NFB Sensible Finance Magazine Issue 19

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Issue 19 November 2011

PERSONAL FINANCE Magazine

OFFSHORE INVESTING worth your consideration Where do you put your money in times like these?

PROVISIONAL TAX FOR THE INDIVIDUAL I have group life cover so I don't need life cover, right?.....

WRONG!

private wealth management

A look at some key amendments

“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 Mikayla Collins (NFB East London), Travis McClure (NFB East London), Marc Schroeder (NFB East London), Brendan de Jongh (NFB

a sensible read

Gauteng), Shaun Murphy (Klinkradt & Assoc.), Grant Berndt (Abdo & Abdo), Samkelo Zwane (Glacier by Sanlam), Debi Godwin (IE&T), Natalie Dillion (Old Mutual), Robert McIntyre (NVest Securities), John Green (Investec Asset Management)

Advertising Robyne Moore rmoore@nfbel.co.za

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

Address NFB Private Wealth Management East London Office NFB House, 42 Beach Road Nahoon, East London, 5241 Tel: (043) 735-2000 Fax: (043) 735-2001 E-mail: nfb@nfbel.co.za Web: www.nfbec.co.za

Photos used in this magazine BigStockPhoto.com

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. ©2011 All Rights Reserved.

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

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lthough strictly speaking there are still two months left of the year, this will be the last edition for 2011 and so it doesn't seem too early to give the year a quick review.

The Rugby World Cup didn't quite live up to our expectations, so this will be my only mention of it (we are sore losers, aren't we?).

North African and Middle Eastern countries were the newsmakers of the year as we saw several dictators ousted off their pedestals; well, them and European countries which are leading the race towards sealing a global recession once and for all. What intrigues me is why developing countries like ourselves who are doing a relatively good job of managing our economies, are the first ones to suffer as US and European investors withdraw their foreign investment in a 'flight to safety' and put the money back into their own countries, the very ones that caused the chaos to begin with!

Notable deaths of the year range from those who few will miss such as Osama Bin Laden and Muammar Gaddafi, to the premature deaths of Amy Winehouse and Steve Jobs, and then those that lived full lives and who left lasting legacies such as Wangari Maathai and Elizabeth Taylor.

2011 has had its ups (marriages of Prince William to Kate Middleton and Price Albert to our very own Charlene Wittstock, and the world's very first synthetic organ transplant), its downs (the 9.1 magnitude earthquake and tsunami that followed in Japan) and its contemplative moments (tenth anniversary of the 9/11 terror attack on the US). But what this year and life in general should teach us is that time is fleeting and that we need to make the most of every opportunity that life presents us with.

And your finances are no different! As the World Bank's Chief Economist, Justin Yifu Lin, recently advised developing economies in respect of the debt crisis, “hope for the best and prepare for the worst”.

We hope that you find our magazine useful and welcome feedback of any nature. Have a very good, safe and happy festive season!

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

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Photo BigStockPhoto.com

SENSIBLE CONTENTS

nfb sensible finance

November 2011

6 IS CASH THE SAFEST BET? Comparing cash and equities. By Marc Schroeder, Private Wealth Manager - NFB East London.

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9 PROVISIONAL TAX FOR THE INDIVIDUAL A look at key amendments to the way provisional tax is calculated and submitted.

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

10 THE CONSUMER PROTECTION ACT AND MARKETING A brief look at how the CPA affects you. By Grandt Berndt - Abdo & Abdo.

12 OFFSHORE INVESTING – WORTH YOUR CONSIDERATION Where do you put your money in times like these? By Mikayla Collins, Paraplanner NFB Private Wealth Management.

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15 ETF'S – SHOULD YOU HAVE ANY? ETF's have taken the investment world by storm. By Brendan de Jongh, Private Wealth Manager - NFB Gauteng.

16 I HAVE GROUP LIFE COVER SO I DON'T NEED LIFE COVER, RIGHT? WRONG! Ensure that your deceased estate does not become insolvent. By Natalie Dillon, Senior Legal Advisor - Old Mutual Broker Division.

17 THE IMPORTANT ROLE OF EXECUTOR - NO SIMPLE TASK

By Debi Godwin, Director - Independent Executor & Trust.

19 AN INVESTMENT VIEW ON MMI HOLDINGS A further discussion on core equity holdings. By Rob McIntyre, Portfolio Manager - NVest Securities.

20 RETIREMENT: LET THE NUMBERS DO THE TALKING Will your savings be sufficient for your retirement? By Samkelo Zwane, Solutions Specialist - Glacier by Sanlam.

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21 DEFECTIVE DESIGN OR CONSTRUCTION CAN CAUSE A CLAIM REJECTION Ensure when buying a home that you have it thoroughly inspected - sourced from FA News, www.fanews.co.za

23 INSIGHTFUL TO UNDERSTAND HOW GLOBAL ASSET OWNERS ARE CHANGING PORTFOLIOS Shifting to an emerging market and global equity approach. By John Green, Head - Global Client Group - Investec Asset Management.

24 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.

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Is Cash The Safest Bet? Written by By Marc Schroeder, NFB East London, Private Wealth Manager

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f you accept that inflation is the biggest threat to the value of your money the answer to the question above is definitely “no�. The after tax cash yield over the longer term has been 6% per annum, which is less than the longer term average of CPI of 7%, meaning that cash only investors have suffered a -1% per annum real return over the longer term.

On the other side of the spectrum you have equities, known to all as the risky asset class. It's a confusing title as this asset class provides investors with the greatest chance of beating inflation over the longer term.

Equities, over the long-term, have provided investors with inflation plus 10%. Investors are rewarded for taking on the volatility factor associated with this asset class. A study was recently conducted to determine, based on historical data, what the probabilities of loss were for investing in equities.

Std deviation Probability of less than 0% 1 yrs 25.82% 27.03% 3 yrs 33.06% 14.62% 5 yrs 8.06% 4.68% 7 yrs 6.61% 2.20% 10 yrs 5.50% 0.91% 15 yrs 4.00% 0.04% Source: Rand Merchant Bank The table above is taken from analysis conducted on each rolling period depicted for equity returns since 1960.

If you consider that over the past 10 years the statistics for a real loss of money, if holding cash, has been

100%, and for holding equities for any rolling 10 year period the statistical chance for loss has been 0.91%, surely this provokes a change in paradigm when considering which of the two is really the risky asset class?

Fortunately the picture is not black and white; there are shades in between, represented by multi asset class portfolios. There are funds that have had significant successes through balancing assets, increasing cash holdings when equities are expensive and vice versa when there is value.

For those more than 10 years away from retirement, the maximum equity exposure should be adopted for obvious reasons. Those closer to retirement should still have significant exposures through high equity balanced funds. The most difficult period for any investor is during retirement, where most investors do not have enough.

Funds such as NFB's Cautious Fund and Coronation's Balanced Defensive Fund are specialist low-equity balanced portfolios designed for this purpose - their mandates are to achieve inflation plus 4%. Simply put, if you can afford to live on 4% of your retirement capital, you can look forward to inflation linked returns.

The point is: in order to get to, and get through, your retirement, you will need to reconsider your view of risk.

Inflation is the biggest risk, and equities are the best defence against it.

Should you wish to review your risk profile or revisit any of your investment portfolios, we suggest you give your NFB Financial Advisor a call.

SENSIBLE ADVICE

PROVISIONAL TAX FOR AN INDIVIDUAL A look at key amendments to the way provisional tax is calculated and submitted. By Shaun Murphy, CA (SA) Partner - Klinkradt & Associates IRP6 cannot be less than the basic amount, unless SARS has specifically agreed to accept the lower estimate. Should you wish to use an estimate higher than the basic amount, this estimate must be within 90% of your actual assessed taxable income for the year of assessment.

The basic amount is the taxable income shown on your latest assessment from SARS. However, the latest assessment has to be older than 60 days in order to be used as the basic amount. Should the

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he last 2 years have seen key amendments to the way provisional tax is calculated and submitted. In June 2010, SARS issued a notice of changes in the provisional tax process, deferring the onus of registering for provisional tax from SARS to the individuals. Taxpayers that were always salary cases, were having penalties charged for underestimation. IRP6's would no longer be issued

by SARS, but all individuals that are liable for provisional tax, registered or not, would be required to request the IRP6 for submission.

The methods for estimation of taxable income and the penalty system for provisional tax is clearly defined in the Fourth Schedule of the Income Tax Act; where it shows that your estimated taxable income is split into 2 groups – Tier 1 and Tier 2. The method of calculating your estimated taxable income in each tier is dealt with differently.

Should a provisional taxpayer not submit an estimate to SARS, SARS will estimate the taxable income, and such estimate will be final and conclusive. Likewise penalties will be imposed on the estimated income. Further, SARS has the right to ask you to provide additional information to support or justify your estimate of taxable income.

Tier 1 – Your estimated taxable income is R1 million or less: Your estimated taxable income used on the

year of assessment be older than 1 year, you have to increase the basic amount by 8% per year.

Tier 2 – Your estimated taxable income is more than R1 million: The rule here is straight forward. Your second provisional tax estimate cannot be less than 80% of actual taxable income.

In both Tier 1 and Tier 2, penalties of 20% will be imposed should the estimate used be less than the 90% and 80% respectively. The penalty is imposed on the difference between assessed income and estimated income not the difference in provisional tax paid, which will result in a substantially higher penalty.

Should your first or second payment be late, an additional penalty of 10% will be imposed. If SARS believe that you postponed or evaded your first payment by substantially reducing the payment and subsequently loading the second payment, a penalty of 10% can be imposed for late payment of the first provisional tax return. The taxpayer should remember that they bear the burden of onus of proof, so they need to convince SARS that they had no intention of evasion or postponement.

SARS has not removed the option for a third provisional tax payment, therefore the remaining 10% for tier 1 and 20% for tier 2 should still be paid as a topping up to avoid interest being charged on the outstanding balance. Interest is charged at the prescribed rate, currently 8.5%, from 1 October 2011.

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SENSIBLY LEGAL

THE CONSUMER PROTECTION ACT AND MARKETING A brief look at how the CPA affects you.

By Grandt Berndt Abdo & Abdo

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he Consumer Protection Act (CPA) came into operation on 1 April 2011 and with it stringent restrictions on the way goods and services are marketed to us as consumers. Marketing practices are not to be deceptive and misleading.

This, however, only applies to transactions falling within the CPA. Certain industries are excluded from the CPA; such exclusions include the marketing of insurance and pension funds, while banks are also excluded in respect of fixed term agreements, such as fixed term deposits.

Direct marketing is probably that form of marketing most affected by the CPA. Direct marketing includes any supplier who approaches consumers in person, by mail or electronic communication for the purpose of, directly or indirectly, offering or promoting any goods or services or to obtain a donation. The contact of a supplier by a consumer in response to a public advert is, however, not direct marketing. Any transaction as a result of direct marketing must make provision for a 5 day cooling off period for the consumer.

One is now not to be contacted at home between the hours of 8:00pm and 8:00am on weekdays, or before 9:00am and after 1:00pm on a weekend or at any time during a public holiday.

One must be allowed to opt out of this marketing, which option must be in writing and free of charge.

All existing customers should provide suppliers with confirmation that they want to continue receiving direct marketing and one is entitled to place a "no advert" sign on one's postbox or premises to prevent direct marketing. The

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consequences for any supplier who breaches these provisions of the CPA are severe, from having the agreement declared void to the making of any other just order. The National Consumer Commission has been set up to enforce the CPA and to deal with consumer complaints and, where required, refer them to the appropriate forum.

The CPA makes provision for an opt-out registry which is in the process of being established. One may register a preemptive block on your contact details to avoid unwarranted direct marketing. A direct marketer will then only be allowed to contact you if he is registered with this registry and has received confirmation that he may contact you. How the registry will actually operate is currently unknown.

The enforcement of the CPA is still in its infancy and the rules and regulations for carrying out the Act and its enforcement through the National Consumer Commission are being developed. The CPA provides a free forum for resolution of complaints by consumers and aims to use Ombudsmen, Arbitrators and Mediators to achieve consumer protection.

The CPA only applies to transactions entered into after 1 April 2011 or after 1 April 2011 for fixed term contracts which fall within the CPA. These fixed term contracts do not need to be renegotiated, but as from 1 April 2013 the consumer will acquire the protection of the Act. The CPA should have a marked effect on the South African consumer, but the full ramifications will only be known in time as the Act is implemented and enforced.

OFFSHORE INVESTING WORTH YOUR CONSIDERATION Where do you put your money in times like these? By Mikayla Collins, Paraplanner, NFB Private Wealth Management

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ith European debt problems and a shaky situation in the US, there has been extreme volatility in the stock market recently. Investors are paranoid and ready to react to any hint of bad news that reveals itself. So where do you put your money in times like these?

MONEY MARKET: The safe bet would be to wait and see how things pan out. If you keep your cash in the money market you are looking at a return in the region of 5%. It might seem acceptable, until you start considering that this isn't even inflationary growth.

So the real value of your money will actually decline and you will come out with less buying power than you put in.

So where are the opportunities?

SA ASSET CLASSES vs. WORLD MARKETS: Looking at the last 10 years, SA equity and property seems to have been the place to be. This position seems to be shifting though. This year so far, foreign equity and foreign bonds have been the top achievers. Investors may have burned their fingers with offshore investing in the last 10 years, as both performance and exchange rates played against them. This negative experience has made South African investors apprehensive to invest offshore.

Looking at the graph below and taking the MSCI World Index as a proxy for global equities, we can clearly see the poor performance offered in this asset class relative to others. However, one should always bear in mind that performance moves in cycles, and historical performance is in no way indicative of what can be expected in future.

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* Shorter History for MSCI (41 years) and Property (31 years) Source: Deutsche, I-Net Bridge, “Triumph of the Optimists�, Dimson, Marsh, Staunton.

With this in mind, let us consider where offshore markets are now. Looking at the graph below, comparing the All Share Index, MSCI World Index (for world stocks) and the S&P 500 (for U.S. stocks) since 2005, it is clear that the JSE is priced much higher at the moment than U.S. and world stocks and isn't likely to increase much further. The upside potential in offshore stocks, however, is clear.

Source: Glacier International

SENSIBLE INVESTOR CURRENCY: Another important factor to consider when investing offshore is the added currency risk that the investor faces. As the South African Rand went from strength to strength, reaching its lowest levels in 2010/11, so the currency risk eroded the performance in Rand terms of South Africans' offshore investments further. The appreciation of the rand over recent years can be attributed, among other factors, to the relative stability of our inflation rate. We have already seen a depreciation of the Rand in September and October this year, and with wage increases way above inflation and the effect of rising electricity prices being just two of the major factors threatening our inflation rate. With these in mind, it is unlikely that the Rand can continue to appreciate at the rate at which it did in the last decade. We have already seen over the last month how sentiment has shifted and our currency has moved out significantly into a new trading band. It therefore shouldn't pose as high a threat to investment returns in the near future as it has in the recent past.

PAST vs. FUTURE: All these aspects considered, it is clear that we are turning a corner. Comparing the past 10 years to what is expected in the decade to come, consensus is that global equities are expected to be the next performer.

towards global markets then we might see a further depreciation in our currency as more money moves to developed markets. ! If we see a move up at the same pace as exchange rates came down, your wealth could reduce substantially in value in Dollar terms. By investing offshore now you may still be able to take advantage of this overvaluation. ! Though global equities are risky, there are plenty ways to avoid or reduce that risk to levels that you feel are acceptable. These include limiting the portion of your overall portfolio that is invested offshore or looking at Global Bonds. In addition to this there are new and innovative offerings that can allow you to limit the downside potential of your investment while still benefiting from the upside growth. These can be explained further by your financial advisor. ! Certain structures afford the investor substantial advantages in terms of the tax payable on investment growth and income. ! The idea that the fees are much greater in offshore investment products is a myth. The product and resulting fees would be decided on based on your investment amount and objectives and a reasonable fee can be negotiated. The fees should not discourage you from exploring offshore investment opportunities. ! Global equities consist of global companies.

Many of these large corporate are showing excellent valuations. They have improved their earnings over the past decade and are more streamlined. A good portion of their earnings also comes from their emerging market exposure and global revenue. At current prices, these shares offer great value after a decade of no return.

BOTTOM LINE:

Source: I-Net Bridge, Deutsche Bank, CFM Forecast

The South African investor may still be hesitant to take money offshore, owing to past experience and the risks involved. However the following advantages must be taken into account: ! The Rand has been overvalued and has started to correct. Current levels do not look as attractive as they were a month ago, but if sentiment moves

To sum up, don't pin all your hopes on local equities. While they may have been the investment vehicle of choice in the last 10 years, the next decade is shaping up to be a very different investment environment and unless investors can overcome their negative perception of offshore investing, they may be missing out on the next big opportunity. Don't assume that offshore investing means taking on more risk or paying higher fees.

There are so many options available and your portfolio can be structured to suit your risk constraints and needs. Consider all of the available options, regardless of their track record, and pay attention to the future rather than the past. sensible finance november11

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SENSIBLY DIVERSE

ETF's should you have any?

Exchange Traded Funds (ETF's) have taken the investment world by storm. Article written

by Brendan de Jongh, NFB Gauteng, Private Wealth Manager

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xchange Traded Funds (ETF's) have taken the investment world by storm and have attracted just under $1.5 trillion of assets under management worldwide thus far (Blackrock Inc). Considering that the ETF industry was a little shy of $1bn of assets under management in 1993, this is significant growth. The ETF market is dominated by America with more than half of the market share, but South Africa is making a small footprint having introduced ETF's in 2000. ETF's are basically unit trusts that can be transacted through stock exchanges. They are therefore bought and sold like shares on the JSE, making this investment vehicle very popular with investors. The portfolio of securities in an ETF typically comprises the constituent securities of an equity or bond market index. In plain language you can “buy” an index (e.g. JSE Top 40, All Bond Index etc.) through one unit / share of an ETF. The asset classes covered by ETF's in South Africa include equities, bonds (including inflation linked bonds), property, fundamental indices, commodities and offshore equities. This is only the tip of the iceberg and if our ETF market were to follow the innovations in the global ETF industry we can expect to see many more offerings in time to come.

Asset allocation and diversification form a great deal of the decision making in portfolio management. Effective diversification involves mixing certain assets in such a way that the overall risk of a portfolio is minimised without sacrificing (or trying not to sacrifice) potential returns of the portfolio. This is achieved by blending assets or

asset classes that have a low correlation to one another in an attempt to ensure smoother, more predictable returns. Quite simply it is the old adage of “don't put all your eggs in one basket”. ETF's offer investors a means of gaining exposure to certain asset classes (through indexes) cheaply and quickly (efficiently).

Because ETF's are passive investments (i.e. there is not an asset manager actively trying to outperform a benchmark of sorts) that merely try to track the performance of a broad index, the costs involved in managing the ETF are lower than that of actively managed unit trusts. You can therefore gain exposure to a particular asset class at a fraction of the cost. This could be the strongest reason for the products' growing popularity in the retail and institutional space in South Africa. The passive versus active management styles have been debated for ages and one of the strongest arguments in favour of the passive management style is cost. Essentially you pay extra to an active manager in order for them to hire top talent and pay for research that will enable them to make investment decisions that may result in outperformance of an index or benchmark. Active managers can therefore purposefully deviate from weightings of an index they are trying to outperform and can be under/overweight an industry (industrials vs resources) or a particular stock (Billiton vs Anglo's). When it comes to active management you pay extra for the manager's prowess and superior investment knowledge. If you purchase an ETF you will never outperform the continued on page 22... sensible finance november11

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SENSIBLE ADVICE

I have group life cover so I don't need life cover, right?

WRONG! Ensure that your deceased estate does not become insolvent . By Natalie Dillon, Senior Legal Advisor Old Mutual Broker Division.

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n the first quarter of 2010, I wrote an article entitled “Who receives my pension benefit when I die?� I covered the workings of Section 37C of the Pension Funds Act (PFA) and explained that the trustees of a pension fund exercise their discretion in determining who receives the benefit that is due from one's retirement fund at death.

Section 37C of the PFA contains a general rule that provides that if, within 12 months of the death of the member, the fund becomes aware of a dependant(s) of the member, the member's benefit must be paid to such dependant(s) in a manner that the trustees deem equitable (Note: if a retirement fund's rules specify a benefit that pays to a spouse or child, such benefit is not subject to the discretion of the trustees).

A 'dependant' is defined by the PFA and includes a person = whom the member is legally liable to provide maintenance for; = whom the member is not legally obliged to provide maintenance for, but # that person is factually dependant on the deceased member (for example, an elderly parent who is financially supported by their child); # who is the spouse of the member; # who is the child of the member = in respect of whom the member would have become legally liable to maintain had the member not died.

Often overlooked is that fact that your group life cover may also be subject to the provisions of Section 37C.

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Group life cover is generally provided as part of your employment benefit and in most cases is provided in terms of the rules of the particular fund that you are a member of. For example, the rules may provide that at death, your beneficiaries are entitled to an amount of group life cover that is equal to a certain multiple of your annual salary.

If this is the case, one needs to understand that this benefit is subject to Section 37C which means that, as with your retirement benefit, the trustees will exercise the discretion afforded to them and may pay the proceeds to those parties that qualify as a 'dependant' and not to the beneficiary that you have nominated. The trustees will also decide to pay the benefit as either a lump sum or an income.

The provisions of Section 37C override any beneficiary nominations – the trustees may take them into consideration in exercising their discretion, but there is no obligation to honour them as they are bound by the overriding legislation.

This means that while you may have a significant amount of group life cover in place, it will probably not pay to your estate to be used to settle liabilities, pay taxes (Estate Duty, CGT etc) and provide the cash needed to cover funeral and other costs; it may also not pay to the person whom you have nominated as a beneficiary.

So, REMEMBER that having group life cover does not mean that you do not need life cover.

Make sure that your financial advisor analyses your estate and, most importantly, ensure that you have sufficient cash available to prevent your deceased estate being insolvent.

SENSIBLE PLANNING

The Important Role of Executor

By Debi Godwin, Director - Independent Executor & Trust.

Whom Should You Appoint to Settle Your Estate?

Does your spouse REALLY want to take on the role of executor of your will? Probably not...

When our time on earth comes to an end, it is seldom planned or timed to suit us. One way of leaving our loved ones able to recover from the trauma of our loss is to have a current will. The winding up of an estate can be a lengthy and unnecessarily traumatic experience for those left behind. We have all heard the whispers about the way that Jackie or Jim was treated by the executor.

Before you appoint someone to the role of executor in your Will, you should at least be aware of what is involved. It may not be fair to burden a surviving spouse with decisions and responsibilities during a very difficult time period. Bad financial decisions and family conflict might be the end result.

be distributed; and * Pay debts and file the final tax return.

It should be fairly obvious from the above that the role of executor in winding up an estate is not necessarily a simple task. Bear in mind that a surviving spouse may find relatively routine decisions difficult to make in the weeks and months following the death of a life-long partner. It is also important to note that a competent, professional executor will be able to finalise the estate more speedily than a novice. Professional executors often have good working relationships with staff at the various Masters' offices around the country.

These offices are generally overloaded with work and under-staffed, and they are unlikely to have much patience with a bumbling, novice executor.

It is quite common for an estate to take up to a year to be finalized, even with an efficient executor on board.

What is an Estate?

A deceased's estate consists of assets and liabilities (including borrowings and sureties signed) at the date of death. The administration of an estate is the process whereby liabilities are settled and expenses paid, with the remainder of the assets being transferred to the nominated beneficiaries.

The executor is the person responsible for the administration of the deceased estate. His or her appointment is approved by the Master of the High Court, who is also ultimately responsible for ensuring that the executor performs the required functions appropriately.

What can you do now to prevent future complications?

Firstly, ensure that your Will is up-to-date and as simple as possible. Communicate your intentions to your immediate family and ensure that they know where your original will is and where your other important documents are located. Ensure that your spouse has some accessible funds of their own in their own bank account. Spend some time discussing your financial affairs with your immediate family, especially if they are complicated.

Then apply careful thought as to whom to appoint to the role of executor of your will. A professional executor may save much time and hassle, and can be well worth the fee. It would also be an option to appoint your surviving spouse to the role of executor together with a professional.

The professional will no doubt do the bulk of the work, but at least your spouse will feel included and can bring important family issues into consideration.

What are the duties of an Executor?

In general detail, this is what needs to be done.

In brief, the functions of the executor are to: * Control and protect the assets in the estate; * Identify heirs and ultimately distribute the assets to them; * Draw up accounts that reflect all assets, claims against the estate and how the residue (if any) will

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

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SENSIBLE ALIGNMENT

An investment view on MMI Holdings Limited (MMI)

By Rob McIntyre, CA (SA), Portfolio Manager - NVest Securities.

MMI HOLDINGS

METROPOLITAN

ĂŽĂ?

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MOMENTUM

n this article we continue discussing the core

dividend growth portfolio.

equity holdings in many of the portfolios that we manage and today we deal with MMI.

The Group CEO recently indicated that MMI is carrying excess capital over the regulatory minimum, which is a good indication of solid financial strength and could lead to excess cash being returned to shareholders should good use not be found for it. The group has previously bought back shares and paid out special dividends. While an investment case should not be made on the promise of excess returns of cash, any such action should bolster returns.

The group continues to attract new flows into its businesses, and while this could be volatile going ahead, the recent results present a well managed business that appears to be growing and performing to expectation. The CEO has indicated that merger benefits are expected as the businesses are integrated. Any merger comes with some execution risk, but given the mature manner in which the process has been handled to date, and the fact that MMI has cornerstone investors like Remgro, who were instrumental in cobbling together MMI, we believe that there is limited risk of the merger unravelling.

We believe that MMI's businesses are well aligned to the desirable segments of the market and that with its empowerment credentials it should continue to attract mandates for fund management and medical aid and pension fund

MMI was formed from the merger of Metropolitan and Momentum in December 2010 and is the third largest listed life insurer in South Africa with a market capitalisation of R24bn. MMI services the life and investment markets, fund management and medical aid administration fields. It caters both to the individual and corporate market. It operates in South Africa and has a relatively small African business that operates in select African countries.

Metropolitan has been a listed company for many years with a good track record of steady growth both in earnings and dividends and Momentum was demerged out of FirstRand into the combined group.

At the ruling price of R16.10 per share on 6 October 2011, MMI trades at a 15.8% discount to its embedded value of R19.12 at 30 June 2011 and is on a forward price earnings ratio of 8.7 times and a forward dividend yield of 6.3% (tax free). The importance of the dividend has been a constant feature of the old Metropolitan group and following the recent release of MMI's results to June 2011, all indications are that the current dividend policy will continue into the future. In the current uncertain investment environment, this dividend yield is a source of great comfort and earns MMI's inclusion into any well balanced general equity portfolio, with a suggested weighting of 5-10% depending on the risk profile. MMI is also a contender for equal weight inclusion into a

administration. It is also conceivable that MMI will play an administrative role in the new National Health Insurance that Government seems intent on rolling out over the next decade. sensible finance november11

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RETIREMENT: LET THE NUMBERS DO THE TALKING Will your savings be sufficient for your retirement? Written by Samkelo Zwane, Solutions Specialist at Glacier by Sanlam

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bout 46% of people approaching retirement believe they have saved enough for their retirement. However, only 26% of retirees actually do retire with enough savings to allow them to retain a standard of living comparable to what they enjoyed while working 1.

Is it that retirees do not know how much they should have saved to retire comfortably or is it because retirees simply do not start early enough to save for retirement?

This article will shed some light on some of the issues mentioned above. The needs of the investor in retirement determine how much he should save for retirement. Categorising the needs into essential and non-essential varies from one investor to another. Your income in retirement should cover both essential and non-essential needs.

Due to the fact that retirees' needs differ and that retirement planning is over a long time horizon, it is difficult to quantify the needs of a retiree in advance. The solution is to compare your income after retirement to your income before retirement.

This is called the replacement ratio.

Replacement ratio =

Income after retirement Income before retirement

The rule of thumb is that in order to retire comfortably you have to aim for a replacement ratio of 70% to 80%. The fact that this ratio is less than 100% is based on the assumption that the retiree's expenses will be lower in retirement.

Although certain expenses such as medical care may increase, other expenses such as the costs of raising children (food, clothing, education, etc.), bond repayments and other such expenses will ordinarily fall away. Of course, if the retiree will still have some of these expenses, the required replacement ratio will be higher.

The question remains - how much do you have to save on a monthly basis in order to replace 70%, 75% or 80% of your pre-retirement income? The result will be greatly influenced by the time you start saving for retirement, the return you earn on your savings and the interest rate at the time of retirement.

For starters let's assume that you start saving for retirement at age 30, will retire at age 60 and you save 21% of your gross pre-retirement income.

Further assume that you are earning R340 000 gross pre-retirement income. Assume that the long term inflation assumption is 5% per annum and the long 1

Retirement survey statistic from Old Mutual

term investment return is 8% per annum (Inflation+3%).

Replacement Ratio Savings per month

70% 21%

75% 22.5%

80% 24%

100% 30%

Calculation based on male lives. Female lives should expect to save more to meet the same replacement ratio as a male.

The difference between replacing 70% of your preretirement income and replacing 80% of your preretirement income is an extra 3% of savings per month. If you wanted to replace 100% of your preretirement income you would have to start saving an extra 9% compared to someone who is aiming to replace 70% of pre-retirement income.

What will be the fall in your replacement ratio if you delay saving? The table below gives an idea of the drop in your replacement ratio if you delay saving for retirement by 5, 10, 15 and 20 years. It is assumed that the individual will save 22.5% of his gross pre-retirement income per month until he reaches retirement age of 60.

Age at which you start saving Replacement ratio

30 75%

35 58%

40 43%

45 50 31% 20%

Calculation based on male lives. All things equal, female lives should expect a lower replacement ratio.

The average drop in the replacement ratio will be 3% for each year of delay. You have to save an extra 2% per year for each year you delay saving for retirement. If you start saving for retirement at age 40 you will have to save 42.5% of gross income in order to replace 75% of you pre-retirement income. This is almost half your income. Most retirees will find this impossible to achieve. A rand in your retirement savings today is better than a rand in your retirement savings tomorrow. The earlier you start saving for retirement the earlier you will earn interest on your savings. In this way you can target obtaining a higher replacement ratio.

References: - Samkelo Zwane and Danelle Van Heerde.

Optimising a client's post retirement portfolio using the Four Box Strategy. Retirement Matters - R. E. Dorrington and S Tootla. South African Annuitant Standard Mortality Tables 1996-2000 (SAIML98 and SAIFL98). South African Actuarial Journal

SENSIBLY PREPARED

DEFECTIVE DESIGN OR CONSTRUCTION CAN CAUSE CLAIM REJECTION Ensure when buying a home that you have it thoroughly inspected sourced from FA News, www.fanews.co.za

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erewith an article, courtesy of FA News, which is particularly relevant in light of the heavy storms in East London on July 5th

2011.

Homeowners should not confuse an insurance contract with a guarantee or warranty. If there is a defect in the design of your home or it is poorly constructed, or both, your insurance claims may be rejected.

Insurance is there to protect you against any sudden or unforeseen events. It is not a contract to pay for maintenance work on your home, or to “fix damage resulting from defective design, materials or workmanship”, the article goes on to say.

Upon receiving a claim it is standard procedure for insurers to investigate the cause. If poor workmanship, defective construction, or defective design is identified as a significant factor in causing the damage, the claim may well be rejected.

For example, if your boundary wall was defectively built your insurer will be entitled to reject the claim. This would be the case even if the event that destroyed the wall was “sudden and unforeseen.” So, “regardless of whether a freak storm or flood destroyed the wall, if it was poorly designed or built, the insurer would be unlikely to pay out” cautions the article.

Common causes of a claims rejection can include: ! Tiles lifting due to poor adhesive; ! Tiles cracking due to insufficient spacing preventing normal expansion and contraction; ! Retaining or boundary walls not built to regulation, for example single course brick walls built higher than 1.8m without either supporting piers, weep holes, brick force or adequate foundations;

! Inadequate roof pitch preventing water flowing freely off the roof. Water pooling on the roof will penetrate buildings causing damage; ! Houses built against slopes without underpinning or adequate compaction supporting the foundation, allowing movement and causing cracks; ! Poorly damp proofed foundations allow rising damp to gradually penetrate the building.

So, if you are buying a home, make sure that you have it thoroughly inspected. You need to know if any one of the structures is not built to regulation and what it will cost you to remedy the situation.

The article goes on to say “To avoid claims being rejected at a later stage, your safest course is to check first before you buy and if you are going to do alterations, use approved providers at the outset”.

“It is better to know and remedy your risks up front before damage becomes a problem, or you try to off-set damages on your insurer”.

Even though building regulations have been in force for about 60 years, structures like boundary and retaining walls are still routinely built without compliance.

As such it is important that homeowners ensure that the contractors they appoint to carry out maintenance or construction work are properly qualified, have the necessary certificates and come highly recommended.

Please contact Tony Gray, Steve Pope or Richard Clarke for all your Short Term Insurance needs or queries on 043 – 735 2000

insurance brokers (border)(pty)ltd.

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SENSIBLY DIVERSE

ETF's should you have any? ... continued from page 15 market, if anything you will slightly underperform because of some of the frictional costs. There is therefore a risk of structural underperformance in the ETF space.

The decision between active and passive management lies with whether the market you are dealing in is efficient or not (or whether you believe the market is efficient or not). What we mean by efficient is that, in most part, investors are rational, risk averse and prices reflect all past and present information correctly. If this is the case, there is no additional information that you can act on that will set you apart from the market because the market has exactly the same information and will act in exactly the same way because investors are rational. Efficient also means that all investors analyze investment decisions in the same manner and therefore come to the same conclusions and act on those conclusions forcing market prices to reflect all known information. Efficient means that active management will not result in consistent, long-term outperformance, and therefore a passive investment strategy is better suited. NFB Asset Management believes that investors are not rational and are not risk averse (they are loss averse).

In the present day and age more and more emphasis is being placed on liquidity, tradability, flexibility, accessibility, transparency and so on.

ETF's are the closest to offering all of these things. In order to buy into an ETF all you need is a brokerage account. As previously mentioned, ETF's are traded like shares on the JSE and can therefore be bought and sold anytime during the trading hours of the JSE. This differs to normal unit trusts that are priced only at the end of the day. Market makers stand ready to sell units to you should you want to buy and they will buy back the units from you should you want to sell. Because of this, ETF's tend to trade close to net asset value though there are times when the net asset value deviates from the listed price. Like any share on the JSE, prices are updated throughout the trading day and the ETF issuer discloses the underlying portfolio of shares on a daily basis. This makes the product extremely transparent.

One of the most important features of an ETF is that it is a great means of diversification. When you buy an ETF you are buying all the securities that

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make up a particular index. The ongoing rebalancing of the underlying securities is handled by the ETF provider and this is why you pay them a small fee. Diversification is good, but over diversification means you diversify away from your opportunity of outperforming the market.

When considering including an ETF in your portfolio you need to ask yourself what purpose the ETF is going to serve in the overall objective of the portfolio. Like anything there are pros and cons that need to be weighed up. If you sell all of your existing investments and buy ETF's what you are saying is that no one can outperform the market and therefore the market is the highest return you will receive over the long term (any outperformance is based on luck). Although ETF's are well diversified, they still carry the same underlying risk attributes of the particular asset class the ETF is tracking. An ETF that tracks an equity index will therefore behave similarly to any other equity investment. Understanding the securities that make up the ETF is very important. For example, the Satrix 40 portfolio tracks the ALSI/JSE Top 40 index which is dominated by two resource stocks - Anglo's and Billiton - that make up 28% of the index.

Investing according to your risk profile is still the name of the game. That involves appropriate asset allocation which many believe is more important than individual security selection or market timing.

ETF's are a cheap and effective way of asset allocating, but you still require the necessary portfolio management skills to do just that. The development of the ETF industry in South Africa will be an interesting affair. In the overseas market there are already ETF's that are managed in such a way that asset allocation is done for you by a professional manager. The market for ETF's will continue to grow and will form a greater part of investment decisions. ETF's are an effective portfolio management tool, but active management still forms a big part of our investment strategy. That is because of our belief that humans are not always rational and markets are not always priced correctly. Because of this fact we will continue to seek out those asset managers whom we believe have the capabilities and necessary skills to outperform.

SENSIBLE INSIGHT

INSIGHTFUL TO UNDERSTAND HOW GLOBAL ASSET OWNERS ARE CHANGING PORTFOLIOS Shifting to an emerging market and global equity approach. By John Green, Head - Global Client Group - Investec Asset Management

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s investors and their advisers come to grips with asset allocation against the backdrop of a highly volatile and uncertain global environment, John Green, Head – Global Client Group at Investec Asset Management, suggests there are valuable insights to gain from understanding how the large global asset owners such as sovereign wealth funds and large pension funds are changing their portfolios and the likely impact this will have on money flow and asset pricing.

Green serves Investec Asset Management's growing global client base and engages with institutional asset owners around the world. Of the R640bn in assets under management, approximately half is from clients in Africa, 36% from the UK, the Middle East and Europe, 7% from the Americas and Japan and 5% from Asia and Australia.

According to Green large asset owners are grappling with three key issues. “Firstly, with the outlook for many of the traditional asset classes being neutral to negative, the question of investment growth dominates their thinking. How and where are they going to generate returns for their stakeholders in the next decade?”

With growth the scarce commodity, Green believes assets and investment strategies that have strong growth potential are, and will be, receiving a lot more attention. “Right or wrong, emerging market equity has become a big focus. More importantly, we are seeing a shift from domestic, home-biased equity to a more global equity approach, as asset owners recognise that they need the broadest possible opportunity set to find returns and that they need to leverage the skill of their managers more effectively.”

This move away from home bias is evident in the net sales of mutual funds by strategy in the US and Europe between 2005 and 2010, which show both foreign (global) equity and emerging market equity funds in the top five.

One outcome of this globalisation of portfolios is the move from the MSCI World Index – which has 0% emerging market representation – as the

preferred benchmark to the MSCI All Countries World Index, which has 13% emerging market representation. “With the subsequent adjustment of allocation to emerging markets, the consequences for investment flows are far reaching,” Green believes.

Other areas that are garnering increased attention in the pursuit of growth from global asset owners are frontier markets, such as those in Africa, hedge funds and specialist global equities.

The second theme dominating thinking, Green says, is the question of inflation. “Is inflation a threat or not? The inflation debate is building, with many asset owners taking proactive steps to address the potential for meaningful inflation increases and they are doing so by adding assets to portfolios that have strong inflation-protection characteristics.”

According to Green this has also translated into increased demand for real assets like commodities and resources, real estate and infrastructure.

Finally, asset owners are rethinking their fixed income exposure. “To borrow a term, what is the 'new normal' in fixed income? The days of allocating the bulk of your fixed income exposure to developed market sovereigns is rapidly disappearing,” Green says.

Asset owners have had to adapt to be more inclusive of new fixed income thinking, which has resulted in some fundamental shifts in fixed income portfolios, Green explains. “Currency exposure has become a far more important consideration, and global portfolios are now likely to have a much more explicit currency component. Furthermore, as the search for yield intensifies, local currency emerging market debt and high yield strategies are becoming an ever larger component of global portfolios,” Green said.

With South Africa's position as one of the most developed and liquid capital markets in the emerging market universe, the impact on fixed income and the currency will be significant, he concluded.

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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: The last year has seen some major turmoil in financial markets. As a nervous investor, what should I be doing? If things are looking bad, is it not an idea for me to get out into safer assets like cash and then get back in when things are improving?

A: MYes, it has been very volatile on the world markets. The most important thing that an investor needs to do, is not to panic! Making a rash decision based on factors that happen as fast as they have, can lead investors into locking in losses.

Your strategy of moving into safer assets can work, but your problem is trying to time it right on the way back into the market when it recovers. As fast as the market can fall, so it can recover. If you miss the recovery, then once again you have locked in the losses made in the beginning.

A better approach would be to asses your investment strategy and risk profile. Make sure your portfolio is diversified across various assets so that you have some protection should one asset class lose value. Should one asset class be very volatile then you may want to trim the exposure to this asset, but not get rid of it completely. The same applies when the same asset shows big growth in the short term. It will lead to your portfolio being overweight this asset and again you would need to trim the exposure to bring it in line with exposure that you were originally comfortable with and that suited your risk profile.

When things are volatile like they have been it is often a test of one's true risk profile character and how much risk you are actually prepared to take on. When this happens it is often a good time to revisit your risk profile and investment strategy with your financial planner.

Inflation is the enemy and the only way to beat it is to have a portfolio that has some exposure to

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growth assets such as equities and property. These tend to offer better inflation beating returns in the longer term, but can be very volatile over the shorter term. Currently the inflation rate is very close to what current interest rates are so your real return is almost negative if you are just holding cash. We understand that certain investors cannot stomach too much risk in their portfolio, so it is important to match the risk levels and asset allocations to the client's needs and profile. Unfortunately, no return comes without an element of risk. There is a price to be paid for taking on risk and that comes in the form of the return you achieve and the volatility that comes with it.

Once you have established your true risk profile you will be able to structure an investment portfolio that will suit your requirements. A lot of the unit trusts and managed portfolios have mandates that will try and preserve capital whilst trying to achieve inflation beating returns. These cautious to moderate risk portfolios are often best suited for those investors who do not like taking on too much risk, but do need a return that is better than cash or inflation. In these portfolios the asset manager will actively allocate funds to the investments that are best suited.

Don't panic. Speak to your advisor and make sure your portfolio is diversified and correctly structured to meet your needs and matches your appetite for risk. The world is in a tough place right now, but it is still turning and things will recover -and when they do you still want to be participating.

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

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: nvest@nvestsecurities.co.za

www.nvestsecurities.co.za

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;

Duncan Wilson (BCom Hons, CFP®) – Private Wealth Manager, 4 years experience;

Andrew Kent (MIFM) - Executive Director and Share Portfolio Manager, 16 years experience;

Glen Wattrus (B.Juris LL.B CFP®) – Private Wealth Manager, 14 years experience;

Walter Lowrie - Private Wealth Manager, 26 years experience;

Leona Trollip (RFP™) - Employee Benefits Divisional Manager and Advisor, 35 years experience;

Robert Masters (AFP™, MIFM) - Private Wealth Manager, 26 years experience; Bryan Lones (AFP™, MIFM) - Private Wealth Manager, 20 years experience; ®

Travis McClure (BCom, CFP ) - Private Wealth Manager, 12 years experience;

Leonie Schoeman (RFP™) - Healthcare Divisional Manager and Advisor, 14 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.

Marc Schroeder (BCom Hons(Ecos), CFP®) -

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