NFB
A FREE publication distributed by NFB Private Wealth Management
Issue 28 November 2014
Eastern Cape's Community...
PERSONAL FINANCE Magazine
BUY-AND-SELL AGREEMENTS business continuity and the value of your business
NVest Financial Holdings raffle in aid of The Loaves & Fishes Network – enter now – loads of awesome prizes up for grabs!
IN PURSUIT OF QUALITY building real wealth over the long term ALTERNATIVES TO CASH beating the risk of inflation 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) 702-8571 or e-mail: mcollins@nfbct.co.za
web: www.nfbec.co.za NFB is an authorised Financial Services Provider
private wealth management
sensible finance
ED’SLETTER
editor Brendan Connellan bconnellan@nfbel.co.za
Contributors Bryce Wild (NFB East London), Prudential Portfolio Managers, Rory Judd (MiWay Insurance Company), Grant Berndt (Abdo & Abdo), Lunga Nkonki (NFB East London), Julie McDonald (NFB East London), Clyde Rossouw (Investec Asset Management), Shaun Murphy (Klinkradt Murphy), Andre Tuck (Glacier by Sanlam), Xolisa Funani (NFB Port Elizabeth), Debi Godwin (IE&T), Travis McClure (NFB East London), Mandy Botha (NVest Securities)
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
Photos used in this magazine - 123rf.com
Web: www.nfbec.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. ©2014 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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number of topics from Ebola to the secret life of Shrien Dewani nearly graced this editorial as being central to its theme; but, instead, I have decided on a much more appealing topic...me! Ok, perhaps I am not quite that self-indulgent, but a milestone soon to be reached in my life was my inspiration. I will be turning 40 imminently and life, like everyone else's, has been so busy the past few months I haven't even had time to sit and reflect on a decade that has been characterised by constant, yet mainly positive, personal change. Nor have I had time to fear the villainous mid-life crisis that many men around this age seem to experience (possibly because I still look so youthful I'd like to think), and so writing this article has made me stop for a minute and consider the importance of reflecting on my life's journey so far. I think that we tend to under-prioritise self reflection. In fact, not too long ago, the Harvard Business School conducted some research, the result of which showed that irrespective of how one learns best (seeing, hearing or doing), people reap the most rewards by spending time reflecting on their experiences. This adding impetus to American philosopher John Dewey's statement that “we do not learn from experience, we learn from reflecting on experience”. Research has shown that people who undertake self reflection handle stress more effectively, are often best positioned to juggle home and work lives and that those that self reflect tend to better understand themselves and thus other people – and as a result are often more effective leaders and make better, more informed decisions. Self reflection needs to be an honest and candid process. So, this will be a process I will be undertaking in the next several weeks as I ready myself for the next decade during which life apparently begins and I urge everyone, no matter your age, to do similar. People often spend so much of their lives shifting blame about why they have interpersonal conflict, why they can't hold down a job, why their finances aren't strong or why they haven't achieved everything they always expected that they would in life – and often the answers are rather close at hand! Brendan Connellan - Editor and Director of NFB
Email your full name to info @nfbel.co.za to subscribe to NFB 's free economic electronic newsletters. another aspect of our comprehensive service
sensible finance november14
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SENSIBLE CONTENTS
nfb sensible finance
2014 November 2014
4 GOLD AS AN INVESTMENT Is gold still worth considering in today's economic environment? By Bryce Wild, Private Wealth Manager - NFB East London.
6 PRUDENTIAL NAMIBIA'S NEW CASH-BEATING FUND A new unit trust aimed at beating the returns from traditional “cash” products.
8 CREDIT SHORTFALL INSURANCE Essential for those who have recently bought a new car. By Rory Judd - MiWay Insurance Company (contributed by NFB Insurance Brokers).
9 SECURING OUR SAFETY
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An interesting look at electric fencing. By Grandt Berndt - Abdo & Abdo.
10 ALTERNATIVES TO CASH Beating the risks of inflation. By Lunga Nkonki, Financial Paraplanner - NFB East London.
12 WIN AWESOME PRIZES Enter our raffle in aid of the Loaves and Fishes Network.
14 BUY-AND-SELL AGREEMENTS AND POLICIES Ensuring business continuity. By Julie McDonald, Risk Assurance Specialist - NFB East London.
16 IN PURSUIT OF QUALITY Building real wealth over the long term. By Clyde Rossouw, Portfolio Manager Investec Asset Management.
17 RETIREMENT REFORM Making sense of all the noise. By Lunga Nkonki, Financial Paraplanner - NFB East London.
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18 INCOME TAX VERIFICATION The documents SARS will request from you. By Shaun Murphy, partner at Klinkradt Murphy.
20 ENDOWMENTS, USED SMARTLY, CAN CREATE IMMENSE VALUE Could this be the right investment option for you? By Andre Tuck, Investment Account Manager - Glacier by Sanlam.
21 INCOME PROTECTION VS. LUMP SUM DISABILITY What are the differences between the two? By Julie McDonald, Risk Assurance Specialist - NFB East London.
24 A TAX-FREE SAVINGS ACCOUNT A look at this new savings opportunity. By Xolisa Funani, Financial Paraplanner - NFB Port Elizabeth.
26 WILLS AND VULNERABLE FAMILY MEMBERS Making provision for a disabled child. By Debi Godwin, Director - Independent Executor & Trust.
27 Q &A. YOU ASK. WE ANSWER. Advice column answering your investment, personal finance, life and/or risk insurance questions with Travis McClure, Director/Private Wealth Manager - NFB East London.
28 REINET INVESTMENTS SCA A value play for the patient investor.By Mandy Botha, Portfolio Manager - NVest Securities.
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SENSIBLE DIVERSIFICATION
Gold as an Investment Is gold still worth considering in today's economic environment? By Bryce Wild, Private Wealth Manager NFB East London.
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any a time, while enjoying a braai with friends, one of the questions that I am often presented with is whether gold is still an investment worth considering in today's economic environment. Many people have favored this asset class in the past and have experienced great returns as a result (as can be seen below), but the question of whether gold is still a fundamentally good security seems to be one of the questions that comes to many investors' minds first when they have the opportunity of spending some time with a financial advisor.
Source: http://goldprice.org/gold-price-history.html
Gold is a good investment for a number of reasons, some of which I have highlighted below: < Gold serves as a hedge against inflation. < Gold acts as a safe haven asset and maintains its value well over long periods of time, especially in times of political uncertainty, which are rife all over the world at the moment. < Gold is negatively correlated to equities and bonds and should therefore be held in most investment portfolios, to reduce the overall risk and volatility of the portfolio. The above points indicate that it is important to include gold in one's investment portfolio, however, one should not be over-exposed to gold
and should take the following factors into account when trying to ascertain how much of their investment portfolio to allocate to this age-old security. < Gold is negatively correlated to the US dollar. Even though spot gold reached a 15-month low on Monday the 6th of October 2014 at $1 183.46 per fine ounce, the US Federal Reserve is set to tighten monetary policy before other major central banks, which indicates that the US dollar will continue to strengthen against other major currencies and the gold price is therefore set to fall even further. < Equities provide an income stream in the form of dividends, property in the form of rental income and bonds in the form of coupons, but gold does not provide an income stream. This may not be an issue if you are planning on re-investing those income streams anyway, but if you are relying on being able to draw an income from your portfolio, gold exposure will need to be limited. From the above points, it is clear that most investment portfolios should have some exposure to gold as a form of diversification, to protect one against the ravages of inflation and to act as a safe haven asset. However, if you are overexposed to gold and are investing in it for the sole reason of achieving short-term returns, the fundamental outlook for growth in the spot gold price is not looking positive, with the US dollar on the rise. The gold price has shot up since the turn of the century and the fundamentals suggest that it is quite possible that we may go through a period where the gold price will languish for a considerable period of time. If you need assistance in putting together an investment portfolio and would like the peace of mind of knowing that the asset classes and securities in your portfolio have negative correlations to one another and that they reduce volatility in the present time of economic uncertainty, please contact an NFB Private Wealth Manager on one of the numbers below.
NFB's office numbers are: East London 043-7352000 â&#x20AC;˘ Port Elizabeth 041-5823990 â&#x20AC;˘ Cape Town 021-7027880
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SENSIBLY COVERED
CREDIT SHORTFALL INSURANCE Essential for people who have
recently bought a new car By Rory Judd - MiWay Insurance Company (contributed by NFB Insurance Brokers). For many of us, driving that dream car means getting finance through a bank or another financial services provider. However, should your new car be stolen or written off in an accident, there may be a gap between its insured value and the amount owing to the finance company. This gap is known as 'credit shortfall' and when it occurs, it can leave you owing money on a car you don't have. Insurance policies cover the market, retail or trade value of your vehicle. Particularly with new cars, the value drops considerably the instant it is driven off the showroom floor â&#x20AC;&#x201C; but there is no such corresponding drop in the amount owing to the bank. Should an insured event occur, such as a theft or an accident that writes off the vehicle, your insurer will cover it for the replacement value â&#x20AC;&#x201C; which is now less than the purchase price. Credit shortfall insurance, also called top-up or gap insurance, is designed to cover this gap so you don't have debt on a vehicle you no longer own. It is advisable to add this optional extra to your policy particularly with new cars, but also on any vehicle purchase where a credit shortfall might arise. For example, purchasers of used cars where the price is 90% paid by finance should consider credit shortfall insurance. Scenario: Anne buys a car for R200 000 and finances it through Wesbank. She insures the car through NFB Insurance Brokers for its retail value and takes credit shortfall insurance as an optional add-on. The car is stolen months later when the retail value is R150 000. Anne still owes Wesbank R180 000. The shortfall amount is R30 000, which is covered by the credit shortfall add on. If she did not take credit shortfall cover, Anne would have had to cover this amount from her own pocket.
What you need to know When insuring your vehicle, you generally cover for retail value. The retail value of your car is the average of what the same vehicle is currently selling for at car dealerships, and is the highest price you can insure it for. It is necessary to determine if, in the event of a total loss, there would be a credit shortfall. If so, consider credit shortfall insurance. The following are not included as part of credit shortfall: < Unspecified sound equipment or accessories < The excess payable on your claim < Arrear instalments that may be over due and the interest that may have accumulated < Additional finance charges < Any early settlement penalties Useful tip: Credit shortfall insurance is essential for people who have recently bought a new car or a recent model on hire purchase. As you pay off your instalments, there will come a time where the amount owing is less than the value of the vehicle. When this point is reached, credit shortfall insurance is no longer required. Considering credit shortfall insurance is strongly recommended for those vehicle buyers who don't have the cash for a large deposit. If there is a major loss, the credit shortfall can be crippling, not only leaving you owing money on a car you no longer have, but also potentially preventing you from buying a replacement.
insurance brokers (border)(pty)ltd.
Tel: (043) 735-2460
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SENSIBLY SAFE
SECURING OUR SAFETY
ELECTRIC FENCES An interesting look at electric fencing. By Grandt Berndt - Abdo & Abdo.
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lectric fences to protect our homes and work places are now a common feature of the South African landscape.
The installation of electric fences was unregulated in South Africa until March 2011. The Electrical Machinery Regulations of the Occupational Health and Safety Act now defined an electric fence as "an electrical barrier consisting of one or more bare conductors erected against the trespass of persons or animals". In terms of specifications, electric fences are: 1. Not to be higher than 450mm; 2. To be at least 1,8 meters above the natural ground level; 3. To be erected on the top of walls or fences or attached to them; and 4. Not to encroach over boundaries; 5. If free standing, to be set back at least 1 meter from the boundary. Any electric fence installed after 1 October 2012 or if any additions, energizer changes or alterations were effected after 1 October 2012, requires one to have an electric fence compliance certificate. If one sells property with an electric fence, no matter when the electric fence was installed, an electric fence compliance certificate needs to be issued. Once issued, and provided no changes have been made to the electric fence, the certificate remains valid. The responsibility in obtaining the certificate is on the "user or lessor" of the electric fence. Thus if the Purchaser does not stipulate or request an electric fence compliance certificate and transfer is effected, he/she becomes the user or lessor of the electric fence and is liable to ensure possession
of a valid compliance certificate. Most estate agents do now make provision in their Sale Agreements for the Seller to provide the compliance certificate at the Seller's cost. Failure to hold a valid compliance certificate opens the user or lessor to a conviction of a fine or a maximum of 12 months imprisonment, and in the case of a continuous offence to a further R200 per day while the offence continues. The problem in obtaining an electric fence compliance certificate is, however, that there are not many qualified electric fence installers capable of issuing the compliance certificate. According to the South African Electric Fence Installers Association there are 17 contractors in Port Elizabeth and only 3 in East London registered with the Association. These registered installers then need to pass a qualification test in order to be able to issue a compliance certificate, which it appears only a limited number in South Africa have done. In Sectional Title complexes, the electric fence is usually erected on the common property and is owned in undivided shares by the owners through their membership of the Body Corporate. The Body Corporate is the user of the electric fence. There is a debate whether the change in membership of the Body Corporate brought about by the sale of a Unit in the Sectional Scheme results in a change of user as defined for electric fences. It is, however, recommended that Body Corporates err on the side of caution and obtain a compliance certificate. The need to ensure compliance is not only to prevent the possibility of the punishment imposed by the Act, but also to ensure that if someone is injured by the electric fence, whether they are entering or on your property legally or illegally, that your insurance policy will cover such claim.
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SENSIBLE RISK
ALTERNATIVES TO CASH Beating the risks of inflation. By Lunga Nkonki, Financial Paraplanner - NFB East London.
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ith current scepticism surrounding our local investment markets, many investors have, as a course of action, redirected their holdings to cash/money market type structures offering much needed security in these apparent times of uncertainty. At the end of June 2014, South African investors were holding more than R270 billion in money market unit trust funds. In addition to this, there were just as many billions held in bank deposits. I am very aware of the fact that there exists a place for such investment in the market. Typical reasons for holding cash would be with the aim of targeting the following: < Capital stability; < Short term liquidity; < Low risk parking bay for future exploration of opportunity; < Or to merely create a buffer to serve as a form of emergency funding. It is, however, prudent to be wary of the negative impacts of inflation when considering all investment decisions. This is of particular importance to investors with a time horizon longer than one year. In the current economic environment, cash real returns are largely low-to-negative, meaning loss of purchasing power of investor capital. If your objectives are strictly not to lose capital in time horizons less than one year, then cash would appear suitable given your apparent short term needs. However, there are those investors who are as averse to risk, looking for capital stability with some opportunity for positive real returns. These investors are willing to take on just a little more risk for greater potential returns. They are prepared to move some money from cash type structures, for diversification, into income yielding instruments providing a more attractive yield over shorter term periods longer than one year. The best way to protect your investment against credit and asset class risk is always through
diversification. Money market funds are largely restricted in their investment mandate. Income funds on the other hand offer investment into a wider range of issuers and fixed-interest assets, and on average are able to double the diversification benefits offered in the money market. It is important to take heed of the current environment in which we find ourselves. Interest rates are rising and will continue to do so gradually for the foreseeable future. The domestic equity market appears to be expensively price, with the JSE's price earnings ratio currently close to 19 times compared to the past 55 year average of 12 times. Therefore, returns all round are likely to come under pressure against inflation. With cash already yielding a negative real return, income assets are likely to come under pressure as well. When bonds and preference shares are taken into account, inflation plus 2% may be the best return to be expected from an income investment for the foreseeable future. Active Fund Managers are continuously reducing risk and are diversifying across all major asset classes. As an investor, you would want exposure to this level of proactive thinking. A more “relaxed” mandate, yet still operating under strict low risk constraints, has the ability to source favourable opportunities should they arise, breaking free from the risks of negative real returns against inflation. With the current offering now available in the local Unit Trust space, investors can now more easily match their different objectives and time horizons directly to the range of different funds available. So proceed with caution, definitely. But be wary of risks such as inflation, in assessing your nominal returns from cash. Should you require assistance with the diversification of your portfolio, please contact an NFB Private Wealth Manager on one of the numbers listed below.
East London 043-7352000 • Port Elizabeth 041-5823990 • Cape Town 021-7027880
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Loaves & & Fishes Fishes Loaves Network Network
Why not take a ticket in the NVest Financial Holdings raffle in aid of the Loaves & Fishes Network??
We have many awesome prizes up for grabs!! NVest Financial Holdings (of which NFB is a subsidiary) has nominated the Loaves and Fishes Network (LAFN) as its charity. LAFN is an awardwinning, East London based NGO that offers support to impoverished community initiated crèches (currently supporting 31 child care centres) through its three year Early Childhood Development practitioner training programme, by feeding the children who attend the child care centres with two nutritious daily meals and by trying
to find funding to improve, refurbish and renovate general crèche infrastructure. LAFN's vision is “to achieve effective, sustainable, and holistic childcare training and development in disadvantaged communities of the Eastern Cape Province”. www.facebook.com/LAFN.SA www.lafn.co.za
Touching lives in our community...you too can make a difference! Just some of the many prizes which can be won in our raffle:
< < < <
2 night stay for 2 at Fynboshoek Cottage in Tsitsikamma (self-catering) 4 x vouchers from Rivendell Health & Relaxation Spa 2 x vouchers for the Roxy Coffee Shop 2 x bracelets from Charmed (to the value of R250 each)
R25 only
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pe
t ke c ti
Fynboshoek Cottage
Deposits can be made to the following account: NFB Community Development Nedbank Account Number: 900 385 9921 Branch code: 198765 Savings
Please use LAFN and your name as a reference eg. LAFN-John Smith. Please also e-mail Robyne Moore at rmoore@nvestholdings.co.za giving your contact details.
Terms & Conditions: l The accommodation prize has its own terms & conditions. l All other prizes have their own expiry dates. l The draw will take place on the 8th December 2014 and the winners will be contacted telephonically.
Business Continuity & the Value of your Business
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s a business partner in a business, there are many things to consider with the day-to-day running of the company. However, you also need to take the time to consider the continuity of the business should any one of the business partners pass away or become disabled. This unexpected and often unplanned for event can cause havoc and major stress to the surviving partner. In order to ensure both the continuity of the business and peace of mind for the beneficiaries of the deceased estate, one should consider having a Buyand-Sell agreement in place. This ensures that both partners have agreed to transfer the agreed value of their shares in the business to the surviving partner on death or disability, thereby ensuring that the surviving partner can continue with the running of the business and the deceased estate receives fair value for the shares. The benefit of this agreement is that it creates certainty as to what happens to the business interest of the deceased member. The surviving business owners do not have to be concerned about the business interest being inherited by an heir and the heir having different views regarding the future of the business. The buy-and-sell agreement should be supplemented by a buy-and-sell policy. This is done via a life policy which provides the funding for the buyand-sell agreement. This policy needs to be owned by the surviving business owners on the life of the deceased owner, and the life cover on this policy needs to be equal to the value of the deceased member's interest in the business. So in the event of death of one of the owners, the others have the necessary funds to be able to pay the purchase price of the deceased owner's interest in the business and the heirs will then receive a reasonable price for the business and will not have to wait to receive payment. Policies underlying buy-and-sell agreements are usually owned by the co-owner/s of the business and are not employer-owned policies.
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BUY-ANDSELL AGREEMENT
Article written by
Julie Mc Donald, A buy-and-sell agreement is a Risk Assurance formal contract Specialist - NFB East which may be London used in a court of law. A buy-andsell agreement needs to meet the business needs of the client and should deal with the following: < An agreement that the surviving owners of the business will purchase the business interest of a deceased owner. < An agreement that the executor of the deceased owner will be bound to sell the business interest of the deceased member to the remaining members â&#x20AC;&#x201C; a buyand-sell agreement carries more weight than a deceased owner's will. < An agreement regarding the purchase price â&#x20AC;&#x201C; there should be an agreed upon method of determining a market-related price at the time of death. This often requires a valuation of the business by an accountant. < The agreement must make provisions for cession of the remaining policies owned by the deceased member on the lives of the surviving members. < The procedure should more than one co-owner pass away simultaneously, or within a short period, should be included. < It should contain an agreement that the co-owners will not sell their interest in the business during their lifetimes without giving first option to purchase to the other business owners. < It should also be agreed upon if the owners would like to purchase the interest of a co-owner in the event of disability. This disability cover purchased will not form a part of the Life Office's Association's (LOA) code of conduct disability limits. < The buy-and-sell must also be aligned to any other binding agreement in the business. < Even if you have this structure in place, you need to ask the following questions: < Have the agreements been reviewed recently?
< Is the valuation of the business accurate and up to date? < Is your buy-and-sell agreement accurate? < Have there been any additional partners added? < The value and size of the business is immaterial; provision needs to be made to ensure: < The continuity of the business < Outsiders do not gain a controlling interest < The remaining partners have funds available to purchase the deceased's interest in the business < The business interest is not sold for a value below market value.
TAX IMPLICATIONS Because most buy-and-sell policies are not employerowned policies the business has no income tax liability.
CGT A buy-and-sell policy will usually pay the death or disability benefits to the original beneficial owner of the policy and therefore would be excluded for capital gains tax purposes. However, if the business has been dissolved or the agreement has been cancelled or one business owner has passed away and the policies entered into have been ceded to the lives assured under the policy – the policies will no longer be payable to the original beneficial owners. These can still be disregarded for capital gains tax only if the following requirements are met: < The policy was taken out with the purpose of purchasing the life assured's interest in the business concerned, and < No premium on the policy was paid by the life assured while the business co-owner(s) was the owner of the policy.
ESTATE DUTY As a buy-and-sell policy is not usually employer-owned, estate duty will not be applicable. A buy-and-sell policy will be excluded for estate duty if the following three requirements are met: 1. The policy must have been taken out or acquired by a person who, at date of death, is a co-business owner of the deceased; AND 2. The policy was taken out or acquired with the purpose of purchasing the deceased's interest in the business; AND 3. The deceased must not have paid or borne any of the premiums on the policy.
SHARES OWNED BY FAMILY TRUSTS: If the co-owners transfer their interest in the business to their respective family trusts, the family trusts would become the owners of the policies on the lives of the other business partners. As the business partner does not hold the shares and a family trust cannot be insured, you would still insure the partner even though he is not actually party to the buy-and-sell. The
proceeds of a policy would then be 'deemed property' in the estate of the deceased and will be estate dutiable. To make provision for this, you would need to increase the life cover to cater for the estate duty of 20%. However, to cater for the estate duty on the extra 20%, the total increase on the life cover would in fact need to be 25%.
EXAMPLE: Life cover of R1 000 000 – increase by 20% = R1 200 000 However, the estate duty on R1 200 000 @ 20% = R240 000 therefore leaving you with only R760 000 (R1 000 000 – R240 000). So you would need to increase the cover by 25%. Life cover of R1 000 000 – increase by 25% = R1 250 000 Estate duty on R1 250 000 @ 20% = R250 000 therefore leaving you with the correct amount of cover of R1 000 000 (R1 250 000 – R250 000) Please note that the disability cover would not need to be increased as it is not estate dutiable. Benefits to Dead/Disabled Co-owner or His/Her Heirs: < Receives fair value for his/her interest in the business < Certainty regarding the sale of interest < An immediate cash payment that will compensate survivor's income lost as a result of death or disability of a breadwinner. < Benefits to Remaining Co-Owners: < Certainty regarding the future ownership of the business < Business can carry on with minimal interruption < No risk of new co-owners joining the business who might be unskilled and inexperienced < An inexpensive way of funding the purchase price. The value of the business is likely to change over time and therefore it is necessary to review buy-and-sell agreements regularly and to increase the cover amounts in line with the value of the business. There are other business needs that also require consideration such as keyperson cover and contingent liability cover. Keyperson assurance covers essential employees in the business, who, should they pass away or become disabled, would have a detrimental, financial impact on the business. Contingent liability cover is for when you have personally stood surety for a business loan or overdraft. In the event of your death the bank could call up this loan and your estate and family will be responsible for paying this debt. (Both of these covers can be discussed in detail in a separate article). Should you be a business owner and would like to discuss the intricacies of buy-and-sell agreements and policies, please give one of our financial advisors a call at one of the NFB offices in East London, Port Elizabeth or Cape Town.
East London 043-7352000 • Port Elizabeth 041-5823990 • Cape Town 021-7027880
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In pursuit of quality Building real wealth over the long term. By Clyde Rossouw, Portfolio Manager - Investec Asset Management.
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hile investors may be tempted to try and time the market, this is in our view largely a futile exercise. We believe a more prudent investment approach is to look for opportunities while trying to avoid risks, so that portfolios are well positioned whenever a turning point comes. Investing in quality stocks â&#x20AC;&#x201C; both in our local and international portfolios â&#x20AC;&#x201C; forms an integral part of our approach to weather different market conditions and to build real wealth for investors over the long term. In defining quality, we favour companies that don't rely heavily on central bank policies or economic momentum to produce returns. In this way we avoid exposure to stocks that are very sensitive to market volatility. We also invest in companies with pricing power that generates attractive margins. They typically have low levels of debt and provide substantial returns on invested capital while still being able to return large amounts of cash to investors. These businesses have the ability to compound shareholder wealth over the long term. Furthermore, quality companies tend to have dominant intangible assets such as strong brands, patents, licences, copyrights and distribution networks, which create a strong competitive advantage. But the allure of a premium brand is not a sufficient condition for investment. The financial literature is littered with investors who have paid too much for what they thought were good quality businesses and then they turned out to be pretty average or poor. Our research process focuses on identifying companies that display the best combination of high quality, sustainable growth, above average yield and compelling valuations. We apply these criteria across different geographies. NestlĂŠ, a core equity holding in our portfolios, is a good example of a global franchise company that meets our investment criteria. The Swiss multinational is recognised as one of the biggest food and beverage companies in the world. Headquartered in Vevey, Switzerland, this global producer operates in over 194 countries worldwide.
We expect the company to continue to deliver an attractive return over the long term due to the consistency of its earnings and free cash-flow growth, which should compound shareholder value over time. Quality companies tend to outperform through a full market cycle. They can offer meaningful returns when times are good in the broader equity market, but more importantly, their defensive nature means they often have smaller losses than the broader equity market during a downturn. Even if the share prices of quality companies weaken, their earnings and dividend performance usually ensure that investors still receive a cash return during periods of market underperformance. Quality stocks may be vulnerable to lagging share prices during the late stages of a bull market cycle. During this phase of the market, high-beta stocks (shares with a high degree of sensitivity to movements in the broader equity market) typically outperform. Even though earnings may be pedestrian, stocks that are heavily exposed to economic momentum and sentiment tend to do well. Markets have been driven by expectations and sentiment, and many of the traditional fundamental valuation rules no longer seem to apply. We have become more cautious about those areas that have already seen a very strong run and are subsequently avoiding stocks heavily exposed to economic momentum and market sentiment. However, there are global quality companies we believe the market has mispriced. This provides an opportunity to buy good businesses with a favourable earnings profile and a sound balance sheet at a discount to the broader global equity market (MSCI Word Index).
In the Investec Global Franchise Fund, we are reticent to invest in some of the more capital-intensive parts of the market and are not interested in highly leveraged companies. Hence, we are avoiding most financials, mining companies and utilities. We have material exposure to consumer staples and we are also seeing some attractive opportunities in the technology area. These are companies with good business models we believe the market has mispriced. The performance of the Investec Opportunity and Cautious Managed Funds have benefited from their offshore holdings, which beat global markets by a wide margin last month. Locally, SA stocks still look rich in general, but the portfolios remains balanced, broad, and have multiple opportunities, despite being defensive.
SENSIBLE REFORM
RETIREMENT REFORM MAKING SENSE OF ALL THE NOISE By Lunga Nkonki, Financial Paraplanner NFB East London.
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lot has been said and written about the new changes to South Africa's retirement landscape, spear-headed by our National Treasury. In coming to terms with new changes proposed, it is important to first understand the root of the problem facing most South African's at retirement. It is said that at reaching retirement age 65, less than 10% of the retirement population can afford to retire comfortably. Take this into account, and the fact that 21% of people changing employers are said to withdraw from their retirement fund on resignation, the shortfall in provisions at retirement becomes gaping. It is often then left to government and relatives alike to carry the financial burden of the retiree - a vicious cycle which tends to replicate itself over the generations. So how does government break the chain, and promote more saving towards retirement, and the preservation of capital thereafter? The answer, they hope, lies in the reform proposals issued through National Treasury.
What is retirement reform? Retirement reform is a process whereby government, through policies, seeks to: < Encourage employees to save and provide adequately for retirement. < Encourage employers to provide retirement saving plans to their employees as part of the employment contract. < Ensure that employees receive good value for money for their retirement savings and are treated fairly. < Improve standards of retirement fund governance, including trustee knowledge and conduct, and the protection of members' interests.
How will they attempt to do this you may ask? Pre retirement: As from 1 March 2015, all retirement saving products will be aligned, allowing for individuals to
make tax deductible contributions of up to a maximum of 27.5% of remuneration or taxable income (higher of), limited to an annual cap of R350 000. This rate applies to the aggregate of contributions made to an individual's Pension, Provident and Retirement Annuity Funds. Individuals who contribute more in any one year can carry forward any unclaimed amounts and deduct these from tax in subsequent years, subject to the deduction limits in those years. Any unclaimed contributions are returned untaxed at withdrawal or retirement. In addition to this, government is also expected to introduce tax-friendly discretionary (after-tax) savings products, designed to encourage additional savings, over and above compulsory retirement savings. The intention is that these savings vehicles will not attract capital gains tax or tax on income and dividends. However, there will be an initial annual contribution limit of R30 000 and a lifetime limit of R500 000. These amounts will be inflation-adjusted on a regular basis. Once this product has been launched, the current interest exemption (R23 800 for persons under 65, and R34 500 for persons 65 years and older) will no longer be adjusted for inflation.
Post retirement: Access to retirement fund capital will be standardised to the normal 1/3rd cash, 2/3rds annuity rule currently applied to members of Pension and RA Funds. Provident Fund members will now have to play by the same rules mentioned at retirement, although accumulated savings prior to the date of change will be protected and the limitations will only apply on the new contributions made after 1 March 2015.
So, what might retirement reform mean for you, the client? < Simplicity and transparency of fees, advice, disclosure and reporting, < Equalisation and consolidation of retirement savings vehicles, < High net worth clients: tax deductible amounts continued on page 25... sensible finance november14
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INCOME TAX VERIFICATION The documents SARS will request from you. By Shaun Murphy, partner at Klinkradt Murphy.
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f you are one of the lucky winners of an income tax verification the fun has only just begun. As part of the verification, the South African Revenue Service (SARS) will look at whether your tax deductions were allowable and whether you have accounted for all your income. If you have all the documentation to support the deductions on your tax return, your verification should be completed relatively quickly. When receiving a verification of income tax letter, you will have 21 working days from the date of the letter in which to submit all the necessary documentation. SARS will open a link on eFiling that will allow you to upload supporting documentation. There are certain areas where requests for verification are common.
Interest and dividends Any interest or dividends received during the year of assessment has to be included in the tax return. Ensure that you have received all your IT3(b) certificates from your financial advisor/institution to ensure that you have accounted for all income during the year of assessment. SARS allows a local interest exemption of R23 800 for persons under the age of 65 and R34 500 for persons over the age of 65. Local dividends are not subject to income tax, however, all dividends received have to be declared to SARS.
IRP5 documentation already loaded on SARS Even though when you open your tax return for the first time your IRP5 from your employer or any other institution is already reflected, it is essential that you have the original as this will have to be uploaded on eFiling should you be selected for verification. Should the IRP5 reflected on your tax return not agree to the original IRP5 received from your employer, confirm which IRP5 is correct and this will have to be corrected on the tax return.
Medical aid deduction One of the essential supporting documentation for the medical aid deduction is the medical aid certificate. SARS allows a medical scheme fees tax credit deduction as follows: Persons under 65 - R242 Persons under 65 with one dependant - R484 Each additional dependant qualifies for an additional credit of R162 per month. SARS also allows a medical expense deduction subject to certain limitation rules. This can be the “claims not covered by medical aid” amount reflected on the medical aid certificate or additional medical slips for various doctors, hospitals and pharmacies (for prescription medicine only) incurred and paid. Therefore, should you want to claim medical slips, ensure that
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you attach proof of payment. Medical expense deductions for persons over the age of 65 may claim the deduction in full, however, they will not qualify for the medical scheme fees tax credit. Medical expense deductions for persons with a disability may be deducted in full, however, an ITR-DD form for the Confirmation of Diagnosis of Disability will need to be submitted and approved by SARS.
Retirement annuity fund deduction SARS permits two deductions for qualifying contributions made to a retirement annuity fund, one for current contributions and the other for arrear contributions. The deduction allowed during the year of assessment is limited to the greatest of: 15% of an amount which is determined as income derived by the taxpayer R3 500, less current contributions to a pension fund, or R1 750 Ensure that you have your retirement annuity fund certificate from your broker, as this is essential documentation which needs to be submitted to SARS for verification.
Commission earners A taxpayer who derives more that 50% of their total remuneration (basic salary plus commission) in the form of commissions may deduct expenditure incurred. All documentation for proof of expenses claimed must be kept ensuring that they are within the year of assessment from 1 March 2013 to 28 February 2014. These expenses are for the “purposes of trade”, therefore private and domestic expenses such as groceries, salon visits and pet food do not qualify for a deduction.
Travel allowance SARS has become extremely strict with the travel logbook and it is recommended that individuals use the logbook template supplied by SARS, detailing each days travel whether it be private or business and note the opening and closing mileage for each day. Details of business travel are essential. Organise all your information and keep it neat, to make life easier for SARS. Group documents together and send them through with explanations. Should SARS reject any information that you have submitted, by law, you are entitled to object to an assessment, which will force SARS to take another look at your tax affairs. Should you have any queries relating to the article please feel free to contact me on tel: 043 726 9555 or email me at shaun@kliwal.co.za
“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)
Endowments Used smartly, can create immense value Could this be the right investment option for you? By Andre Tuck, Investment Account Manager - Glacier by Sanlam.
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f you are a higher income earner looking for an investment that will result in you paying less tax, while still following a growth investment strategy, and where maximum liquidity is not essential, then an endowment may just be the right investment option. Endowments are after-tax investment vehicles that can hold a variety of underlying investment options, including unit trust investments and the structuring of a share portfolio. The main considerations when making use of an endowment are the tax and estate planning benefits. Traditionally, endowments were viewed as expensive – particularly when investors wished to access the funds before the end of the investment term. However, with the so-called “new generation” endowments, where investors and their advisers can select the underlying investment options, there are no longer any surrender, or early termination, penalties. In addition, investors, and not the assurance companies, determine the adviser remuneration – making these investments more investor friendly than the traditional endowments of the past. Endowments are taxed at a flat rate of 30% in the case of individuals and trusts, making them suitable for investors with a marginal tax rate greater than 30%. Interest income declared within the endowment would therefore be taxed at 30%, as against the maximum marginal rate of 40% for individuals. This also translates into a lower capital gains tax rate of 10%, compared to a maximum rate of 13.33% for individuals. If an endowment is housed within a trust with natural persons as beneficiaries, capital gains will be taxed at an effective rate of 10%, as opposed to the effective capital gains tax rate for trusts which is 26.64%. In the case of individual investors or trusts with natural persons as beneficiaries, the insurance company withholds dividend withholding tax at 15% on all dividend distributions received from South African companies. The Long-term Insurance Act does impose some restrictions on the number of withdrawals that
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can be made in the first five years (one loan and one surrender are permitted). The maximum withdrawal during this period is limited to the amount invested plus interest at 5%. The balance may be withdrawn after five years.
Benefits of an endowment: < <
<
< <
< <
Greater tax efficiency for higher income earners (above 30% tax rate) who have exhausted their interest exemptions. Beneficiary nomination can lead to potential savings on executor's fees (up to 3.99% of fund value). Where a beneficiary has been nominated, payment of the death benefit does not depend on the winding up of the estate and beneficiaries will receive the proceeds relatively quickly. The proceeds from the endowment do form part of the estate for estate duty purposes. However, the first R3.5 million of the value of the estate is exempt from estate duty. Tax administration is taken care of on your behalf (the insurance company calculates, deducts and pays the tax to SARS). Insolvency protection – the entire value of the endowment will be protected against creditors after three years. This protection will continue until five years after the termination of the policy. Investors are not restricted to maximum levels of equities and offshore investments, as in the case of retirement savings products. Investors can also use an endowment to draw income upon retirement – provided the fiveyear restricted period has passed. This may be done on an ad-hoc basis, and they are not forced to draw income at specific intervals.
Product selection can sometimes be a daunting process and investors are encouraged to consult with a qualified financial intermediary.
SENSIBLE INCOME
Income Protection
vs Lump sum disability What are the differences between the two and which should you have in place? By Julie McDonald, Risk Assurance Specialist - NFB East London.
Lump sum disability cover pays a once off lump sum amount on permanent disability. The onus is then on the disabled person who has received the funds to use these funds to settle any outstanding debt such as bonds and cars, to pay for any adaptation's to the home and vehicle which may be necessary, and then to invest the remainder of the funds in order to provide themselves with an income every month to live, as in most cases you may not be able to continue in the same line of work any longer. A survey conducted by re-assurer Swiss Re indicates that three quarters of disability cover in South Africa is lump sum cover. The danger of this is that you could easily outlive the income you can receive from a lump sum payout especially in the case where the disablement does not affect your life expectancy, such as being a quadriplegic. Lump sum cover is traditionally seen as being more cost effective. Income protection cover would provide you with a monthly income amount when you are unable to work/earn an income due to a temporary or permanent sickness/disablement. This would start to pay after your chosen waiting period has passed. An example may be if you are in a car accident, break bones and are booked off, for say 5 months. Your employer may only provide a certain amount of sick leave, leaving you with no income after your sick and annual leave has run out. This is where income protection cover would be needed - to provide you with a monthly income until you are able to return to work. The shorter the waiting period, the more costly the cover and certain waiting periods are only available to certain occupations. Waiting periods
range from 7 days (back-dated to day 1), 1 month, 3 months, 6 months or even 12 or 24 months, after which, if you are still temporarily unable to work, this would be classed as a permanent disablement. The income will pay for the time you are unable to work until you are able to return to work; if you are permanently disabled, the monthly income will be paid (usually with an annual inflationary increase) until age 60, 65 or 70 depending on the age chosen on the cover. While income protection will be able to provide you with an income when you are unable to earn an income, if you have debts, these may not be able to be serviced as most companies restrict the amount of temporary income protection cover to 75% of current income. Therefore, additional expenses directly related to the disability would place pressure on your already reduced monthly income. Currently, premiums paid for income protection cover are tax deductable and the benefit is taxable. However, with legislation changes, this will change as at 01 March 2015. The premiums will no longer be tax deductable and the payouts will be tax free. Therefore, from the above consideration each client's circumstances are different and would need to be considered individually. However, a combination of both lump sum disability cover and income protection is usually the best option, providing for both being temporarily and permanently unable to work, as well as a lump sum amount on permanent disability to settle outstanding debts. For all your income protection and disability cover needs, please contact an NFB Private Wealth Manager on one of the numbers below.
East London 043-7352000 â&#x20AC;˘ Port Elizabeth 041-5823990 â&#x20AC;˘ Cape Town 021-7027880
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SENSIBLE SAVING
A TAX-FREE SAVINGS ACCOUNT A look at this new savings opportunity. By Xolisa Funani, Financial Paraplanner - NFB Port Elizabeth.
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n the 14th March 2014 the National Treasury released a paper titled “Nonretirement savings: Tax free savings account”. In this instalment we're going to go through what the paper covered and how this bill will be applied.
What is the “Non-retirement savings: Tax free savings account” and why is it being introduced? The tax-free savings account was first mentioned in the 2012 budget speech by Minister of Finance, Mr. Pravin Gordhan, under the heading “retirement funding and savings”. In coming up with the proposal National Treasury found that households do not always act in their own best interests when it comes to savings decisions. This was due to a number of factors namely: procrastination when it comes to saving; lack of self control which leads to impulse spending; and the intimidation or lack of knowledge of financial products. Therefore, the purpose of the proposal was to encourage voluntary savings for individuals in South Africa.
These tax-free savings accounts are designed to be flexible and liquid with funds readily available to investors free of tax. However, any reinvestment from withdrawals will be subject to the limits stated above. Unfortunately, at this stage direct share access will not be allowed, but investors will be able to gain equity exposure through investing in high equity unit trust funds. These tax-free savings accounts will be offered by financial services providers who are permitted to do so. Some of the institutions mentioned in the bill are: JSE authorised users, banks, long term insurers, portfolio of collective investment schemes in property or the government. The product regulation will be addressed through the long-term insurance Policyholders Protection Rules and the Collective Investment Schemes Act. These drafts should be released by the end of 2014. Tax that will apply to the tax-free savings account: Tax
Going in
Within the fund
Going out
Income Tax
Anything over yearly limit of R30 000 tax at flat rate of 40%
Exempt
Exempt
Dividend withholding Tax
N/A
Exempt
Exempt
Capital Gain Tax
N/A
Exempt
Exempt
Estate Duty Tax
N/A
N/A
Dutiable
How will it work, who will offer them and what tax will apply? This product will work as a savings account/investment that will be available to investors from the 1st March 2015. Investors will be allowed to open as many of these savings accounts as they want, subject to the contribution limitations set in the bill. The current limits are thirty thousand rand (R30 000) per annum on contributions into the accounts an individuals holds, and a lifetime contribution limit of five hundred thousand rand (R500 000) – thus in order to reach the lifetime limit by contributing the maximum allowed per annum it would take roughly sixteen years (16.67) at R30 000 per annum or two hundred months if you were to contribute at a rate of R2 500 per month. A forty percent (40%) flat rate penalty will apply to any contribution made over the annual limit of R30 000.
Source: Nedgroup Investments
Contributions into the tax-free savings account will be non-deductable, but all proceeds will pay out tax-free.
How will it affect current investments? Your current investments will not automatically qualify or convert into a tax-free savings account. Investors may, however, open up a tax-free savings account and transfer funds from their existing continued on page 25...
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RETIREMENT REFORM ...continued from page 17 will be capped, < Limited access will increase savings and mean a better income and lifestyle in retirement, < Tax friendly savings products should further enhance savings.
Call to action: The tax year ending February 2015 is an opportune time to make additional RA contributions in order to benefit from the tax relief on contributions of more than R350 000.
So, < Be informed. < Plan for change. < Be equipped, and, < Position yourself to take advantage! Please do not hesitate to contact a financial advisor on any one of the numbers listed below should you wish to discuss your retirement savings.
East London 043-7352000 • Port Elizabeth 041-5823990 • Cape Town 021-7027880
A TAX-FREE SAVINGS ACCOUNT ...continued from page 24 investments subject to the limits prescribed. Unfortunately, investors will not be able to make unit transfers from existing investments into the savings account, which may trigger a capital gain event. Bear in mind, though, that there will be the benefit of the annual capital gain tax exemption (currently R30 000), which coincidentally is the same as the yearly contribution into the tax-free
savings account.
Going forward This could be a great way to increase household savings and could also act as a way to increase an individual's tax-free portion at retirement. Contact an NFB Private Wealth Manager for further detail in this regard on any of the numbers listed below.
East London 043-7352000 • Port Elizabeth 041-5823990 • Cape Town 021-7027880
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Wills & Vulnerable Family Members Making provision for a disabled child. By Debi Godwin, Director - Independent Executor & Trust. Is it appropriate to leave part of one's estate outright to such a family member if that person is not able to look after his own affairs? In some cases the disabled child will not be able to look after his own finances if money is left outright to him. A deputy may not have been appointed by the Court to manage that child's finances. The better way to make provision for that child is to include a discretionary trust in the parents' wills, to come into operation when the second spouse dies.
We also recommend that a separate memorandum (or letter) of wishes is prepared at the same time as the wills are made, setting out the parents' wishes and providing guidelines for how the trust should be run. Whilst they are not legally binding on the trustees, the trustees will no doubt appreciate the guidance and knowing what the parents have in mind. For their part, the parents appreciate the opportunity to make those wishes known.
What provision should be made for a disabled family member and what is the best way to ensure that it is put to best use? Our advice is often sought by clients who have family members suffering from a disability, mental or physical. Such questions can cause particular heartache to parents of a disabled child. The parents should take care to appoint in the wills appropriate, independent trustees to administer the trust fund. Flexible and appropriate powers give the trustees wide powers to use income and capital of the trust fund for the benefit of the child, if and when needed. Thus the trustees would normally have powers to use the trust fund to purchase living accommodation where appropriate, to pay for carers and to provide for other 'extras' that would not otherwise be available to the child. By leaving the estate in a discretionary trust, the disabled child is not entitled to any part of it 'as of right' and the funds are not within his control. This should not only ensure that the child's benefits are unaffected, but means that the funds are protected for the child's benefit from, for example, those that might take advantage of their vulnerability.
What about any other able children? Where the disabled child has siblings, the discretionary trust can be set up for the benefit of all of the children and their offspring. The memorandum of wishes should give guidance to the trustees on how much of the trust fund should be made available for the non-disabled children and at what stage(s) those children should receive their inheritance. If appropriate, grandparents and other relatives who might be minded to leave an outright gift in a will to the disabled child should be alerted to the other options.
What about provision for the child's physical needs?
Wouldn't it be easier to leave the cash to the able children to look after their disabled brother or sister? Parents with a disabled child should not be tempted to make no (or very little) provision for that child in their wills on the basis that the government grant will provide for some of their needs, or that other siblings will 'do the decent thing'. It hardly needs pointing out that this is a risky approach! (Even if the other children do ensure that their disabled sibling is looked after financially, this approach can be fatal if one of the other children becomes bankrupt, dies prematurely or gets divorced).
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
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SENSIBLE Q&A
Travis McClure
“Sensible Finance - Questions and Answers” is an advice column that will allow our readers the opportunity to write to a professional and experienced financial advisor for advice regarding investments, personal finance, life and/or risk cover. Travis McClure will be answering any questions that you may have.
Q: As I plan for my retirement what income withdrawal rate should I be using on my Living Annuity? Is there a magic number and what is considered safe and what is dangerous regarding the drawdown of my capital?
A: Ahh, the old conundrum of Income vs Capital! Always a difficult one to answer as generally the income advised is almost always lower that what is required by the investor. With the introduction of Living Annuities some time ago investors become responsible for their own pension portfolios and were able to elect the level of income they wanted to withdraw from the portfolio. The advantage was that the portfolio could be managed to keep pace with inflation and investors had the flexibility to adjust the income annually to suit their needs. The disadvantage was that the portfolio could either be managed badly or the investor tended to ask for too high an income withdrawal. One could then find the real value of income not keeping pace with inflation, or worse still, your capital depleting sooner rather than later. The planning and advice one receives on how much income to withdraw is very important. The expectations around returns and income need to be managed very carefully. The general rule of thumb is an income level of between 3.5% and 5.5% p.a. This should allow a portfolio targeting inflation +4% to 5% to give you sufficient return to provide you with an income, whilst at the same time putting some growth back into the capital to allow for next year's income to increase and keep pace with inflation. Research has shown that drawing an income at a rate of 4% should ensure that your income can keep pace with inflation over a 20 to 30 year cycle. One has to look at the makeup of the underlying portfolio as well. Keeping a mix of around 50% in equities and the balance spread across property bonds and cash should allow you to draw 4% and keep pace in real terms. Of course, this is not always the case and one has to take into account return volatility and the sequence of returns. If you consider two portfolios drawing the same income that achieve the exact same average return over a period of 20 years, but portfolio A started with a return of 30% in year one
and had varying annual returns ending with a negative 37% in year 20, whilst portfolio B returned the exact same annual returns, but in reverse i.e. it started with a -37% and ended with a positive 30%. The difference in the end capital amount was as much as 217% with portfolio B being 21% below its starting value. The volatility and the sequence of returns in conjunction with the income withdrawal can make a material difference to the portfolio outcome. It is therefore important to have a portfolio that can produce a sustainable income stream through dividends, rental and interest. If one is relying on total return from capital growth to fund income then one is playing a dangerous game. The yield of the portfolio is very important when it comes to retirement and this yield needs to grow and keep pace with inflation. A portfolio that is able to provide a good dividend stream from equities as well as strong rental yields from property that grow each year will provide the investor with this. The fact that the investor is drawing only from the yield means that the capital volatility or sequence of returns has little bearing. NFB currently offers direct equity portfolios via the Living Annuity platforms that combine these elements giving a current gross income yield of 7% before any capital growth is taken into account. The portfolio is not without risk and may not be suited to everybody, but in retirement where “income is King” these portfolios should allow you an income that is real value. A retired investor needs reliable income each year that can provide an annual growth in income close to CPI as well as long term capital growth (total return) at above CPI to sustain income over a long period. Each person's circumstances are different and as always we would suggest that one chat to your financial advisor for a more detailed analysis of your personal requirements. Solving the following conundrum: wnggori necoim deyil.... will give you the answer. Please address all Questions to: Travis McClure, NFB Sensible Finance Q&A, Box 8132, Nahoon, 5210 or email: info@nfbel.co.za
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SENSIBLE INVESTMENT
REINET INVESTMENTS S.C.A. Where there is Smoke there is Fire A value play for the patient investor. By Mandy Botha, Portfolio Manager -
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n the current market environment, finding embedded value can be a challenge. In this article we discuss a value play for the patient investor, Reinet Investments SCA. Established on the 21st October 2008, Reinet Investments SCA, a Luxembourg-based investment vehicle, was formed when the former Richemont SA changed its legal status to that of a partnership limited by shares. The demerger saw Richemont SA redeem its ordinary capital, held exclusively by Compagnie Financiere Richemont (CFR), by way of the distribution of its entire luxury good interests to CFR. The result saw CFR become a specifically focused luxury goods company and Reinet an investment vehicle with a principal asset comprising of the former Richemont SA's holding in British American Tobacco (BAT). Reinet is primarily listed in Luxembourg with a secondary listing on the JSE. The investment objective of Reinet is to achieve long-term capital growth. A diverse investment universe is set out in the company's prospectus, ranging from equity securities to property and derivatives, making it clear that Reinet has left its options wide open. However, since its listing, Reinet has often been accused of lacking an adventurous deal-making spirit. It held on to its BAT holding intended for diversification and failed to declare its promised dividends. Despite its lacklustre diversification and poor performance on listing, Reinet has since managed to maintain a steady share price performance, attributed to the underlying performance of its BAT holding and further, to the confidence held in CEO and well known figure head, Johann Rupert. As the portfolio currently stands, the principal asset of Reinet, BAT, comprises 74% of the company's Net Asset Value (NAV). With two thirds of its NAV attributable to its BAT stake, Reinet finds its prospects closely tied to that of the tobacco giant, its industry and its dividend. This being said, the performance of BAT over the past few years has been strong, which has supported Reinet and its shareholders in the interim. The balance of Reinet's portfolio is comprised of unlisted assets and
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cash, two of the biggest being Pension Corporation worth EUR 664 million and Trilantic Capital Partners (the old Lehman Brothers investment banking business) worth around EUR 221 million. Johann Rupert's ability to create value over time has been witnessed through the growth and success of both Swiss luxury goods group Richemont and investment holding company Remgro. This attribute has automatically created inherent value in Reinet. Rupert has been criticised in the past for inflated performance and management fees in a portfolio lacking active management where performance can mainly be attributed to one share. Despite this, others argue a premium should be paid for access to Johann's renowned deal-making ability. Reinet has over the past few years traded at a considerable discount to its underlying holdings and has been a cheaper alternative to BAT. However, the market has noticed Reinet's structural change and embedded value and begun to value it accordingly. Further, in its annual results for the year ended 31 March 2014, Reinet declared its long-awaited maiden dividend. Albeit slow, Reinet's aim to create a diversified portfolio, not only across assets, but geographies as well, is progressing, allowing the South African investor exposure to unlisted offshore private equity, and in turn, providing a Rand hedge. With a forecast P/E of 11.62 for the coming year and the distribution of its maiden dividend, we feel the tide has changed for Reinet. We have seen the company slowly evolve over the years and believe that in a market which lacks deep value, Reinet may be an interesting play for a growth orientated portfolio. All figures are correct as at 06 October 2014.
The Eastern Cape's first home-grown
STOCK BROKERAGE NVest Securities (Pty) Ltd NFB House, 42 Beach Road, Nahoon East London 5241 PO Box 8041, Nahoon 5210 Tel: (043) 735-1270, Fax: (043) 735-1337 Email: info@nvestel.co.za
www.nvestsecurities.co.za Port Elizabeth clients can call 041-582 3990 and you will be re-directed accordingly
NVest Securities is an Authorised Financial Services Provider
NFB have a STRONG, REPUTABLE TEAM OF ADVISORS with a WEALTH OF EXPERIENCE between them: Anthony Godwin RFP™ І MIFM – Managing Director, 25 years experience; Gavin Ramsay B.Com MIFM - Executive Director and Private Wealth Manager, 20 years experience; Andrew Kent MIFM - Executive Director and Share Portfolio Manager, 20 years experience; Walter Lowrie - Private Wealth Manager, 28 years experience; Robert Masters AFP™ | MIFM - Private Wealth Manager, 28 years experience; Bryan Lones AFP™ І PGDFP, MIFM - Private Wealth Manager, 22 years experience; ® Travis McClure CFP І B.Com, PGDFP, MIFM – Executive Director and Private Wealth Manager, 15 years experience; ® Marc Schroeder CFP І B.Com (Hons), PGDFP, MIFM - Private Wealth Manager, 9 years experience; ® Phillip Bartlett CFP І BA LLB, PGDFP, MIFM Executive Director and Private Wealth Manager, 11 years experience;
Alex Grunewald CFP® І PGDFP – Managing Director - PE and Private Wealth Manager, 14 years experience; ® Mikayla Collins CFP І B.Com (Hons), PGDFP, CFA Level 1 - Private Wealth Manager, 2 years experience; ® Glen Wattrus CFP І B.Juris, LLB, PGDFP – Private Wealth Manager, 16 years experience; ® Julie McDonald CFP І B.Com, PGDFP – Financial Advisor (Risk Assurance Specialist), 3 years experience;
Bryce Wild B.Com (Hons), PGDFP – Private Wealth Manager, 1 yr experience Leona Trollip RFP™ І Divisional Manager – Employee Benefits, 37 years experience; Leonie Schoeman RFP™ І Divisional Manager – Healthcare Advisory Services, 16 years experience; Nonnie Canham LLB – Healthcare Advisor, 2 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.