median Domestic – Equity – General fund. Importantly, over the five-year period all seven funds also outperformed the FTSE/JSE All Share Index after fees, which in turn outperformed the peer median fund, dispelling the argument that large managers can only deliver index performance. A largely similar picture is evident for the 3, 7 and 10-year period.

As a separate measure, all seven funds received either 3 or 4 PlexCrowns at end March 2016. The PlexCrown methodology ranks funds on a percentile basis over five- and three-year periods according to various risk / return measures.

the question is; 'is this nimbleness and market access a true competitive advantage?' ¢ Related to this point is the fact that the SA equity market is extremely concentrated; getting the big calls right is important to outperform the market (for example overweight rand hedges and underweight resources in 2015) = Large managers are able to invest in people, processes and research, and have unrivalled support structures, including administration, client support, legal and compliance, operations, risk and performance, etc.

What then drives performance and success?

A blend of general equity funds may be the optimal investment solution for most equity investors. This strategy limits the binary risk associated with selecting a single fund. In deciding on which funds (be they managed by large or smaller asset managers) to blend, investors need to consider, amongst other factors, the different investment styles, performance drivers, fund manager skill, how the funds are correlated – to maximise diversification benefits you want to select funds that are less correlated – etc.

It is worth noting that research shows that diversification benefits are limited beyond a small number of funds. This is because the risk reducing benefit of adding an additional fund to a portfolio dissipates quickly as most funds have some degree of correlation.

So, while we acknowledge that it is possible for size to inhibit returns, being a large asset manager does not guarantee underperformance. What then could explain this ability for large managers to deliver better-than-average returns? Again, there are a number of factors that we think play a role: = Large managers have always been large; their

share of the market's free float has grown in line with the market's growth = The broader investment universe; asset managers can now invest up to 25% of their domestic equity portfolios in offshore assets and a further 5% in Africa = Many of the managers listed above profess to follow a 'long term investment philosophy', which manifests in low asset turnover, so while small managers can be nimble and can build more meaningful positions in smaller companies,

Blending portfolios as a possible solution

SENSIBLE ESTATE PLANNING

PROVISION FOR YOUR DEPENDANTS WHEN YOU ARE NOT AROUND continued from page 10

trustees of your desire for them to pay the minor beneficiaries benefit to a trust for their benefit. It is, however, important to consider that some investment companies do not allow the nomination of a Trust for proceeds on a retirement investment, which is why your will should properly state your wishes.

In choosing to house your dependants inheritance in a trust, whether intervivos or not, the tax benefits should not be the only motivating factor, as the taxation of these structures is expected to change in the near future.

A financial advisor can create an estate plan

which will cater for your needs whilst you are alive and the needs of those you wish to benefit upon your death. In addition to retirement investments there are many other investment structures you can invest in to provide for your dependants and to ensure that their inheritance is protected from creditors.

Should you require assistance or advice with your estate planning, please do not hesitate to contact one of our Private Wealth Managers.

East London 043-735 2000 = Port Elizabeth 041-582 3990 Cape Town 021-202 0001 = Johannesburg 011-895 8000

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19

SENSIBLE INCENTIVE

EMPLOYEE TAX INCENTIVE continued from page 11

= Calculate each employee's monthly

= Hours worked on a Sunday

remuneration; = Calculate the incentive applicable to each employee per the table below.

= Hours worked on a public holiday

What if I claim the ETI on employees who do not qualify?

Calculating the incentive for a company with a large number of qualifying employees on the payroll can prove to be an administrative burden in some cases as well as a rather time consuming monthly exercise. In some cases, payroll systems were set up incorrectly at the start of the programme which has resulted in employers possibly over or under claiming on the incentive.

Many employers have also experienced difficulties in submitting their half yearly EMP501 recons to SARS due to the ETI. In theory, the ETI concept is a good one, however, the implementation thereof can be somewhat involved.

In the case where an employee claims ETI for an employee who earns less than the minimum wage or when an employer is believed to have displaced an employee with one who qualifies in order to claim the incentive will be subject to penalties.

The penalty can be as much as 100% of the ETI claimed for that employee as well as additional interest and penalties for the underpayment of PAYE in terms of the Tax Administration Act.

Applying the incentive in practice: In theory the formulae appears to be fairly straight forward to apply, however, complications arise when an employee is employed for part of a month. The concept of 'employed' hours also proves to be undefined in the ETI Act. There is also uncertainty around: = Overtime hours = Unpaid leave hours

In conclusion:

Should you require advice or further information on ETI, please contact the Klinkradt Murphy office on 043 – 726 9555.

Source: www.sars.gov.za - Payroll World, Edition 01/2016.

Monthly Remuneration

Employment Tax Incentive per month during the first 12 months of employment of the qualifying employee

Employment Tax Incentive per month during the next 12 months of employment of the qualifying employee

R 0 - R2 000

50% of Monthly Remuneration

25% of Monthly Remuneration

R 2 001 - R4 000

R1 000

R500

R 4 001 - R6 000

Formula: R1 000 – (0.5 x (Monthly Remuneration – R4 000))

Formula: R500 – (0.25 x (Monthly Remuneration – R4 000))

Step 1: Take the monthly remuneration and subtract R4 000

Step 1: Take the monthly remuneration and subtract R4 000

Step 2: Take the result in step 1 and halve the number

Step 2: Take the result in step 1 and take a quarter of the number

Step 3: Take R1 000 and subtract the amount calculated in steps 2

Step 3: Take R500 and subtract the amount calculated in steps 2.

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sensible finance July16

SENSIBLE SAVINGS

RETIREMENT SAVINGS

AND DIVORCE

Planning adequately in a trying situation. By Lydia Byrnes, Representative under Supervision - NFB Gauteng. recently assisted a friend who was going through a divorce. Financial planning is usually the last thing on one's mind when dealing with all the emotions, money matters, kids and changing circumstances, but it is important to consider how retirement benefits are dealt with in these situations, so that you are able to plan and adequately make provision for your retirement.

The current position in terms of the Divorce Act, a pension fund is permitted to pay a portion or all of the “pension interest” to the member's former spouse (referred to as the non-member spouse).

I

and therefore cannot be awarded to a nonmember spouse upon divorce.

What does “pension interest” mean? a) In respect of a member of a pension, provident or preservation fund: the total benefit to which the member would have been entitled to in terms of the fund rules, if their fund membership has ended on the date of the divorce by virtue of resigning from the fund.

1. The divorce order must specify the pension interest assigned to the non-member spouse. In other words, the percentage or amount of pension interest must specifically be stated in the decree.

2. The fund must be identified by name or at least identifiable from the order. A simple reference to the member's “retirement fund” will not suffice.

3. The fund must be ordered to pay the nonmember spouse. In other words, there must be an order to pay, and the order must be directed at the fund; 4. The divorce order must be valid, i.e. issued by a High Court, regional court or divorce court.

5. The member must still be a member of the fund on the date the divorce is granted.

b) In respect of a retirement annuity fund: the total amount of the member's contribution to the fund up to the date of the divorce, together with a total amount of annual simple interest (at the official prescribed rate), provided that this does not exceed the fund return.

For example: Let's say a member's total retirement annuity fund totals R1 200 000 as at the date of divorce, and the member contributed R50 000 pa since becoming a member 10 years ago. The amount that will be considered as pension interest is R50 000 x 10 years, plus 15,5% pa simple interest = R926 250 as your pension interest amount. The court will award either the total pension interest amount or a portion of it to the non-member spouse.

So it's important to calculate the value of the pension interest when negotiating the divorce settlement and not the value of the retirement fund.

Also important to note is that a life annuity or a compulsory life annuity (generally regarded as compulsory money), are not retirement funds and not included in the definition of pension interest,

22

“How fund administrators deal with the division of retirement funds” If you are getting divorced, and intend claiming against your spouse's retirement fund benefit, it is important that your claim meets specific conditions as set out in the Divorce Act or the Pension Funds Act. A fund will only make a divorce payment if the divorce order is binding on the fund and meets all of the criteria:

If the divorce order does not meet all the criteria and is not binding on the fund, the administrator of the fund should inform the non-member spouse accordingly. In this instance, the member and the non-member spouse cannot come to an agreement between themselves; the court order must be amended.

What are the non-member spouse's options upon being awarded an amount from a retirement fund? = Take the full amount awarded as a cash lump sum (taxable); = Take a portion as a cash lump sum and transfer the balance to an approved preservation, pension, provident or retirement annuity fund; = Transfer the full benefit amount awarded to an continued on page 28

sensible finance July16

SENSIBLE ADVICE

ROBO-ADVICE Is this the end of face-to-face financial planning? By Zukiswa Sonjica, Financial Paraplanner - NFB East London.

T

he manner in which services are delivered has evolved across many industries and continues to change. With the fast pace of life nowadays we are constantly exploring new innovations that make life easier to live, and take up the least amount of our time, which has meant more computer-led transactions with minimal face-to-face interaction.

In most cases this has proven to be less time consuming and less frustrating than standing in queues to pay bills during a lunch hour. Face-toface interaction has now become optional. You can buy movie tickets from the movie ticket counter or use the self-service machines.

Checking-in at the airport can be done online.

Instead of racing to the mall to pick up things for tonight's supper, online shopping ensures the goods are waiting at home when you get back from work. Gone are the days when paying for a parking ticket involved a person in a little booth before the boom gate.

In this Information Age where the aim is to simplify decision-making for transactions, and significantly lower costs for both the producers and consumers, there are a few services that have not been penetrated. Financial advice has now ceased to be an exception. Robo-advisors are automated investment platforms that provide an online investment solution to the investor wishing to invest some money. Through computer algorithms, questions are posed to the investor and the responses are used to assess the investor's risk tolerance to formulate a suitable portfolio. The transaction is then finalised after submitting the required FICA documents.

So is this the end of the financial planning service as we know it? Some fear so, but a closer look at true financial planning will reveal that roboadvice is actually the Financial Planner's 'little helper'. It introduces the financial planning process

at a basic level and at a low cost, to a wider range of clients. Most of these consumers are said to be in the 'advice gap' – those with smaller sums to invest for short time periods, who cannot yet afford to have a professional financial planner looking after their affairs. It also saves the advisor from the frustration of servicing such a client knowing that the relationship will end in the short term when the client reaches their goal of saving up for a holiday and withdraws the funds. With robo-advice, such consumers can use the financial advice services offered to attain their goal at minimal cost.

As life and careers progress, the Generation X's and Millennials, who are the target market of this revolution, will come to a stage where they start families, successful businesses and later retire or go through various life changing events related to their financial existence. Robo-advisors cannot offer an holistic financial planning service. The computerised service cannot ensure a tax efficient financial planning solution; and cannot structure a financial plan that will provide for your family when you are no longer able to do so. At some point, robo-advice clients will, more likely than not, reach a stage where they see the need of involving a professional financial planner to look into their financial affairs.

Robo-advice will undoubtedly contribute to the growth of the Financial Advice industry and should be seen as the direction in which the industry must adapt in order to find its way to future clients in the Information Age. Should you be at the stage of your financial planning process where you would prefer face-toface contact, please contact one of our advisors at the NFB offices on the following numbers: East London 043-735 2000 = Port Elizabeth 041-582 3990 Cape Town 021-202 0001 = Johannesburg 011-895 8000

sensible finance July16

23

SENSIBLE RESEARCH

Diving Deeper into Investment Research Methodology Unpacking the top-down and bottom-up approach. By Xolisa Funani, Financial Paraplanner - NFB Port Elizabeth.

T

here is no full proof system or strategy that will guarantee good returns when it comes to the selection of shares. However, sound research and the implementation of investment strategies may be able to generate better returns.

There are many strategies used by investment managers, but this article will focus on two of the most widely known and utilised strategies which are the top-down approach and the bottom-up approach.

What is the top-down approach?

This approach looks at the bigger picture i.e. the economy at large, whether it is the global economy or local economy, right down to the individual share/company. This approach uses a qualitative (non-numerical) analysis in reaching the findings.

Top-Down approach With the top-down approach, which NVest carries out when deciding on the asset allocations of the model portfolios; what the blend of each model portfolio will be between the various instruments (shares, property, bonds and cash) in order to ensure the most efficient portfolio in order to minimise unnecessary risk.

Investment decisions are then taken to determine the necessary exposure of the equity portion to various sectors of the market (industrial sector stocks, financial sector stocks, mining and resource sector stocks etc). This is basically the analysis of the big economic picture to determine their basic strategy, supplemented by technical and qualitative analysis from various external sources.

Example of sector allocation of the General Equity portfolio:

What is the bottom-up approach?

This approach de-emphasises the significance of the so-called bigger picture or economic and market cycles and uses quantitative analysis to reach conclusions. The focus of this approach is on the individual share/company rather than the industry in which the particular share/company participates in.

How are these approaches applied when it comes to NVest Securities model portfolios?

These approaches form an integral component when it comes to the research process done by NVest Securities.

24

Industrial/Consumer 45% Financials 16% Resources 31% Property 7% Cash 1%

Source: NVest Securities General Equity Portfolio Fund Fact Sheet

Bottom-Up approach Once they have conducted the top-down analysis, continued on page 28

sensible finance July16

SENSIBLE RELATIONSHIPS

The Law and Cohabitation An interesting look at common law marriage. By Debi Godwin, Director - Independent Executor & Trust.

C

ohabitation, also referred to as a common law marriage, living together or a domestic partnership, is not recognised as a legal relationship by South African law. There is no law that regulates the rights of parties in a cohabitation relationship.

Cohabitation generally refers to people who, regardless of gender, live together without being validly married to each other. Put simply, men and women living together do not have the rights and duties married couples have. This is the case irrespective of the duration of the relationship.

Contrary to popular belief, the assumption that if you stay with your partner for a certain amount of time a common law marriage comes into existence whereby you will obtain certain benefits is incorrect. In South Africa, cohabitation has become more common over the past few years and the number of cohabitants increases by almost 100% each year Unlike marriage, which is regulated by specific laws that protect the individuals in the relationship, cohabitation offers no such comfort. For example, when a cohabitant dies without a valid will, their partner has no right to inherit under the Intestate Succession Act. A cohabitant can also not rely on the provisions of the Maintenance of Surviving Spouses Act to secure maintenance on the death of a partner. There is no obligation on cohabitants to maintain each other and they have no enforceable right to claim maintenance.

The law, as it stands, is unsatisfactory.

Fortunately, the South African law on cohabitation may soon be rectified by the draft Domestic Partnerships Bill that was published in January 2008.

Until the Bill is adopted into legislation, however, the status of cohabitants in South Africa will remain significantly different from spouses in a marriage and partners in a civil union.

Cohabitation agreements It is becoming more common for partners in a

cohabitation relationship to draw up a contract.

Life partners are permitted to enter into a contract similar to an antenuptial contract that regulates their respective obligations during the subsistence of their union and the consequences of the termination thereof. Such agreements are referred to as cohabitation contracts or domestic partnership agreements. Such an agreement will usually contain regulations regarding finances during the existence of the cohabitation relationship and deal with the division of property, goods and assets upon its termination.

When the relationship ends - Claiming back As no reciprocal duty of support between partners in a domestic partnership exists, there is no enforceable right to claim maintenance, either during or upon termination by death or otherwise of the relationship, unless maintenance is regulated in a cohabitation agreement. There is also no action for claiming damages in the event of the unlawful death of a partner.

There is no law that allows for a person's pension assets to be transferred in a cohabitation partnership. A cohabitation agreement will have no effect either, as it would not be enforceable against the pension fund. Even those who are able to prove the existence of a universal partnership and a joint estate cannot share in their partner's pension assets on termination of the relationship.

In the absence of a cohabitation agreement or a proven universal partnership, private property acquired by the cohabitants prior to their relationship belongs to the partner who originally acquired it and no community of property can be established. It therefore follows that a cohabitant who is not the owner of the property has no special right to occupy the common home. (with reference to: article by Bertrus Peller and Associates; FISA Focus article by Charles Evison of Legacy Fiduciary Services)

At Independent Executor & Trust we are committed to personalized service and individual attention. With combined experience of 65 years, we specialize in the Drafting of Wills, Administration of Estates & Testamentary Trusts.

49 Beach Road, Nahoon, East London, 5241 | PO Box 8081, Nahoon, 5210 Telephone: (043) 735 4633 Fax: 086 693 3356 / (043) 735 3942 | e-mail: info@iet.co.za

Port Elizabeth clients can call 041-582 3990 and you will be re-directed accordingly

SENSIBLE OPPORTUNITIES

TEXTON PROPERTY FUND A Company in Transition A company in transition and an attractive investment opportunity. By Liam Graham, Portfolio Manager - NVest Securities.

At NVest Securities we are continually in search of attractive investment opportunities. Texton Property Fund (TEX) falls into this category, offering a very attractive yield of 12.8% and trading at a discount to Net Asset Value (P/NAV = 83%) providing a margin of safety. TEX is in the middle of a strategy transition and clearly the market is pricing in lots of execution risk. If management are true to their word and able to meet their stated goal of top quartile distribution growth (10%) we believe that there is tremendous value at current levels.

TEX Share Price DY Disti growth Tgt NAV/shr P/NAV Property Value (R’000)

8.28 12.80% 10%+ 10.03 83% 7,112,685

A BRIEF HISTORY‌.

Texton Property Fund began as Vunani Property Fund, whose focus was originally Tier 1 & 2 Offices mainly in Gauteng. In 2014 Angelique de Rauville & co. bought the management company; they convinced the board to change the office focused strategy and shift to a more diversified strategy within office/commercial/retail and also expand into the UK property sector. This strategic shift caused the old executive team to leave, Angelique stepped into the CEO role, and Nic Morris and Brigitte De Bruyn were brought into the COO & CFO roles, respectively.

The stock has essentially underperformed since the change of strategy as the existing shareholders exited with the previous management team while new shareholders sit on the sidelines waiting for the new management team to prove themselves.

EXECUTING TO PLAN Aquisitions 1,800,000 R 1,600,000 R 1,400,000 R 1,200,000 R 1,000,000 R 800,000 R 600,000 R 400,000 R 200,000 R - R

2H16

1H16

2H15

1H15

Over the last 18 months TEX has made R2.6bn worth of acquisitions, increasing their Property Portfolio from R2.225bn in FY14 to R6.253bn as of Feb '16.

They have managed to take their portfolio value in the UK from 0% to 34% of total book value & reduced their exposure to office properties from >90% to <45% of GLA (Gross Leasable Area).

TEX's goal is to get the UK to 50% of the portfolio. Management are currently assessing 38 different opportunities in the UK, so this goal looks easily attainable in the new future.

Geographic Mix by BV Industrial (31%) Office (54%)

Office/Retail (5%) Retail (11%)

Sector Mix by GLA Gauteng (50%)

NP (0%)

UK (37%)

NWP (1%) FS (1%) EC (1%) KZN (3%) WC (7%)

Over the last 6 months TEX has bought over R1.5bn

26

sensible finance July16

SENSIBLE OPPORTUNITIES Broad Street Mall in Reading (a JV with Tradehold, Christo Wiese's property vehicle) offers lots of potential upside with the prospect of adding several residential blocks to the property.

Another potential earnings enhancer is TEX's ability to borrow at better rates. TEX initially financed its UK acquisitions via Investec SA, hedging using currency swaps ultimately paying 3.5%+. TEX is currently in talks with HSBC and Stander to set up a line of credit directly in the UK at 3%. Not only do these better rates make the cash returns on future acquisitions more enticing, but TEX currently has R1.112bn worth of debt in UK properties, a 50bps saving in the cost of financing would drop 1.5c/shr to distributable earnings.

worth of property, acquiring annualized revenue of more than R85mn (vs FY15 R401mn) which should be sufficient to grow distributions for the next 18 months.

BALANCING DIVERSIFICATION WITH GROWTH While it has become all the vogue for property companies to grow their portfolios overseas, diversifying into “hard currency assets” in a country better placed in the economic cycle, however, it comes with a lower Return On Equities (ROE's) and much less embedded growth via annual escalations.

Yield Interest Rates LTV ROE Leasing Terms Annual Rate Escalations

UK 6.50% 3.50% 50% 9.50% 15 years 2% p.a (adjusted every 5yrs)

SA 9.50% 8.27% 35% 10.16% 5 years

ASSETS HELD FOR SALE TEX currently has R340mn of assets held for sale. In the most recent interim results TEX wrote down R146mn of book value (BV) from these assets.

Management are currently in advanced talks with buyers of the 2 major assets (Vodacom Park, BV R97.9mn & Perseus Park, R85mn) at values higher than book value. If these sales should go through it would remove a major overhang, freeing up capital and acting as a catalyst to move the stock higher.

8-10%

Some investor concerns surround the effect TEX's expansion in the UK will have on distribution growth and ROE.

THE UK PORTFOLIO TEX's focus in the UK has been in Tier 2 cities with Tier 1 customers where the yields tend to be more attractive and leases longer. Please refer to the table below.

Ultimately FY16 results will be a big moment where management will be able to prove to the market it is executing on its strategy. Having met with management we are confident that they will deliver - in the mean time you get paid 12.5% to wait.

Tenants

WALE (yrs)

GLA (m2)

Initial Yield

Kent

Lloyd’s of London

12.5

168,826

6.21%

UK

Nottingham

Browne Jacobson

5.8

57690

7.50%

146,119,20 R

UK

Gainsborugh

Coveris Flexibles

15.5

85,161

6.75%

170,813,50 R

UK

Peterlee

Catepillar

14.4

12,099

7.54%

B&Q

12.25

5,341

6.40%

DHL

15

30,251

6.45%

25,294

6.45%

Property

Date Acquired

Amount Paid (R’0000)

Chatham Building

26-May-16

128,138,80 R

UK

Mowbray House

26-May-16

225,411,00 R

Heapham Road

26-May-16

Catepillar UK Building

22-Jan-16

Location

Camborne Retail Park

08-Jan-16

224,186,00 R

UK

Camborne (Newquay)

Bawtry Building

23-Dec-15

368,220,00 R

UK

Doncaster

Broad Street Mall

01-Jun-15

570,935,50 R

UK

Reading

Zeya

27-May-15

13,755,00 R

UK

Wales

Chobe

27-May-15

189,699,00 R

UK

Duneim

14.29

1,783

6.53%

Newcastle

Tesco Bank

9.32

9,323

7.74%

Chevelon

27-May-15

15,179,00 R

UK

Nottingham

BonMarche / Poundland

12.47

2,601

7.80%

Gladstone Inv

27-Feb-15

71,153,00 R

UK

Warrington

Talk Talk

10.44

5,090

6.80%

Heddon

27-Feb-15

29,160,00 R

UK

Burton upon Trent

Bocker

9.83

3,826

7.50%

sensible finance July16

27

SENSIBLE SAVINGS

RETIREMENT SAVINGS AND DIVORCE continued from page 22

approved preservation, pension, provident or retirement annuity fund.

Taxation The non-member spouse who elects to receive a cash lump sum is liable for tax on the payment as per the withdrawal lump sum tax table.

If no lump sum is taken and the pension interest is transferred to another retirement fund, then no tax is due. The proceeds will be taxed in the hands of the non-member spouse, upon withdrawing or

retiring from the fund at a later stage.

Should you have any queries or would like assistance with your retirement planning, please do not hesitate to contact an NFB Private Wealth Manager at one of our NFB offices in Johannesburg, East London, Port Elizabeth, Stellenbosch or Cape Town.

East London 043-735 2000 = Port Elizabeth 041-582 3990 Cape Town 021-202 0001 = Johannesburg 011-895 8000

SENSIBLE RESEARCH

Diving Deeper into Investment Research Methodology continued from page 24

How do these two approaches come together? = Macro economics “bigger picture” = Sector and Industry growth = Global/Local regionalisation

opportunities

TOP DOWN (Qualitative analysis)

= Geographical landscape

Prospect of profitability

the second process is a bottom-up analysis which is carried out when selecting the individual stocks.

This process is geared towards researching individual companies and focuses on selecting a stock based on the individual attributes of a company.

They look for strong companies with good prospects. This process is very closely related to the top- down analysis, and where possible, stocks are selected in line with the broad asset allocation decisions. Where strong stocks with good prospects and strong fundamentals are found that do not correspond with the sector allocation assessment, however, they may still be selected, as on occasion quality stocks are found which are well positioned to perform strongly despite the broader market conditions. It is this quality stock picking, which will potentially see the investor's portfolio outperform.

28

sensible finance July16

= Valuations = Historical earnings and

growth thereof = Positive earning anomalies = Future growth expectations

(Quantitative analysis) BOTTOM UP

It is a well known saying by Philip Fisher, “The stock market is filled with individuals who know the price of everything, but the value of nothing”. Therefore, align yourself with a fund manager who knows the value within the market and applies sound and tested investment methodology which can generate the desired outcomes.

Should you have further queries on share selection and how to build your own portfolio, please contact one of our advisors at the NFB offices on the following numbers: East London 043-735 2000 = Port Elizabeth 041-582 3990 Cape Town 021-202 0001 = Johannesburg 011-895 8000

NFB have a STRONG, REPUTABLE TEAM OF ADVISORS with a WEALTH OF EXPERIENCE between them: EAST LONDON OFFICE: Andrew Kent | MIFM - Executive Director and Share Portfolio Manager, 23 years experience; Anthony Godwin RFP™ | MIFM – Executive Director and Private Wealth Manager, 28 years experience; Bryan Lones AFP™ | PGDFP, MIFM - Private Wealth Manager, 25 years experience;

experience; Leona Trollip RFP™ | Divisional Manager – Employee Benefits, 40 years experience; Leonie Schoeman RFP™ | Divisional Manager – Healthcare Advisory Services, 19 years experience;

Bryce Wild CFP® | B.Com (Hons), PGDFP – Private Wealth Manager, 3 years experience

Mikayla Collins CFP® | B.Com (Hons), PGDFP, CFA Level 1 - Private Wealth Manager, 5 years experience;

Gavin Ramsay | B.Com, MIFM - Managing Director EL and Private Wealth Manager, 23 years experience;

Nicky McLean | National Certificate in Wealth Management – Apprentice Healthcare Consultant, 1 year experience.

Glen Wattrus CFP® | B.Juris, LLB, PGDFP – Private Wealth Manager, 19 years experience;

Phillip Bartlett CFP® | BA LLB, PGDFP, MIFM Executive Director and Private Wealth Manager, 14 years experience;

Jaco de Beer RFP™ │ National Certificate: Financial Services Wealth Management, Private Wealth Manager, 21 years experience;

Robert Masters AFP™ | MIFM - Private Wealth Manager, 31 years experience;

Juanita Niemand | National Certificate in Wealth Management – Healthcare Consultant, 2 years experience;

Travis McClure CFP® | B.Com, PGDFP, MIFM – Executive Director and Private Wealth Manager, 18 years experience;

Julie McDonald CFP® | B.Com, PGDFP – Financial Advisor (Risk Assurance Specialist), 5 years

Walter Lowrie | Private Wealth Manager, 31 years experience;

PORT ELIZABETH OFFICE: Alex Grunewald CFP® | PGDFP – Managing Director PE and Private Wealth Manager, 10 years experience;

GAUTENG OFFICE: Andrew Duvenage CFP® | B.Com (Hons), PGDFP Advanced Investments – Managing Director NFB Gauteng and Private Wealth Manager, 12 years experience; Grant Magid CFP® | B.Com, PGDFP - Executive Director Gauteng and Private Wealth Manager, 15 years experience; Jeremy Diviani CFP® | B.Com, PGDFP Advanced Investments - Private Wealth Manager, 11 years experience; Laurie Wiid | B.Com, ILPA - Executive Director Gauteng and Private Wealth Manager, 23 years experience;

Paul Jennings CFP® | B.Com (Hons), PGDFP - Private Wealth Manager, 44 years experience; Philip Shapiro CFP® | B.Acc, H.Dip Tax, Admin of Estates, PGDFP – Financial Director Gauteng and Private Wealth Manager, 22 years experience; Stephen Katzenellenbogen CFP® | B.Com (Hons), PGDFP Advanced Investments – Director and Private Wealth Manager, 13 years experience; Terrance Janse Van Rensburg | B.Econ - Director and Private Wealth Manager, 22 years experience; Xintol Schoeman | Higher Certificate in Wealth Management - Financial Advisor (Life Specialist), 4 years experience.

Mike Estment CFP® | BA – CEO Gauteng and Private Wealth Manager, 31 years experience;

NFB has a separate specialist Short Term Insurance Division, as well as now offering specialist group companies in the fields of stock broking, wills and the administration of deceased estates.

For 30 years, NFB have successfully guided our clients.

Now let us navigate your financial future too. private wealth management

Contact one of NFBâ&#x20AC;&#x2122;s financial advisors: East London s tel no: (043) 735-2000 or e-mail: info@nfbel.co.za Port Elizabeth s tel no: (041) 582-3990 or e-mail: info@nfbpe.co.za Cape Town s tel no: (021) 202-0001 or e-mail: info@nfbct.co.za

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