NFB Sensible Finance Magazine Issue 18

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PERSONAL FINANCE

Issue 18 July 2011

Magazine

CRYSTAL BALL? Forming a base case scenario on which to base future expectations of investment returns

RISK AND LIFE INSURANCE A necessary evil or an investment in peace of mind?

YOUR FINANCIAL ADVISOR Is he/she “fit & proper”?

WIN A WEEKEND STAY AT BUSHMAN SANDS see inside for details private wealth management

“The best way of preparing for the future is to take good care of the present, because we know that if the present is made up of the past, then the future will be made up of the present.

Only the present is within our reach. To care for the present is to care for the future.�

- Buddha

private wealth management

Providing quality retirement, investment and risk planning advice since 1985. fortune favours the well-advised contact one of NFB's private wealth managers: East London tel no: (043) 735-2000 or e-mail: nfb@nfbel.co.za Port Elizabeth tel no: (041) 582-3990 or email: nfb@nfbpe.co.za Johannesburg tel no: (011) 895-8000 or email: nfb@nfb.co.za Web: www.nfbec.co.za NFB is an authorised Financial Services Provider

sensible finance

ED’SLETTER

editor Brendan Connellan bconnellan@nfbel.co.za

Contributors Stephen Katzenellenbogen (NFB Gauteng), Travis McClure (NFB East London), Shaun Murphy

a sensible read

(Klinkradt & Assoc.), Grant Berndt (Abdo & Abdo), Patrick Sheehy (Glacier by Sanlam), Debi Godwin (IE&T), Natalie Dillion (Old Mutual),

We certainly live in interesting times!

There is said to be a Chinese Curse which goes along the lines of

Robert McIntyre (NVest Securities),

“may you live in interesting times”. Although the origin of the saying

Robyne Moore (NFB East London)

is actually uncertain, it is said to possibly come from the Chinese saying, “it is better to be a dog in peaceful times than a man in

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chaotic times.” Now I think times would have to be very chaotic for

Robyne Moore

me to want to come back as a dog (although some do lead pretty

rmoore@nfbel.co.za

cushy lives), but times they are a changing and I am very pleased to be a witness to it.

layout and design Jacky Horn Design jacky@e-mailer.co.za

What is interesting is that I think we are reaching a time where people, wherever they may be, are tired of leaders who do not have the best interests of the people at heart. The change may be a slow one and there are certainly still many leaders who use their

Address NFB Private Wealth Management East London Office NFB House, 42 Beach Road Nahoon, East London, 5241

position to line their own pockets (recent warnings by Zwelinzima Vavi of the dangers of SA becoming a Banana Republic come to mind), but happenings in Syria, Libya, Egypt and even in South Africa, if we look at the results of the municipal elections where the DA won 24% of the vote, indicate a mind shift. The DA has traditionally been a “white” and “coloured” party, however, if all the

Tel: (043) 735-2000

white, coloured and Indian people in the country are aggregated,

Fax: (043) 735-2001

they only form 20% of the population – so some kind of cultural

E-mail: nfb@nfbel.co.za

convergence seems to be appearing. I believe the shift will come

Web: www.nfbec.co.za

from the youth of the country who are increasingly educated and finding themselves with little opportunity for economic advancement and no real voice. But their vote will make them be

The views expressed in articles by

heard! The days of blind loyalty are numbered and politicians

external columnists are the views

everywhere need to beware as the vote will be one based on

of the relevant authors and do not

delivery and accountability and not congeniality and skin colour.

necessarily reflect the views of the

Personally, I am happy to support anyone who has the best interests

editor or the NFB Private Wealth

of South Africa and its people at heart and look forward to the day

Photos used in this magazine BigStockPhoto.com

Management. ©2011 All Rights Reserved.

where all people are open-minded enough to judge on merit.

Brendan Connellan - Editor and Director of NFB

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

Email your full name to nfb@nfbel.co.za to subscribe to NFB's free economic electronic newsletters. another aspect of our comprehensive service

sensible finance july11

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Photo BigStockPhoto.com

SENSIBLE CONTENTS

nfb sensible finance

July 2011

4 A LOOK INTO THE NEW COMPANIES ACT How it impacts on Close Corporations. By Shaun Murphy, CA (SA), Partner Klinkradt & Associates.

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6 A BRIEF GUIDE TO BUYING OR SELLING YOUR HOME A brief overview of the duties of the two principal parties involved. By Grandt Berndt - Abdo & Abdo.

9 YOUR FINANCIAL ADVISOR What does it mean that they are “fit and proper”? By Robyne Moore - NFB, East London.

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10 CRYSTAL BALL? Forming a base case scenario on which to base future expectations of investment returns. By Stephen Katzenellenbogen, Private Wealth Manager – NFB, Gauteng.

13 TESTAMENTARY FREEDOM The reasons for possibly challenging a Will. By Debi Godwin, Director Independent Executor & Trust.

15 A TAX DEDUCTION IS NOT THE ONLY REASON TO PURCHASE A RETIREMENT ANNUITY A look at some of the other benefits. By Natalie Dillon, Senior Legal Advisor - Old Mutual Broker Division.

16 RISK AND LIFE INSURANCE A necessary evil or an investment in peace of mind? By Patrick Sheehy, Head of Product Management - Glacier by Sanlam.

18 SHOULD YOU BE HOLDING ANGLOS IN YOUR PORTFOLIO?

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A compelling investment at current levels. By Rob McIntyre, Portfolio Manager NVest Securities.

20 Q&A. YOU ASK. WE ANSWER Advice column answering your investment, personal finance, life and/or risk insurance questions with Travis McClure, Private Wealth Manager – NFB, East London

21 WIN A WEEKEND STAY AT BUSHMAN SANDS Stand in line to win an awesome weekend stay for two, compliments of Harvey World Travel, East London

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sensible finance july11

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SENSIBLE ADVICE

A LOOK INTO THE NEW COMPANIES ACT: 71 OF 2008

How it impacts on Close Corporations.

By Shaun Murphy, CA (SA) Partner Klinkradt & Associates

A

hotly debated topic in financial circles of late has been the long awaited introduction of the new Companies Act,

which although had a slightly delayed introduction,

= 1 Point for every R1 million of turnover generated

in the financial year = 1 point for every shareholder / member = 1 Point for every employee of the company /

has been welcomed as a new era in South African

close corporation

business unveils itself.

The first point of interest is the impact that the

= 1 point for every R1 million of unencumbered

new Companies Act has on Close Corporations.

The initial indicators leaned towards a phasing out period, during which all close corporations would be converted to Proprietary Limited's or private Companies. This was to take place over a ten year period during which time no new Close Corporations would be able to be registered. This provision was changed somewhat in that Close Corporations may be registered up to the date that section 13 of the Companies Act, 2008 comes into effect and all those registered up to that date will continue for the foreseeable future. This may have placed a premium on the cost of shelf Close Corporations available as the numbers will slowly dwindle over time.

Although Close Corporations that are registered at the effective date of section 13 coming into being, there are still provisions within the Companies Act, 2008 that are applicable.

Firstly, the requirements surrounding the preparation of financial statements are the same for both forms of entities; secondly, the persons eligible for membership of a Close Corporation must satisfy the same criteria as if they were being appointed as a director of a company. The third item is the most interesting: it is that of whether or not the financial statements of the close

excludes secured debt over assets like installment sale agreements) The points are totaled and evaluated in three brackets: 1. Less than 100 points, a basic compilation of financial statements occurs which is much the same as the current situation for a Close Corporation.

2. Between 100 and 350 points, an independent review of the financial statements must be conducted by an independent accounting professional.

3. 350 and above requires a full statutory audit 4. The last bracket, which is probably not applicable, is where the PIS is between 100 and 350 and the entity prepares its own annual financial statements; this type of entity is required to have a full statutory audit.

It is our understanding that the above introductory guidelines for the audit criteria are at present being reviewed and there may well be some changes to the thresholds depicted above as the powers that be deliberate the matter further.

The above is a very brief introduction and in next issue we will elaborate on one or two of the items mentioned above that require further explanation. For more detailed advice and insight

corporation are required to be audited or not; this is based on a Public Interest Score (PIS), which is derived as follows:

into how this may help you please feel free to contact me on 043 – 7269555.

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sensible finance july11

debt of the company / close corporation (this

SENSIBLY LEGAL

A BRIEF GUIDE TO BUYING OR SELLING YOUR HOME A brief overview of the duties of the two principal parties involved. By Grandt Berndt Abdo & Abdo

T

he buying or selling of property is usually the largest investment most people make during their lives. In this article we will attempt to give a brief overview of the duties of two of the principal parties involved, namely the estate agent and the conveyancing attorney.

As a purchaser, one needs to know how much you can afford and the cost involved in the registration of the property, any mortgage bond and relocation costs. Most estate agents and attorneys will be able to give an indication of the transfer and bond costs, which are dependent on the value of the property or mortgage bond.

The seller is usually liable for the payment of the estate agent's commission and will mandate the agent/s to sell the property. In terms of the Estate Agency Affairs Board Code of Conduct, estate agents have a duty to protect the public's interest and to protect their client's interests at all times, with due regard to the interest of all other parties concerned.

The estate agent is to disclose to any purchaser or prospective purchaser all facts relating to a property which are, or could be, material to such purchaser or prospective purchaser, and further, has a duty to explain the meaning and consequence of the material provisions of any offer.

No estate agent is, without good and sufficient cause to encourage or influence any party or potential party to a transaction, to use or not to use, as the case may be, the services of any particular conveyancing attorney or firm of attorneys or financial institution. Accepted practice is that the estate agent is to enquire from the seller

whether he has an attorney who is to attend to the conveyancing, and if not, to make a recommendation of approximately three attorneys or firms of attorneys, leaving the choice thereof to the seller.

As in most cases, the conveyancer is nominated by the seller, and the conveyancer's primary duty is to protect the seller's interests. The conveyancer, however, still has a duty to the purchaser and must advise the purchaser if there is any abuse of rights by the seller. If a dispute arises, the conveyancer will usually attempt to mediate an amicable resolution, bearing in mind his primary duty lies in protecting the seller. In the event of being unable to resolve any dispute, the purchaser should be advised to consult his own attorney.

Attorneys may have estate agents as their clients, but the conveyancer's duty is to effect registration in terms of the deed of sale. If conflict arises, the conveyancer may be torn between his duty to the seller and his estate agent client, in which event, he must disclose this conflict, and if necessary withdraw from the transaction. If any seller or purchaser requires clarity on any aspect of an offer to purchase, this should be raised with the estate agent or referred to an attorney of such party's choice, prior to the signing of any offer.

In conclusion, both the estate agent and the conveyancing attorney have codes of conduct to be adhered to in order to ensure that the consumers' (both the seller and the purchaser) rights are protected. Any transgression thereof can be reported to the Estate Agency Affairs Board in respect of an estate agent and the Law Society in respect of the conveyancing attorney.

SENSIBLE ADVISOR

YOUR FINANCIAL

ADVISOR What does it mean that they are “fit and proper”? By Robyne Moore NFB, East London.

C

onsumers are frequently reminded to only deal with financial advisors who comply with the regulatory requirements as set out by the Financial Services Board (FSB), and who conduct themselves in a professional manner. This issue has been highlighted once again with the recent collapse of a property syndication, in which a financial advisor has been ordered by the Ombud for Financial Services Providers, Noluntu Bam, to compensate his client for the loss. There have been a number of such cases since June last year.

With the introduction of more stringent “Fit and Proper” requirements in terms of the FAIS Act in 2008, the bar was raised for any individual wanting to operate as a Financial Advisor.

As one of the largest, independent brokers in South Africa, NFB not only strives to be fully compliant at all times with all regulatory requirements, but also aims to service our clients with the utmost professionalism.

So is your financial advisor “Fit and Proper”?

Regulatory requirements include the following: = Honesty and integrity: your financial advisor's

personal characteristics become critical factors when considering to hand over your financial dealings to him/her. As a client, you expect your financial advisor to advise you honestly and openly with regard to financial services and products.

According to the Fit and Proper requirements an FSP (Financial Services Provider) may not appoint a representative if they have been found guilty by a court of law, a regulatory or supervisory body of dishonesty, negligence, fraud, acting unprofessionally or dishonourably, or in breach of their fiduciary duty. Honesty and integrity is an ongoing process and financial advisors currently have to declare on a quarterly basis to the FSP, that their status has not changed. = Competency requirements: before a financial

advisor is appointed by an FSP, they are required to satisfy specific competencies; the minimum experience and qualifications a representative must meet are prescribed by the Fit and Proper requirements. In order to standardise the minimum competency requirements in the financial services industry, it is now a requirement of the FSB, that every representative pass the Regulatory 1 and 2 examinations. The RE1 exam will test the representative's factual knowledge and understanding of relevant legislation and the SA regulatory framework eg. Code of Conduct, FAIS Act and FIC Act. The RE2 exam will test the knowledge financial advisors have of specific financial products in which they provide advice.

Once financial advisors have passed the relevant RE exams, they would need to take part in Continuous Professional Development (CPD) in order to develop and maintain a certain standard of professional competence. They are at all times required to act with due skill and diligence, and in the best interest of the client. = Operational ability requirements: this requirement applies to all categories of Financial Services Providers. There are a number of requirements/conditions which need to be in place at all times in order for an FSP to remain operational and to fulfil the responsibilities imposed on them by the FAIS Act. = Financial soundness: this requirement is applicable to the FSP itself and not the financial advisors. The FSP must at all times be holding assets which exceed their liabilities, and depending on the category of the FSP, they must maintain liquid assets at a set level.

At NFB we pride ourselves on our strong compliance focus, and in the professional, expert manner in which our financial advisors deal with their clients. We are committed to keeping abreast of any and all changes within the financial services industry, thereby constantly offering you, our client, our best attention at all times.

sensible finance july11

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CRYSTAL BALL? In order to know the outcome of the next Durban July horse race or which market will perform best over the next year, would it not be handy to have a crystal ball? I think we all understand that this type of foresight or forecasting is not possible with any semblance of accuracy. However, we do think that through the analysis of historical information we may be able to form some type of base case scenario on which to base future expectations of investment returns. Unfortunately, we cannot help with horses!

Written by Stephen Katzenellenbogen, NFB Gauteng, Private Wealth Manager

THE BASE CASE

bottom up, we use, based in part on the textbooks

This article will breakdown and then rebuild an

mentioned above, the following components:

investment return in order to gain some insight as

= Inflation (CPI) – an investment needs to match

to what we could expect from our investment

CPI to maintain its purchasing power.

portfolios in terms of future returns. Before we get

= Risk Free Rate (STEFI Call Deposit) – this is the

going, it should be noted that the content to follow

minimum return you would expect from a risk free

will be based on equity returns in South Africa.

asset. In other words: for anything other than risk

Secondly, there are some inputs that are variable

free cash you would demand a higher return.

and, as such, assumptions or analysis needs to take

= Dividend Yield - it is quite easy to forget the

place alongside these. We would ask that you

importance of a dividend yield, alternatively

apply your own views to these variables and, in so

known as cash flow, but when looking at long term

doing, challenge our thinking.

total returns from equity you will see that the

If you happen to own or pick up some form of

reinvestment of dividends accounts for the majority

theoretical investment book you are likely to come

of your overall return.

across a section describing the components of an

= X-factor – this would be very difficult, if not

investment return. It is these components that we

impossible, to predict as this is the positive or

will look at individually and then try to decide

negative return enjoyed by investors after

whether historical averages are likely to remain

deducting CPI, STEFI and dividend yield from the

true or, if untrue, whether we have entered a new

total return of the JSE All Share Index. The x-factor is

phase of economic and investment cycles.

our complete unknown.

When building an investment return from the

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sensible finance july11

If you take the above 4 factors and add them

SENSIBLE INVESTOR together you should then get the total return on the

The above graph depicts the downward trend

All Share Index for the corresponding period. This

in interest rates. We do think that going forward we

works better for longer-term periods (i.e. ten years)

will continue to be in a lower interest rate, and

than it does for shorter periods.

lower inflation rate, environment. As such, the ten year risk free return, measured by the STEFI Call

ONE STEP AT A TIME

Deposit rate of 8.93%, is likely to average down over time.

INFLATION DIVIDEND YIELD

The average inflation rate, using CPI, for the last ten years has been 5.84%. This should also be

When you buy a share you are buying a part of

placed in the context of the South African Reserve

that particular business and, as such, will

Bank's target range of 3% - 6%. Inflation has a vast

participate in the profits and losses of that entity. If

number of interrelated components than can

a business has excess profits it can either apply

positively or negatively affect the final number. We

these within the business to fund future expansion

will not make an attempt at predicting these

projects or, alternatively, these profits can be

variables, but rather give a broad synopsis. We do

distributed to shareholders in the form of a

think that the Reserve Bank will, on average, keep

dividend. Very often a combination of these

inflation within the target range. It is also likely that

options is used and shareholders enjoy a dividend

global authorities will continue to pursue a positive,

to reward them as loyal owners of the company.

but controlled inflation environment, thus

We have discussed the importance of dividend

impacting South Africa's inflation environment.

reinvestment and long term returns and, as such, it is worth noting that the average dividend yield of

RISK FREE RATE

the JSE All Share Index over the last ten years has been 3.49%.

(We must not forget that a quality company may not always pay a dividend, with Anglo American being top of mind during 2010).

X-FACTOR We mentioned above that the final and fourth component of total equity return is: JSE ALSI Total Return minus (inflation + risk-free rate+ dividend yield) The net result of this sum gives us an average continued overleaf...

sensible finance july11

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SENSIBLE INVESTOR ...continued from page 10

CRYSTAL BALL? Table 2:

return of -1.61% over the last 10 years.

Inflation

4.5%

This is in the middle of the

Risk Free rate

6.5%

Common belief is for

WHAT IS THE 'BOTTOM LINE'?

Let us begin by looking at a graphical

target range

representation combining the different

interest rates to

components of investment return.

remain lower than those enjoyed historically Dividend Yield

3%

Increased competition

X-Factor

0%

We have given this the

may lead to lower profits benefit of the doubt against its historical track record of -1.61% TOTAL

14%

Due to a lack of space please forgive us for making some assumptions with little explanation in 'Table 2'. Nevertheless, if we can in principal agree At a glance we can see that historically both

with these numbers we then could expect long

the dividend yield and risk-free rate have been

term returns to be around 2.6% lower than those

positive, with inflation and the x-factor moving

enjoyed historically. Put another way, future

between positive and negative territory.

expected returns could be approximately 15.5%

The average yield of the above components

lower than historical averages.

can be summarized as follows:

THE END GAME Throughout this article we have focused on equity

Table 1 Risk Free Rate (STEFI Call Deposit)

8.93%

returns. A balanced portfolio should have a blend

Inflation (SA CPI)

5.84%

of cash, bonds, property and equity in accordance

Dividend Yield (JSE All Share Index)

3.49%

with the appropriate risk-profile. Expected returns would thus need to be modified based on the

X-Factor (JSE Total Return minus CPI, STEFI & Dividend Yield) AVERAGE TOTAL RETURN

-1.61%

overall asset allocation. In some instances you may

16.65%

have inflation plus (e.g. CPI + 5%) targets and can adjust your sights accordingly.

What we have achieved so far is identifying,

An unfortunate consequence of a lower return

describing and quantifying the different

environment is the need to save additional funds

components of total return. The next and final step

for retirement or other investment goals. Always

is to determine how this affects us as investors. For

remember to, as far have possible, have a well

the purposes of our discussion let us assume the

thought out investment plan constructed in

following going forward:

conjunction with a professional advisor to ensure prosperity and peace of mind. *All graphs courtesy of NFB Asset Management

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sensible finance july11

SENSIBLE PLANNING

TESTAMENTARY

FREEDOM The reasons for possibly challenging a Will.

By Debi Godwin, Director - Independent Executor &

T

he phrase "testamentary freedom", i.e. the freedom to leave your property to whomever you wish in your Will, is well known, but what can you do if you have been written out of a Will or want to challenge the wishes of a recently departed family member?

It is surprisingly common for individuals to try to disinherit their families and leave it all to the proverbial cats' home. The more unusual cases make the papers – remember the case of Golda Bechal, an 88-year-old widow living in the UK, whose relatives challenged her Will after she left most of her £10m fortune to the owners of her favourite Chinese restaurant.

As people are now living longer many often decide to change their Wills later in life without the assistance of a professional. This can lead to family members suspecting foul play if they have been written out of the Will. Challenges to Wills are costly and difficult to win, not least because the principal party one might want to obtain evidence from is no longer with us!

Legally-speaking, it is possible to challenge a Will for one or more of the following reasons: = Lack of proper formalities = Lack of testamentary capacity = Lack of knowledge and approval = Undue influence and fraud

Lack of proper formalities A Will must be made in writing, preferably not handwritten, and signed by the testator on every page, in the presence of two witnesses who must each also attest and sign the Will in the presence of the testator. If any of these requirements are missing the Will is invalid.

Lack of testamentary capacity To make a valid Will the testator must have the

requisite mental capacity. The testator must be capable of understanding that they are making a Will and disposing of their assets on death. The testator must also be capable of understanding the extent of their estate and appreciate the claims on that estate to which he ought to give effect.

The difficulty with proving this ground is that you must produce evidence of the testator's capacity after their death. When a Will is drawn up by a professional and if there are doubts about a person's capacity, the professional should ask a doctor to assess capacity before a Will is made.

Lack of knowledge and approval A testator must know and approve the contents of the Will. If a Will has been properly executed, it is presumed that the Will is valid on this ground and, generally-speaking, you will have to prove (on the balance of probabilities) that the testator did not know and approve the contents of the Will.

Undue influence and fraud A presumption of Undue Influence usually arises when the beneficiary had actively participated in the preparation and execution of the Will and had disproportionately benefited from it. Undue influence means coercion, but no physical force is necessary. This is not the same as persuasion.

Reminding the testator of their family obligations or what you have done for them in the past is not undue influence. It is essentially down to the person alleging undue influence to show that the testator was coerced into making the Will. Given that the testator is no longer around and that they have often been isolated by the person against whom undue influence is alleged, it is one of the most difficult allegations to sustain - there may be lots of suspicion, but relatively little hard evidence!

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: iet@iet.co.za

sensible finance july11

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SENSIBLE ADVICE

A tax deduction is not the only reason to purchase a Retirement Annuity A look at some of the other benefits.

By Natalie Dillon, Senior Legal Advisor Old Mutual Broker Division.

M

ost people are advised to purchase a retirement annuity because of the tax concession allowing a deduction, in respect of that contribution, for an amount of up to 15% of a person's taxable non-retirement funding income.

Don't lose sight of the fact that the primary reason for purchasing an RA, however, is to accumulate capital towards your retirement. The tax concession certainly is a benefit, but is merely a pat on the back from SARS for planning for your retirement.

Besides these obvious benefits, there are several other benefits to owning a retirement annuity. Let's look at a few‌ 1. Protection against creditors The Pension Fund Act provides that a member's benefit and any annuity purchased by the fund for that member, may not be reduced, attached or subject to any form of execution under a court order. An exception to this is a reduction in respect of a housing loan from an employer or damage caused to the employer by a member's theft or fraud.

This means that if someone obtains a judgement against you in respect of a debt that you owe that party, the funds in your retirement annuity cannot be laid claim to by such parties.

2. Protection against insolvency If a person's estate is sequestrated, a benefit under a retirement fund is excluded from being an asset in that person's insolvent estate.

The trustee of the insolvent estate or a creditor of that estate may not attach or appropriate the

retirement benefit i.e. the retirement annuity is effectively disregarded as an asset in the estate and it can thus not be taken it into consideration when realising assets to generate the funds needed to repay the insolvent estate's creditors.

3. Protection against Estate Duty and Executor's fees At death, a person's estate is subject to executor's fees of 3.99% (incl. Vat) and Estate Duty of 20%. A person's estate consists of all the assets that are registered in that person's name – properties, vehicles, cash in the bank, investments, etc., as well as any policies on which that person is the life assured (life policies, for example).

Retirement annuities are not regarded as an asset in a person's deceased estate and are thus not subject to Estate Duty or Executor's fees.

Contributing towards/purchasing a retirement annuity is thus a very effective estate planning tool.

Effectively, the value of any contributions to a retirement annuity will be 'removed' from a person's estate.

For example, R1 000 000 in a money market account will attract estate duty of R200 000 and executor's fees of R39 900. This will leave R760 100 available to the spouse/dependants to generate an income. Purchasing an RA with that money will immediately remove the asset from your estate and will leave R1 000 000 available in the RA for your spouse/dependants to generate an income.

A retirement annuity is not just a retirement plan - it is also a very effective estate planning tool that should be used as such!

sensible finance july11

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SENSIBLE ESTATE PLANNING

Risk and life insurance.

A necessary evil or an investment in peace of mind? “Life insurance is an investment in your family's future financial security, and should not be seen as a grudge purchase,� says Patrick Sheehy, Head of Product Management at Glacier by Sanlam.

A

family needs to know that its finances will be sufficient to maintain its standard of living in the event of the death, critical illness or disability of the main breadwinner.

Life cover The purpose of life cover is to protect the financial well-being of your family in the event of your death.

Some of the many considerations when evaluating the adequacy of your life cover include the following: = When last your life cover was reviewed by a financial intermediary = Changes in your family or business circumstances, your lifestyle or occupation since your life cover was last reviewed = If your children's future education will be guaranteed in the event of your death or disability = How your debt will be paid off in the event of your death = The possible reduction in your income should you be forced to stop working due to ill health.

Inflation may also result in your cover becoming insufficient over time. There are policies available that automatically provide for inflationlinked increases in cover. However, this should not replace reviewing your cover needs on a regular basis.

Disability There are two main forms of disability cover, namely lump sum or income replacement benefits.

A lump sum disability benefit cover will pay out the sum insured in the event of you becoming permanently disabled. Because it pays out a lump sum it is ideally suited to covering outstanding debts and once-off expenses associated with the disability.

An income replacement benefit is designed to replace any reduction in income you might suffer as a result of disability. It covers permanent as well

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sensible finance july11

as temporary disability up until your normal retirement age.

The premiums you pay under an income replacement benefit are tax deductible, with benefit payments taxed as part of your income. By contrast, no tax is payable by you on any lump sum disability payment, but the premiums you pay are not tax deductible.

Critical Illness cover Critical Illness cover is designed to offset the expenses associated with a critical illness. Aside from the direct medical costs there may well be substantial expenses incurred during the recuperation period. Because the costs associated with different critical illnesses vary substantially, the Critical Illness benefits will vary according to both the type and severity of the illness. The amounts paid by different companies do vary so it is important that you understand exactly what level of cover you're getting and what you're covered for.

Life insurance should never be purchased on price alone. The range of conditions covered and corresponding benefit payments should always be looked at. A cheaper policy may have exclusions or limitations. In certain instances a more expensive policy, which is more appropriate for your needs, may be the wiser choice in the long run.

Given the amount of information to be considered and the complexity of the policies, it is recommended that clients consult a qualified financial intermediary. As stated earlier, life cover should be seen as an investment. When seen this way, it becomes obvious that it needs to be planned for and adjusted continuously to ensure peace of mind for the entire family.

SHOULD YOU BE HOLDING ANGLO AMERICAN PLC (ANGLO) IN YOUR PORTFOLIO? A compelling investment at current levels. By Rob McIntyre, CA (SA), Portfolio Manager - NVest Securities.

n the JSE, Anglo has the third largest market capitalisation of R458bn as at 31 May 2011 (after British American Tobacco plc of R620bn and BHP Billiton plc (BHP) of R585bn).

Anglo is also listed on the London Stock Exchange where it is a constituent of the FTSE 100 index. The FTSE 100 index comprises the 100 most highly capitalised blue chip companies, representing approximately 81% of the UK market.

Together with BHP and Rio Tinto plc (Rio), Anglo constitutes the only large capitalisation, multinational and well-diversified mining companies worth investing in. There are a number of other contenders such as Vedanta Resources plc (Indian), Companhia Vale do Rio Doce

O

of the commodities fell dramatically. Given its strong balance sheet, BHP was the company that navigated this crisis the best. This financial strength enabled BHP to increase its dividend in US Dollars throughout the crisis. From an income perspective, BHP investors were therefore unaffected. Rio fared the worst as it had taken on substantial debt at the peak of the cycle to buy Aluminum assets.

Aluminum (given its industrial demand) was one of the worst performing commodities and Rio was eventually forced to pass its dividends and undertake a substantial rights issue at a deep discount to clear this debt. Anglo muddled through by passing its dividend for the first time in its history on three occasions (an interim and two finals),

(Brazilian), Antofagasta plc (Chilian), Xstrata plc and the recently listed commodities trader and mine owner; Glencore International AG. However,

however, it did not have to undertake a rights issue and therefore avoided the consequential dilution to existing shareholders.

none of these companies have the diversity of mining resources that BHP, Anglo and Rio do.

The recent global financial crisis was punishing

Given the fact that Anglo has interests in diamonds (through De Beers) and platinum (through Angloplats) in its portfolio, it was badly

to mining companies, in particular, as demand for its products was severely curtailed and the prices

affected by the sharp fall in the demand and the prices for these two commodities. Anglo had to

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sensible finance july11

SENSIBLE PORTFOLIO

underwrite recapitalisations in these two divisions

commodity capacity over the last few years of the

during the crisis.

Anglo earns its income in US Dollars and pays

economic crisis as projects were cancelled or scaled back.

its labour in the currency of the country in which it

Anglo has substantial projects in developments

extracts its resources. Given the weakening of the

on its balance sheet in iron ore (Minas-Rio in Brazil

US Dollar over the past few years, Anglo has found that currency issues have had a negative effect on

of USD5bn coming into full production in 2014), copper (Los Bronces in Chile of USD2.5bn coming

its earnings.

into full production in 2012) and diamonds

During 2010 Anglo resumed the payment of dividends as its income recovered and its balance

(Jwaneng in Botswana of USD3bn coming into full production in 2024 – but already in partial

sheet stabilised and comments from the new

production). There are also other projects in nickel,

chairman, Sir John Parker, seem to indicate that the level of these dividends has formed a new

platinum and thermal coal. It is funding these projects and not earning an income until these

base from which investors can expect reasonable

have been commissioned. While there is a level of

growth. The Chief Executive, Cynthia Carroll, has been determinately implementing the strategy of

execution risk in bringing these projects into full production, we believe that such projects should

Anglo since her appointment and, apart from the questionable merit of the share buy backs over R500 per share, this strategy seems to be bearing fruit.

For the 2010 year Anglo earned roughly R30 a share (up 90% from 2009) and the consensus forecasts taken from I-Net is that Anglo should earn roughly R45 a share for 2011. At the current share price of R340, this places Anglo on a forward price earnings (PE) ratio of 7.5 times. By comparison, I-Net places BHP on a forward PE of 9.5 times. We believe that the fact that investors are prepared to pay 27% more for BHP than Anglo is chiefly due to the fact that BHP is seen as better managed than Anglo and the lingering country risk ascribed to South Africa (in which Anglo is far more represented than BHP). However, one cannot choose where platinum and other resources are found, and country risk goes with the terrain! Anglo is forecast to pay just short of a 2% dividend at its current share price.

To some extent the PE ratios for all commodity companies reflect the belief that the commodity super cycle may well be over and that commodity prices will return to a more normalised long term trend. This is a discussion for another article, but our

meaningfully enhance Anglo's earnings and increase its earnings outside of South Africa. Anglo's development record is no worse than its competitors, so we are encouraged by its new projects. Anglo did not get where it is now without undertaking substantial projects in the past.

Anglo has also continued delivering against its stated objective of disposing of assets that no longer fit into its portfolio. The most significant remaining asset is Tarmac in the UK and Europe and it has taken steps to create a joint venture as a means to extract value. Anglo has, however, largely completed such disposals over the past 5 years.

So where does this leave us?

Our view is that as its diamond and platinum earnings recover to match its investments in these commodities and as it brings into full production its new projects, together with continued performance of its iron ore, copper, nickel and coal assets, that Anglo is a compelling investment at current levels.

Given the US Dollar nature of its income, we also believe that at current levels of the Rand, it is an opportune time to be accumulating Anglo to an appropriate weighting in any general equity

view is that commodity prices should continue to benefit from elevated growth in emerging economies for many years to come and will begin

portfolio (such weighting would depend on the investor's individual circumstances, but should be around 10%).

to also reflect the under investment in new

sensible finance july11

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SENSIBLE FINANCE QUESTIONS & ANSWERS

“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.

Travis McClure

Q: When taking out life cover and disability cover there seems to be a myriad of options and different benefits and premiums. This is all rather confusing and I would like to know what one should be looking out for when considering taking out cover?

A: Most South Africans are under insured when it comes to life and disability cover. It is often seen as a grudge payment or one of those necessary evils.

There is no benefit paid back to you and if there is then something bad has happened to you in order for the benefits to be paid.

It is therefore important for you to make sure that you are getting value for your money and understand what options you have. One needs to understand what you are getting for the premium you are paying and how that premium will change.

Cheaper is not always better.

The benefits you take out will determine the price you pay. Life cover is generally the same across all companies. It is in the disability and severe illness space that you may find differences in how these benefits are paid. You have the choice of Comprehensive cover or Core cover. We would always suggest that you go for Comprehensive cover as this eliminates any gaps in your cover. You will also have the option of choosing between having benefits at lower severity levels or upgrading the cover to pay out a higher amount even though the severity level is low.

Companies also offer multiple payouts and claims while others will pay out 100% of the benefit as soon as any severity level is obtained. This should be discussed with your advisor and you need to ensure that in the event of a claim that you are comfortable with what will be paid to you. If you have an illness that is in a low severity level stage then you may only receive a smaller payout

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sensible finance july11

initially, but should the illness get worse you could end up with more payouts than had you just received a full benefit payout in the early stages.

It is also important to understand, with Disability cover, the difference between own occupation based disability versus own or similar occupation based Disability. Own occupation disability protects you against you being able to perform your nominated occupation. Own or similar will look at whether or not you could still work and earn a living doing something similar.

You are also able to choose your disability or severe illness cover as an accelerated benefit or a stand alone benefit. If it is accelerated then this will reduce your life cover amount down by the amount of the disability or severe illness claim.

Stand alone costs more, but a claim will not affect the life cover amount.

The choices you make will determine the premium you pay. You can also change the type of premium pattern and cover increases. You are able to choose between a level premium or a premium that starts off cheaper, but increases each year. You will also be able to choose what percentage you would like your benefit to increase by each year. A level premium will generally work out to be cheaper in the long run, but a premium with a compulsory increase each year will be significantly cheaper in the shorter term.

It is important to get comparative quotes and to ensure that you compare “apples with apples”.

Your Financial Advisor should be able to assist and explain the differences.

Please address all Questions to: Travis McClure, NFB Sensible Finance Q&A, Box 8132, Nahoon, 5210 or email: nfb@nfbel.co.za

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NFB have a STRONG, REPUTABLE TEAM OF ADVISORS with a WEALTH OF EXPERIENCE between them: Anthony Godwin (RFP™, MIFM) - Managing Director and Private Wealth Manager, 23 years experience;

Private Wealth Manager, 7 years experience; Phillip Bartlett (BA LLB, CFP®) - Private Wealth Manager, 9 years experience;

Gavin Ramsay (BCom, MIFM) - Executive Director and Private Wealth Manager, 18 years experience;

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“It requires a great deal of boldness and a great deal of caution to make a great fortune...but when you have got it, it requires 10 times as much wit to keep it” Nathan Rothschild, 1834

You’ve worked hard for your money... now let NFB make your money work for you. fortune favours the well advised contact one of NFB’s financial advisors East London • tel no: (043) 735-2000 or e-mail: nfb@nfbel.co.za Port Elizabeth • tel no: (041) 582 3990 or e-mail: nfb@nfbpe.co.za Johannesburg • tel no: (011) 895-8000 or e-mail: nfb@nfb.co.za Web: www.nfbec.co.za

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