private wealth management
ROFICIO PNFB FINANCIAL UPDATE ISSUE 94 OCT/NOV 2017
FROM THE CEO’s DESK t NFB we set about building robust advisory processes and once we had achieved appropriate Assets under Management, our own in-house solutions. These can be troublesome, as the question will always beg asking, “Why is an NFB Advisor recommending an NFB solution; is this not just NFB taking advantage of the client?”
A
which materially affects Family Trusts. In essence “7C” deems the non-charging of interest to be a donation, subject to donations tax (at 20%) on an amount of 8% of the loan advanced. NFB's advisors are collaborating with clients and their accountants to mitigate this and would recommend clients with trusts address this issue promptly.
This issue has raised its head often in a market where profit comes before delivery! In the case of NFB's Asset Management business, I can proudly record that not only is the process world class, but two of our most significant offerings are amongst the country's top few funds. In addition, the business was also awarded a Plexus 5 Star rating - the highest in the industry. This independent recognition comes hot on the heels of the two Raging Bull Awards NFB Asset Management won earlier this year.
Probably the second most discussed issue is the Rand. Whilst we exist in a market brimming with negative economic news, daily political shenanigans and generally a world full of risk, the local currency remains relatively strong. Our equity market similarly seems to be testing new highs, leaving investors asking how, why and when does this end?
Rank
Out of
NFB Ci Balanced Fund of Funds A
7
th
92
NFB Ci Cautious Fund of Funds A
1st
80
NFB Asset Management
1st
92
Since I last penned an article, the Bell Pottinger affair has progressed somewhat. We are particularly pleased that they have been censured, that the consequences are dire and will hopefully serve to warn other businesses and service providers that civil society has limited patience. The one sad reality is that this took place in England, where the Industry Association had the gumption to properly react to the complaint and follow through with their most severe and punitive censure, being expulsion. Far too often these matters are managed away, undermining public confidence. On the home front, public and business scrutiny of professionals, banks and businesses associated with the Guptas and their cronies has become prominent. Reaction to suspicion and accusation has been swift and material. This is necessary, but should also not be judgement by media. Proper process needs to be followed or else this is no different to the threat of vigilantism. With regard to investment, advice and technical issues, quite a bit has been happening. Probably the most discussed topic at NFB with clients has been the new Section 7C amendment,
Probably the most discussed topic at NFB with clients has been the new Section 7C amendment, which materially affects Family Trusts.
On a global level, it appears that Emerging Markets are enjoying quite a bit of attention. Developed markets have enjoyed a fairly protracted period of growth and South Africa, whilst experiencing domestic difficulty, remains an element in the Emerging Market Indices, therefore almost automatically experiencing interest in both equities and bonds from abroad. Our market has, like others, experienced fairly diverse outcomes for sectors and stocks. In the USA, the acronym FAANG has become folklore. It represents the tech wunderkinds Facebook, Apple, Amazon, Netflix and Google. In SA, we have the crazy weighting of what used to be a Newspaper and paper sales outfit, now giant tech play called Naspers and a few others, which together skew returns and have investors wondering why their hard-earned savings are not displaying Index-like returns. The point right know is that a few stocks, and in some cases sectors, both here and abroad, are having a disproportionate impact on performance. Chasing this performance is easiest in the rear-view mirror, and tends to concern lay investors when comparing short term results. What is important to us is that the money managers we give management mandates to are cognisant of these trends, watch these super stocks, but don't get carried away in the chase for returns. It seems clear that technology, along with disruption, are real and sustainable, but markets and cycles are made up of more, and these will continue to ebb and flow over time. continued on page 3...
Mike Estment CFP® professional BA / Chief Executive Officer NFB Financial Services Group Gauteng
HOME COUNTRY BIAS AND HAVING THE CORRECT MIX
I
nvestors tend to be most attracted to investments in their domestic market as they have a sense of familiarity with them and thus more confidence.
REASONS WHY INVESTORS TEND TO BE OVERWEIGHT DOMESTICALLY Investors feel that they do not know offshore markets well enough and this leads them to have a preference to investing domestically. There are numerous reasons that could influence investors' decisions to favour the local market. Some of the reasons are as follows: Owning large amounts of fixed property: we are not referring to a primary residence, but instead, investment property such as commercial and residential. Individuals often ignore the extent of their property holdings as a percentage of their entire wealth. Retirement funds: these funds need to conform to regulation 28 (Pension Fund) limits. Regulation 28 of the Pension Funds Act set the limits as follows: maximum local equity 75%, maximum local property 25% and maximum offshore assets 25%. These limits restrict offshore investment. Local business ownership and share options: individuals that have large private company holdings or corporate employees that have share options in a local company. These investors often fail to consider their private holdings and these can sometimes be ignored when looking at the geographical allocations of a total portfolio. Exchange Control: historically, investors were limited to the amount of funds that they could take offshore, but due to more recent relaxation in Exchange
Controls, we are afforded more capacity to externalise funds.
WHAT ARE THE RISKS OF HAVING A HOME COUNTRY BIAS
It is imperative that when setting out a wealth plan that an investor's portfolio is analysed holistically and not just a section in isolation. This kind of analysis will provide for a true picture of your overall asset allocation.
Political risk
Performance on the JSE The Johannesburg Stock Exchange (JSE) has historically produced double digit returns and is complimented by a bond market that pays out relatively high yields. The returns on the JSE were stellar from 2010 up until 2014, but more recently the market has largely been trading sideways. The lack of political leadership has negatively affected the economy, which in part has driven low corporate earnings growth and subsequently high price-earnings (PE) ratios as prices stay flat. There has been little real growth in the JSE this year. If we look at the year-todate performance most of it has been driven by internet and media giant, Naspers. In turn, almost all the growth of Naspers can be attributed to its large investment in Chinese conglomerate, Tencent Holdings Ltd.
Jacob Zuma has constantly been in the spotlight for all the wrong reasons and this is unlikely to abate until, at least, his removal as head of the ANC. It comes as no surprise that business confidence is at levels last seen in 1993 with both local and foreign investors nervous to commit new capital, and in some instances, holding on to existing positions. A country plagued with corruption and weak leadership does not imbue confidence, especially to foreign investors who make up a respectable portion of our investment markets. Emerging markets sentiment, which can be very fickle, has been positive over the last few months and on this basis, we have seen consistent rand strength as foreign investors chase yield. There is the other side of the coin...when Zuma is no longer the president in favour of someone such as Cyril Ramaphosa, who “vows to get things done�, then potential inflows into the country as a result of stronger economic growth is a possibility. A change in the governing party is a low possibility, but if it were to materialise, investors could be more confident in respect of the country's future. Sovereign credit risk South Africa is one of the few emerging markets to be included in Citi's World Government Bond Index (WGBI). If all the rating agencies downgrade South Africa below investment grade, South Africa will lose its place in the WGBI and the estimated result is that we will see outflows of $8 billion. If this materialises it is very likely to produce a depreciating rand which could require an increase in interest rates to keep the
currency from significant depreciation. All of this would lead to volatility and further economic slowdown. South Africa's current position with the rating agencies is as follows: Agency
Rating
Outlook
Moody’s
Baa3
Negative
S&P
BB+
Negative
Fitch
BB+
Stable
Currency risk USD/ZAR In terms of currency, it is potentially more attractive to invest offshore now with a stronger rand compared to levels from a year or two ago. Investors should not invest offshore for a short-term currency gain, but instead adopt a long-term investment strategy, a strategy that relies on asset allocation where your currency exposure is part of a strategic allocation. Opportunity cost of being overweight JSE South Africa makes up around 0.56% of the world economy. The JSE Top 40 is a narrow-based index as opposed to a broad-based index. A broad-based index is designed to reflect the entire movement of the market. Apart from Naspers, the vast constituents of the JSE Top 40 are mining resources, consumer goods and financials. When adopting a home bias, we risk not having exposures to sectors that are available elsewhere in the world. Investment opportunities that are scarce or absent in SA are in sectors such as IT, Pharmaceuticals and Biotechnology. When analysing trends, we find that the retail industry has taken a massive dip, with US retail stores such as Macy's closing down. Some analysts refer to it as
a concept known as “retail-mageddon”. This can be linked to the success of the e-commerce giant Amazon and other smaller online stores. We see this happening in the domestic space too, where we have seen the end of Stuttafords. Adopting a home bias may limit us from investing in large ecommerce companies such as Alibaba and Amazon.
CONCLUSION The modern era has introduced additional risks due to technological advancements that were not present even 10 years ago. These advancements have also increased opportunities and provided easier access to worldwide markets. Having a portfolio that is overweight domestically is not necessarily a bad thing, but rather a situation that requires consideration. At NFB, our philosophy revolves around long term investing even in times of tough markets where growth is slow. We do, however, feel that the world's best rugby team will not only have South African players in it, but in fact a mix of superstars from all around the globe. The same concept can be adopted when selecting an appropriate investment strategy. It's not about being invested 100 percent offshore or 100 percent locally. There is no “golden rule” or a “one size fits all strategy”, but it is more about finding a suitable balance for each client and this will depend on numerous factors, such as our clients' needs, aspirations, risk profile, age and asset mix. Once we understand our clients' goals, a suitable investment portfolio can be built around it. Speak to your financial advisor should you require more information about diversifying your portfolio.
The table below is a scale of ratings across the big three CRAs. The highest debt rating achievable is AAA for S&P and Fitch and Aaa at Moody's. Any rating below BBB- (Baa3) is considered sub-investment grade or junk, which means that many investors will be prohibited by their mandates from holding these securities. Rating description
Moody’s
S&P
Fitch
Rank
Prime
Aaa
AAA
AAA
10
Aa1
AA+
AA+
9
High grade
Aa2
AA
AA
8
Aa3
AA-
AA-
7
A1
A+
A+
6
Upper medium grade
Lower medium grade Noninvestment grade
A2
A
A
5
A3
A-
A-
4
Baa1
BBB+
BBB+
3
Baa2
BBB
BBB
2
Baa3
BBB-
BBB-
1
Ba1
BB+
BB+
0
Ba2
BB
BB
-1
Ba3
BB-
BB-
-2
B1
B+
B+
-3
Speculative
Highly speculative
Substantial risks
B2
B
B
-4
B3
B-
B-
-5
Caa1
CCC+
CCC+
-6
Caa2
CCC
CCC
-7
Caa3
CCC-
CCC-
-8
CC
CC
-9
C
C
-10
C
RD
DDD
-11
/
SD
DD
-12
/
D
D
-13
Extremely speculative Ca Default imminent
In default
Our contact telephone numbers are: EL 043-735 2000 PE 041-582 3990 CT 021-202 0001 JHB 011-895 8000
It is imperative that when setting out a wealth plan that an investor's portfolio is analysed holistically and not just a section in isolation.
FROM THE CEO’s DESK NFB has always, in general, plumbed a line where reason prevails and sustainable, risk-adjusted returns are favoured to attempting to shoot the lights out. The Springboks, at time of writing this editorial, remain unbeaten in their latest competition. This is a great trend, and fortunately I
Mohamed Hassain B.Comm (Hons), PGDFP Financial Paraplanner NFB Financial Services Group Gauteng
...continued from front page
write this a day or so ahead of their trip which next has them facing the mighty All Blacks, away. Perhaps they will win, perhaps not, but hopefully the trend is our friend! Go Bokke!
TAXATION OF SEVERANCE BENEFITS W
ith the changing economy, some companies are finding themselves having to tighten their belts, and as part of that process some employees are being retrenched. For instance, the Johannesburg Securities Exchange (JSE) announced that it has embarked on a retrenchment process which will result in 14% of its full time staff being retrenched by the end of 2017. In accordance with the Basic Conditions of Employment Act no 75 of 1997, section 41(2) an employer is required to provide severance payment to its employees where the company is dismissing the employee due to the employer's operational requirements. The question therefore arises as to how these benefits are taxed. From the 1st of March 2011 severance benefits qualified to be taxed based on a table similar to the one used for retirement benefits: Taxable Portion of lump sum Rates of tax R0-R500 000
R0
R500 001-R700 000
18% of the amount over R500 000
R700 001-R1 050 000
R36 000 +27% of the amount
R1 050 001+
R130 500 +36% of the amount
over R700 000 over R1 050 000 As can be seen from the table above, the first R500 000 of the severance benefit will be tax free. The principle of aggregation applies for the taxation and therefore any retirement benefits received as of 1 October 2007 and retirement fund withdrawal benefits from 1 March 2009 will be aggregated (added) to the severance benefit when calculating the tax due. Depending on whether you have received any retirement benefit or retrenchment benefits within the time frames listed above, your R500 000 'tax free' amount might have already been used up.
In order for your benefit to be taxed according to the rates listed in the table above, the benefit you receive should meet the requirement for severance benefits as defined in the Income Tax Act. The Act defines a severance benefit as 'an amount received from an employer in respect of termination or loss of employment if:
The employee is 55 years or above, or The termination is due to the employee being unable to hold their office due to sickness or injury, or The termination is due to the employer having ceased trade or the employee having become redundant in consequence of a general reduction in personnel.’
Should the employee at any time have held more than 5% of the issued shares or members' interest in the employer company, the rates will not apply. The employer might include certain benefits in the retrenchment package. Not all of these benefits will qualify as severance benefits; these include, leave pay and pro rata bonuses which will be taxed based on the employees marginal tax rate. Prior to payment of the benefit, the employer will request a tax directive from the South African Revenue Service (SARS) to determine the amount of tax which should be withheld from the lump sum benefit due to the employee. Due to the fact that human error can happen, it is advised that the employee should request a copy of the tax directive from the employer to see that the correct tax directive number was used and that they were taxed accordingly. For advice on investment of a severance benefit lump sum and on the preservation of the retirement fund benefit, please contact one of our wealth managers on one of the following numbers: EL 043-735 2000 PE 041-582 3990 CT 021-202 0001 JHB 011-895 8000
With the changing economy, some companies are finding themselves having to tighten their belts, and as part of that process some employees are being retrenched.
Phomolo Moreng B.Juris (Financial Planning), PGDFP Financial Paraplanner NFB East London
East London Office
Port Elizabeth Office
Cape Town Office
Johannesburg Office
NFB House, 42 Beach Road, Nahoon, East London Tel: (043) 735-2000 Fax: (043) 735-2001 Email: info@nfbel.co.za Web: www.nfbec.co.za
Ground Floor, Building 6, Ascot Office Park, Cnr. Ascot & Conyngham Rds, Greenacres Tel: (041) 582-3990 Fax: (041) 586-0053 Email: info@nfbpe.co.za Web: www.nfbec.co.za
15th Floor, Metropolitan Building, 7 Walter Sisulu Ave, Cape Town Tel: (021) 202-0001 Fax: 021 202-3888 Email: info@nfbct.co.za Web: www.nfbec.co.za
NFB House, 108 Albertyn Ave, Wierda Valley, Sandton, Johannesburg Tel: (011) 895-8000 Fax: (011) 784-8831 Email: nfb@nfb.co.za Web: www.nfb.co.za
NFB is a licensed Financial Services Provider Members of the NVest Financial Holdings Group of Companies