NFB FINANCIAL UPDATE Issue71 Dec2013
FROM THE CEO’s DESK A colleague, Nina, and I have been having a load of fun, defining what it is we think we as wealth managers do; more importantly what you (and us) as investors need and the “stuff” that makes up the storyboard which is the financial markets, the products and the ingredients which colour the landscape. This exercise is a good idea for any business, and it became patently clear to me that I, and most, if not all of my colleagues in Johannesburg, East London, PE and the beautiful Western Cape, are both pilots and passengers. We are employed by you to deliver something which we are also in need of! In various meetings with clients I like to ask the question as to whether they are happy, both with what the numbers say, but sometimes as importantly, with the rest of what it is that we hope makes NFB special i.e. meeting their varied needs. For instance, as reasonable bunny-hugging types, we thought we would change this newsletter to an electronic thing, sent out via e-mail. We were surprised by the number of requests to send printed copies as these were being carefully filed, as had in some cases, been the case for many years! But I digress…so it is back to the storyboard we go. Nina took the broad concept away and came back with a little guy I hope you will enjoy called “Morph”. This friendly little guy who hasn't any particular identity is important to the story because, as you might know, “morph” means a few things. Firstly, as a noun, “morph” in biology means an individual of one particular form, in a species, that occurs in more than one form. As a verb it means “change”; as in “he morphed into a better person”. So it is that our friendly little guy became a symbol for any of our varied clients. Each has a set of needs, be they personal, corporate, perhaps as a trustee, auditor or spouse, sometimes simply as a dependant of a client. The trick confronting NFB and all players in the Wealth Management profession is Mike Estment BA, CFP® the delivery of results that not only suit CEO - NFB Financial Services Group the individuals very real risk tolerance, but also try to match this with the very real need for growth well in excess of inflation, nett of all costs, taxation and any other drag on returns. The market continues to grow in offerings, complexity and regulation. I have a belief in something I believe Steve Jobs said and I paraphrase, “Simple isn't easy. It takes complexity and hard work to end up with something financial services group that works and is simple to use”. So the challenge at
NFB is to morph complex ideas, products, and tax rules both in your life and in your estate, into a plan that works for you. In doing this we need to ensure our own sustainability and continue to achieve this in a few ways. I have enjoyed the investment we have made in people, many of whom have celebrated ten, fifteen, twenty and in a few cases twenty fifth anniversaries with us. We have promoted and funded studies, provided they are in the broad interest of the business. We have invested heavily in all of the business units in technology and training, an ongoing necessity in a world where technology will assist us in reducing costs and radically improving service and communication. Just as we have allowed Nina to develop Morph and the Storyboard, we have other young, bright people guiding the senior teams on technology, and communication mediums like Facebook, Twitter, LinkedIn and others. We will continue to offer advice and hopefully you enjoy this. The challenge for us and our clients is a shared one. One thing that sticks out for me is that our worst enemies include time, indecision and poor advice. Managing these is important and getting stuck in to making time your ally as opposed to an enemy, is probably the most critical. Back to Morph. Like our parents before us, our needs and circumstances change over time. I was inspired by a talk I attended by the hirsute Kingsley Holgate where he, in his own very well read, but nonetheless unique way, explained that each of us are born with seven stones. Each represents an active decade in our lives, and he asked how many we had used, and how many were left! His point I adapt for my own purposes and would suggest that being 55 as I am, I have navigated well past midway and will soon be entering that important phase of mine and Lisa's lives where we will start harvesting from the crop of savings we have been fortunate to amass. Equally importantly, I have used the team and its experts to finesse my estate plan and asked that my will be kept relevant and up to date with important tax and estate duty changes. You should also do these things, and most importantly, in the blur that is modern living in South Africa and elsewhere, my parting shot is to enjoy the journey, smell the roses and engage with NFB, taking advantage of all of the services it offers. I would like to end, firstly noting my amazement at the way the year has flown by. The years do accelerate, as our lives advance. NFB as a group continues to grow, both as a result of loyal support of our many clients around the country and the effort and skill of each of our staff and management team. I would like to thank you all, as well as our Institutional partners, both in SA and abroad, for your continued support, loyalty and networking which is most appreciated. I wish all of our readers a safe and fun year end and health and happiness in 2014.
fortune favours the well advised
Local vs Global 5 Things you should consider about local and global equities. ®
Image credit: 123RF Stock Photo
By Jeremy Diviani CFP , B.Com Adv PDFP, Private Wealth Manager - NFB Gauteng.
M
y colleague, Andrew, wrote in the last issue about the current risks in the South African equity market and the continued decrease of South Africa's competiveness. He also mentioned the current disconnect with regards to how the markets are reacting to economic data. This article aims to provide 5 things you should consider about local and global equities.
Consideration 1 – How Lekker are Local Equities? Since Andrew's article the All Share Index has risen even further and become even more expensive. Using the Price Earnings Multiple it has gone from below 18 to 20 with a long term average of 14. The concern about these levels is that the market is currently paying a premium for future earnings and if these earnings are not in line with expectations then there may be a sell off. What has been propping up our market is foreign investment flows. The chart below plots the flows into our equity market and, on average, foreigners have been buying in at a rate of R240 million a week for the last 12 months. These are, however, hot flows and can move out as quickly as they have come in.
From this we can deduce two things: one, the local market seems to be expensive, and two, this provides for possible volatility. Both of these affirm Andrew's discussion of assessing one's risk and deciding on the correct asset allocation. If local equities are expensive then you might be asking: where can value be found? With South Africa's declining competitiveness and an economy that has a budgeted GDP growth of under 3%, one should be asking whether returns previously enjoyed in South Africa are sustainable and if the rand is sound.
Consideration 2: Local vs Global It is important to remember that South Africa is just 1% of the global economy and so “having all your eggs in one basket” potentially creates a large opportunity cost. South Africa also does not offer certain industries and has limited exposure to others like Technology. There is the argument that an investor gets global exposure through South African rand hedge companies like SAB Miller, British American Tobacco, Richemont, MTN, Billiton, Naspers etc., as these companies have a portion of their revenue derived outside of South Africa. The problem with this argument is that these companies are now some of the most expensive in an already expensive market. The next step is to see if we are in fact more expensive than the rest of the world. When we compare ourselves to the MSCI World Index, on a relative basis, we can see that we are more expensive.
Consideration 3: How Do Global Equities Look? Continuing with the same analysis using the PE multiple we can then look to the rest of the world and from the table below we can see that both the developed world (orange line) and the developing world (green line) are trading below their long term average. This means that there is possible value on offer in comparison to South Africa.
differentials and inflation rate differentials to get a better sense of the rand's value and movements going forward. These paint a different picture, some of which are discussed below.
The chart above shows that we should be depreciating against the dollar by around 6% per annum over the long term.
Consideration 4: “How much should I have?� This type of question makes me echo my colleague's guidance that a discussion around asset allocation is vital and deciding on how much one should be investing globally must take into account one's risk tolerance and personal circumstances. The table below acts as a guideline and gives one an indication of how a foreign component forms part of a portfolio. This is a guideline and one must confirm with one's qualified NFB Wealth Manager for advice on asset allocation Risk Profile
Cash and Interest Property Equity cash Bearing (listed and equivalents Instruments unlisted) Cautious 30%-40% 30%-40% 10%-30% 0% - 35% Moderate-Cautious 20%-30% 25%-35% 10%-30% 30%-40% Moderate 15%-20% 15%-25% 10%-30% 40%-55% Moderate-Aggressive 10%-20% 15%-20% 10%-30% 50%-75% Aggressive 5%-10% 10%-20% 10%-30% 65%-100%
Foreign
10%-40% 10%-40% 10%-40% 10%-40% 10%-40%
The table below summarises these factors and next to it is an indicator whether they are a positive factor or a negative one. Indicator
Recent Number
Positive , Neutral or Negative Factor Negative
Consideration 5: What about the rand?
Current Account
-6.5% of GDP
The rand is an important factor and is volatile, so trying to call it invariably leads to headaches and missed opportunities. The rand is important as many South Africans had poor investment experiences when they transferred funds offshore in 2007. They took funds offshore with an expensive rand and into an expensive market feeling compelled because of local circumstances. Conditions now seem different and one should be looking to buy dollars at a fairer value so as to enter opportunities offshore and diversify ones portfolio. Historically, the rand has traded between R6 and R11 to the USD with outlying periods. There are many factors influencing the rand and trying to guess it has led many to turn to different sources such as the Big Mac index (this is a proxy for Purchasing Power Parity). It currently states the rand is around 60% undervalued to the Dollar. This offers a counter argument to rand weakness, but it may be too simplistic and one must take into account certain factors such as South Africa's trade deficit, current account deficit, budget deficit, flows into our bond and equity markets, interest rate
Trade Balance Budget Balance Debt to GDP
R-18.9 billion in September -4.1% of GDP 33.50%
Interest rate differential with the US Inflation Differential
4.75% 4.80%
Negative Negative Positive Positive Negative
This gives us an indication that the rand is roughly fairly valued at around R10 to the Dollar, but long term weakness remains a probability. However, if Ronald the Clown's best seller is anything to go by, then the rand may strengthen. Our concerns are that South Africans have been fortunate with local returns and may have become complacent, opting to not concern themselves with looking to invest globally. We feel it important that you discuss any action with your advisor to ensure that you indeed make the correct investment for your portfolio and circumstances. Your advisor will also provide you with the right vehicle and portfolio to match your risk and tax needs. Source of graphs: Bloomberg
Pre and Post
Retirement
Pre-Retirement The problem for many South Africans today is that saving for retirement only becomes a priority when it is too late and they are 'swamped' with other financial commitments. Many find it difficult to part with a large enough percentage of their income at this stage, in order to adequately make provision for retirement. It is important for investors to be made aware of the available retirement savings vehicles at their disposal as early as possible in their working lives, in order to give them a chance of making sufficient provision for their retirement. One of the most effective investment vehicles to make use of when saving for retirement is the retirement annuity (RA), which offers the greatest of the following tax deductions: = 15% of non-retirement funding income, = R3 500 less pension fund contributions or = R1 750 per year. In addition to this, the RA places a “forced saving� on the investor in that they cannot have access to the funds in the RA until the age of 55 (with the exceptions of death, disability or emigration of the fund member). There is also no capital gains tax within the RA structure and the fund is protected from certain creditors. The tax-deductibility of contributions to pension funds, provident funds and retirement annuity funds has been proposed to be increased to 27.5% of the greater of taxable income or remuneration, with a ceiling of R350 000 per annum. This means that within the RA structure, there is going to be even more opportunity for investors to take advantage of tax deductions going forward. However, this ceiling will limit the amount of tax-deductible
contributions high net worth individuals can contribute towards a retirement annuity.
Post-Retirement Up to this point, I have highlighted the benefits of making use of an investment vehicle such as the RA when saving for retirement. It is also crucial that investors make an informed decision when choosing the type of compulsory annuity at retirement stage. Once the retirement age of 55 has been reached, investors will have the option of taking a lump sum of up to 1/3rd of the value of their retirement fund (taxed according to the retirement tax tables), with the remaining 2/3rds having to be transferred to one of the compulsory annuity options, namely a living annuity or a guaranteed annuity. The full retirement fund value may also be transferred to a compulsory annuity should the investor not require a lump sum. The living annuity option provides flexibility in that an investor can change their drawdown rate on the anniversary date of the policy each year (between 2.5% and 17.5% pa of the capital value of the investment) and they can take on the risk of choosing the underlying funds or shares that are invested in. Living annuities also enable investors to nominate beneficiaries and leave a legacy to them. The alternative is to purchase a guaranteed annuity, which will provide the investor with a specified level of income for the rest of their life and the annuity will cease on death (with the exceptions of the Joint and Survivorship Annuity and the Capital Back Guarenteed Annuity). The life company takes on the risk of having to pay an income to the retiree for longer than their life expectancy tables suggest. The
income from the guaranteed annuity can either: remain the same each year, escalate with inflation or escalate by a specified amount annually. An important factor to consider when choosing between a living annuity and a guaranteed annuity is the interest rate. A guaranteed annuity enables the investor to lock in an income based on the prevailing interest rate and with the current low interest rate environment, most investors are choosing living annuities. One can switch from a living annuity to a guaranteed annuity if interest rates rise, but once a guaranteed annuity is chosen, it is not possible to switch to a living annuity. The preference of living annuities may change in years to come, especially with quantitative easing coming to an end in the US and interest rates looking set to begin rising in the near future. If the cycle of retirees running out of capital too soon in South Africa is going to be broken, retirement vehicles such as the RA have to be made use of from an early stage of one's working career and investors need to be guided when choosing the type of compulsory annuity at retirement stage. For personalised financial advice on retirement, contact an NFB private wealth manager on 043-7352000.
Written by Bryce Wild B.Com (Honours), Financial Paraplanner NFB East London
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