Key Investment Themes How will the next 3 years play out?
Walking on Egg Shells Will your nest egg hold out?
2011
budget speech Was Pravin Gordhan’s 2011 Budget a Neutral One?
financial adviser mouthpiece MARCH 2011
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contents
12 Budget speech 2011 14 A neutral budget? 34 Investment themes: 3-year forecast 26 Will your nest egg go the distance?
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20 Navigating short-term insurance 22 Unpacking living annuities 24 How to weather the financial storm 28 Let the experts advise you 30 Roadblocks to financial success 32 Stock insight 36 RMB small/mid-cap fund 38 Save, Save, Save
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24 I t i s t im e to cha n g e t h e mi n d s e t o f v i e w i n g l i f e i n s u ra n c e a s s h o r t - t e rm i n s u ra n c e , a lway s g o i n g f o r t h e lo w e s t p o s s i b l e p r e mi u m d u e to t h e p e rc e p t i o n t hat a p o l ic y o n ly s tay s o n t h e b o o k s f o r a s h o r t p e ri o d.
MARCH 2011
contents I t ta k e s l e s s t ha n 15 mi n u t e s f r o m Sa n dto n to t h e air p o r t, 12 mi n u t e s f r o m R h o d e s f i e l d to Sa n dto n a n d a b o u t f o u r mi n u t e s f r o m Mar l b o r o to Sa n dto n . I t t rav e l s at s p e e d s o f u p to 160 k m / h w i t h q u ic k s to p s at s tat i o n s .
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Get where you are going on the Gautrain
42 Regulatory examinations 46 Cultivate a healthy bank balance 48 Foster child legislation 52 The argument for structured products
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54 One on one with albert roux 56 Momentum asset consulting
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From the editor
10 Foreword: CEO 16 Travel guide 17 Revved up 18 Cutting edge
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19 Taste test
Th e M oto r o l a AT R I X 4 G i s d e s i g n e d to b e c o m e a u s e r ’ s p rimar y d i g i ta l h u b to cr e at e , e d i t a n d i n t e rac t w i t h d o c u m e n t s , m e d ia a n d c o n t e n t. Thi s i s faci l i tat e d b y M oto r o l a’ s w e b to p a p p l icat i o n a n d i n cr e d i b l e n e w acc e s s o r y d o c k s
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MARCH 2011
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Letter from the editor
Welcome back! Alisea Ann Chetty Financial Adviser media schedule: Highveld Dates: 14th March – 11thApril (alternative weeks) Times: Between 06:00 – 09:00 and 16:00 – 19:00 Jacaranda Dates: 21st March – 18th April (alternative weeks) Times: Between 06:00 – 09:00 and 16:00 – 19:00 East Coast Dates: 14th March – 18th April (every week) Times: Between 06:00 – 09:00 and 16:00 – 19:00
Although most of us have probably forgotten our New Year’s resolutions already, the new year has brought about new beginnings for Momentum. February meant it was tax season. Now is the time to get all your financial affairs in order, review your goals and plan for the future. The new year also meant new beginnings for Momentum since the merger was finalised. And in that vein: change seems to be knocking on our doors now more often than not. You asked for it and with this issue, we present a completely changed Momentarily in line with your recommendations and suggestions. So, thank you for taking the time to complete the survey and helping us to help you. In this edition the Budget speech is scrutinised on pages 12-15; Ryan Jameson tackles the thorny issue of living annuities on page 22, while there is more to read on investment characteristics and stock insights from a banking giant, and for a look at the core share portfolio, read Nesi Chetty’s article on page 32.
With the hype around the banking enquiry still going on, the Competition Commission released its programme of action as well as the guidelines on submission to the enquiry. We also release the food price trends as compiled by NAMC for this quarter; and there is more to read about why the high court granted the FSB’s application to place an assets management company under curatorship. To kick off the year, Momentum has embarked on a national, above-the-line campaign focusing on the importance of a broker! Read more in the press or even tune in to this while driving on the highway! For more information see page 10. MDS gets social: Don’t forget to add Bertus Visser on Facebook and follow Momentarily_MDS on Twitter! There’s a lot to read, so enjoy this edition.
Alisea Chetty
OFM Dates: 14th March – 18th April (every week)
Press:
Week starting
Times: Between 06:00 – 09:00 and 15:00 – 19:00
Publication
28/2 7/3 14/3 21/3 28/3 4/4
KFM
Naweek Beeld-Sake 24
5
12
19
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Die Burger (Sat)-Sake 24
5
12
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26
2
9
Sunday Times-Bus Times
6
13
20
27
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10
Personal Finance
5
12
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26
2
9
Sowetan
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25
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Dates: 14th March – 18th April (every week) Times: Between 06:00 – 09:00 and 16:00 – 19:00
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Now is the time to ge t all your financial affairs in order, review your goals and plan for the future.
Foreword
Walking the extra mile
with a financial adviser
Bertus Visser CEO: Momentum Distribution Services The main objec tive is to educate and promote the value of financial advisers. This can be a rather daunting decision, but choosing an appropriate financial adviser provides best results
PUBLISHER Bernard Hellberg bernard@tcbgroup.co.za EDITOR Alisea Ann Chetty alisea.chetty@momentum.co.za +27 12 671 8565 MANAGING EDITOR Nicola Weir nicola@tcbgroup.co.za DESIGN & LAYOUT Aneska Meintjes aneska@virtualdavinci.co.za Language Sugnet Kannemeyer Distribution Lebogang Tefo
The dust has settled after the successful soccer world cup in South Africa, while another spectacular cricket world cup opening ceremony greeted us in 2011. Through this we see that the only constant in today’s world is change. Momentum Distribution Services (MDS) believes that a financial adviser is the core pillar of our business, and we understand that the Conflict of Interest came into force last year and that financial advisers must now complete the regulatory examinations before the end of this year. With the legislative challenges and companies promoting their ‘above-the-line’ advertisement campaigns to cut out the middleman and thus save on commission by going direct, we want to stand up for the financial adviser. MDS has embarked on a national abovethe-line advertisement campaign, which means that adverts have been placed on radio, in the press and on billboards. The core message of the campaign is that financial advisers take the complicated and make it simple. It is important for clients to understand that there is a variety of choices out there and only a qualified financial adviser can help them. It can be a rather daunting decision, but choosing an appropriate financial adviser provides best results, because you get: • the most appropriate financial plan for your needs, • expert mentorship through the adviser’s ability to handle complex financial questions, • industry-related qualifications that allow them to give you relevant advice, and • a solid relationship with someone who knows your risk and can represent you through your life.
SALES MANAGER Estelle van der Westhuizen +27 84 821 7257 estelle@tcbgroup.co.za REPRODUCTION Virtual Da Vinci Creative Room +27 12 425 5800 info@virtualdavinci.co.za www.virtualdavinci.co.za IMAGES © iStockphoto.com PRINTING Business Print Centre, Pretoria CONTRIBUTORS TO THIS ISSUE Anthea Mara, Evan Walker, Francois Tranter, Frank Magwegwe, Ferdi van den Berg, Lee-Ann du Toit, Mickey Gambale, Nesi Chetty, Pieter Erasmus,
Regardless of which income base clients fall into, financial advisers are available to assist them with their specific needs. Jeffrey Wiseman, Head of Financial Solutions, MFP, said that in his view, he completely agrees with the campaign and the concept, since financial advisers do take the complicated and make it simple. “The intention of the conflict of interest legislation is to support and get behind the financial adviser. The conflict of interest has challenged how product advisers give out advice and shows how they previously conducted business. I want to highlight the value advisers add and show how they are able to walk clients through the process of getting good financial advice. Most financial advisers operate with the client’s best interest at heart, however others just offer basic and general advice to all their clients.” Wiseman said. So tune in to Highveld, Jacaranda, East Coast Radio, OFM, KFM and Talk Radio 702. See our campaigns in the following newspapers Naweek Beeld-Sake 24, Die Burger - Sake 24, Sunday Times-Bus Times, Personal Finance as well as The Sowetan. In addition to this, we have allocated billboards in the following areas: Polokwane – Ivy park, Upington at the airport, George at the airport, Kimberley in McDougle Street, Bloemfontein at the airport, Nelspruit at the corner of Ferreira and Henshall Streets, East London near the Old Selbornian Club, Port Elizabeth, at the Southern Freeway in Durban, on Loveday Street, Johannesburg M2 East, on Faraday Johannesburg M2 West, N1 Zambezi Drive – Pretoria North, and at the airport in Cape Town. For more information on the campaign, e-mail me: MDSCEO@momentum.co.za
Bertus Visser
Professor David Abdulai, Ryan Jamieson, Sheshi Kaniki, Alisea Chetty, Pierre Jean Marais, Financial Services Board, Albert Roux, Gordon Smith AFRICAN SPIRIT MEDIA / TCB GROUP 343 Lynnwood Road, Lynnwood, Pretoria, 0081 Tel: 021 876 3137 Fax: 0866 790 006 mail@tcbgroup.co.za www.tcbgroup.co.za Momentum Head Office: +27 12 671 8911 268 West Avenue, Centurion, Gauteng, 0157 www.momentum.co.za Momentarily is a quarterly publication for financial professionals. This edition of Momentarily will be published on our intermediary website www.mdsonline.co.za and on www.momentarily.co.za. Please note that in this publication, the terms financial planner and financial adviser are used interchangeably – both meaning a professional who renders investment advice and financial planning services to individuals and businesses.
Momentarily magazine is published monthly by African Spirit Media, part of the TCB Group, on behalf of the Momentum Group. Opinions expressed in this publication are not necessarily those of African Spirit Media, the TCB Group, FirstRand, MMI Holdings, the Momentum Group, or any of the subsidiaries of the aforementioned companies, their strategic partners or their clients. Information has been included in good faith by the publisher and is believed to be correct at the time of going to print. No responsibility can be accepted for errors and omissions. No material (articles or photographs) in this publication may be reproduced or transmitted, in whole or in part, in any form by any means electronic or mechanical, including a storage and retrieval system, photocopying or recording without prior written permission of the Editor. Submissions of articles and photographs for publication are welcomed, but the publisher, while exercising all reasonable care, cannot be held responsible for any loss or damage. Please ensure that all material is sent by email to alisea.chetty@momentum. co.za. Copyright © 2011. All copyright for material appearing in this magazine belongs to African Spirit Media, part of the TCB Group, and/or the individual contributors. All rights reserved.
Budget speech 2011
Budget
addresses challenges of job creation and education
This article provides a summary of key issues raised in the 2011 Budget. It focuses on the economic outlook, employment, fiscal policy and tax proposals, as well as social security and healthcare reform. The 2011 Budget was tabled in the context of improving domestic economic performance. A day before Finance Minister Pravin Gordhan read the Budget Speech to Parliament, Statistics South Africa released GDP figures for the last quarter of 2010. The domestic economy picked up momentum in the final quarter of last year, growing by 4,4% compared with 2,6% in the third quarter. Minister Gordhan stated that annual growth is expected to increase to 3,4% in 2011 from 2,8% in 2010. Stronger domestic consumption, supported by historically low interest rates are driving South Africa’s recovery. Rapid growth in China, India and Brazil and other emerging economies has resulted in high commodity prices and strong demand for South Africa’s exports. However, the weak recovery path in developed countries and the
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MARCH 2011
sovereign debt crisis in the euro zone, continue to threaten South Africa’s economic prospects in the year ahead. Employment As anticipated, employment creation is the primary objective of the 2011 Budget. This is in line with the Government’s New Growth Path (NGP), which aims to create five million jobs by 2020. The NGP identified six sectors with a high job creation potential, namely infrastructure, agriculture, mining, the green economy, manufacturing and tourism. Only 41% of people of working age in South Africa have a job, compared with 65% in Brazil, 71% in China and 55% in India. To address this challenge, Government is taking a multifaceted approach. The Finance Minister announced the following initiatives to promote job creation: • A R9 billion Jobs Fund over the next
three years to fund proposals from the public and private sectors, and non-governmental and civil society organisations. • The reintroduction of tax incentives of R20 billion for the manufacturing sector for investments with job creation potential. • An allocation of R14 billion for Further Education and Training (FET) and an increase in student financial assistance. • A R5 billion youth employment subsidy set out in a discussion paper for further consideration. Fiscal Policy Prudent management of the fiscus during the period 2002-2007 meant that public finances were in a strong position when the 2008-2009 recession began. This allowed the Government to respond with counter-cyclical fiscal
policy, expanding the social protection net and providing economic stimulus through the infrastructure programme. Declining revenues as a result of the recession necessitated public sector borrowing. Government is committed to ensuring that it manages its debt in a sustainable way. The key fiscal policy features of the 2011 Budget include: • The projected budget deficit for 2011-2012 is R154,8 billion, or 5,3% of GDP. • Tax revenue is forecast to rise from R672,2 billion (25,2% of GDP) in 2010-2011 to R928 billion (26,2% of GDP) in 2013-2014. • The debt-service cost is expected to rise from 2,5% of GDP in 2010-2011 to 2,9% of GDP in 2013-2014. • Expenditure on infrastructure is forecast to decline from 9,8% of GDP in 2010-2011 to 8,1% of GDP in 2013-2014. Social spending is expected to register a steady increase over the period 2010-11 to 2013-2014. During this period expenditure on health, education and social protection is expected to grow by an annual average of 7,5%, 7,6% and 9,0%. Education takes up the largest share of national expenditure, constituting 22,8% of total expenditure in 2011-2012. Spending on social protection will surpass spending on economic affairs from 2011-2012, and will account for the second highest share of total expenditure after education. The modest annual growth in expenditure on economic affairs is consistent with the decline in infrastructure spending.
Social Security and Healthcare Reform There are very few details about social security reform in the 2011 Budget. The latest Government proposals are contained in the consolidated document that is expected to be released during the course of this year. However, there are some important points to note from the Budget: • Government is working to unify the administration of the various social security funds, including the Unemployment Insurance Fund (UIF) and the Compensation Fund. • National Treasury will consult with the public this year on the viability of mandatory preservation upon a change of employment. • Discussions are under way about the future regulation of public sector funds. • During this year National Treasury will also consult with the pension fund industry to draft a code of ethics and to address concerns over high fees. The 2011 Budget is considered to take the first steps towards the establishment of the national health insurance (NHI) scheme. Government has emphasised that the phasing-in of the NHI scheme will be done gradually over 14 years. Steps for the foundation for the NHI initiative include: • R2,9 billion to improve the quality of health facilities, medical equipment and hospital systems. • R1,4 billion to improve district-based maternal and child health services.
Table 1: Government expenditure by function (% of total expenditure), 2010-2011 – 2013-2014
General public service Defence Public order and safety Economic affairs Environmental protection Housing and community amenities Health Recreation and culture Education Social protection
20102011 6,2 4,1 10,1 16,9 0,6
20112012 6,7 4,6 10,9 15,7 0,7
20122013 6,8 5,0 11,8 16,9 0,7
20132014 7,3 5,3 12,6 18,0 0,7
Annual Average 5,8 8,9 7,5 2,1 9,1
12,3
14,7
15,7
16,7
10,7
12,3 0,8 20,8 16,0
13,6 0,8 22,8 17,7
14,5 0,8 24,2 19,1
15,3 0,8 25,9 20,7
7,5 2,9 7,6 9,0
Rapid growth in China, India and Brazil and other emerging economies has resulted in high commodity prices and strong demand for South Africa’s exports. However, the weak recovery path in developed countries and the sovereign debt crisis in the Euro zone, continue to threaten South Africa’s economic prospects in the year ahead. • Funding for the Department of Health to lead the necessary institutional and management reforms. • Expanding the capacity to train medical doctors and nurses. Government will consult on three funding options for the NHI scheme: a payroll tax, an increase in the VAT rate and a surcharge on individuals’ taxable income. Tax Proposals Broadening the tax base is essential if Government is to meet its expenditure objectives in the medium to long term. The main tax proposals include: From March/April 2011 • Revisions to personal income tax brackets and rebates amounting to R8,1 billion in tax relief. • The tax-free lump-sum benefit at retirement will increase to R315 000 from R300 000. • The transfer duty exemption threshold will increase to R600 000 from R500 000. • The turnover tax for micro businesses will only apply to annual turnover in excess of R150 000. • Taxes on tobacco products will increase by between 6% and 12%, while excise duties on alcohol will increase by between 4,5% and 10,3%. • The general fuel levy will increase by 10 cents per litre.
Text: Sheshi Kaniki Senior Economist Momentum Image © iStockphoto.com
MARCH 2011
13
Budget speech: comment
Pravin’s Neutral
Budget
The reading of any annual budget is always awaited with anticipation, because there are usually winners and losers at the end of the day. Indeed, not all constituents in a country are happy when a budget is read because it makes some better off and others worse off. Pravin Gordhan’s budget of 2011 is no exception. However, what can be said in general about this budget is that it is a “neutral budget” because it has tried to satisfy everybody, which is rather impossible.
The main highlights of Pravin’s 2011 budget are: a tax relief of R8,1 billion, a rise in sin taxes, a rise in welfare grants, the introduction of a Youth Employment Subsidy, a huge push for job creation, an increase in the price of fuel, increased spending on infrastructure, a focus on family health, increased spending on education and some spending on municipalities. For me, three major aspects of Pravin’s budget deserve further unbundling, because of their importance to the economic growth and development of the country. First, the threshold for personal income tax in the country has risen from R57 000 to R59 750, with tax relief of 50% benefitting those who earn from R270 000 or less annually, 33% to those who earn R270 000 to R580 000 and 12% to those who earn R580 000 to one million. Second, education has taken the lion’s share of government spending (21 % of noninterest allocation). Specifically, R8,3 billion is for the development of the infrastructure for schools, R1 billion for teacher bursaries and post-graduate students in natural sciences, R9,5 billion for skills development and training colleges and R24,3 billion for the adjustment of teacher salaries, education and skills spending for the next three years. The third and final major aspect of the budget of importance to me is the spending on jobs. The President has already announced setting aside R9 billion in his State of the Nation address for a jobs fund. The budget allocates R14 billion for further education and training colleges as well as for student financial aid, R20 billion for the SETAs
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and R5 billion for the Nation Skills Fund to train job-seekers, the expansion of public work programmes, tax incentives for manufacturing investment of R20 billion amongst others. So what can one make of these three major issues further outlined? First, if one is to critically look at the proposed tax relief, in the end it is not really tax relief. It is more like one hand giving and another taking. Tax relief is given but the fuel price will increase and there will be an increase in sin taxes; and to make up for the 5,3% budget deficit projected for 2010-2011 and 2011-2012, the VAT rate will go up. Thus, the tax relief that was to benefit the tax payer will be blunted. If the effort here was to help the poor, the implicit “regressive tax” that VAT comprises and the impact on the budgets of the poor due to fuel price increases will be missed. True tax relief therefore will not be achieved if such was the goal. Education Spending The proposed spending on education should be lauded. In the current knowledge economy that we are in, an education creates the requisite knowledge workers that offer the country the competitive advantage that it needs. Emphasis in the budget on education is therefore welcome. The concern, however, is the effective utilisation of these resources to achieve this laudable goal. Moving forward accountability, the implementation of effective monitoring and evaluation systems should be put into place. Above all, people should be held accountable for the effective delivery on this goal. But what should also be clear to the government is that the benefits from investments in education are not going to be realised overnight. It might be decades before such benefits become reality. Another major aspect of the budget that I want to comment on is the creation of jobs. I tend to believe that governments in general are lousy at the business of job creation. The effort to create jobs should, in my opinion, only be for the short run. In the longer term, government’s role must be to create an environment in which businesses can grow and thrive, particularly small businesses. For example, small businesses account for about 52% of all U.S. workers according
to statistics by the U.S. Small Business Administration. The same can be done in South Africa to ease the jobs challenge. The budget acknowledges that but has not given specifics on how to contribute to make this sector an engine for the growth of jobs in the country. Policy should have resulted in the budget providing tax incentives, the creation of small business incubators, innovative grants and awards for small businesses, among other measures, to contribute to the growth and sustainability of small businesses in the country. They will in turn contribute to job creation in the economy, which will contribute to solving the jobs challenge. Related to this point is putting in place the requisite structures or policies informed by a reasonable budget to create a conducive environment and the streamlining of labour laws, as well as investment and ancillary laws to increase foreign direct investment into the country, which will contribute to additional job creation. Knowledge economy What was also missing in the budget is the provision of resources for South Africa to move towards becoming a knowledge economy. South Africa’s growth is mostly from natural resources, which are finite. With the good infrastructure and infostructure that we have in South Africa, policy should have informed the budget to make at least some efforts to drive the country in the direction of a knowledge economy. Small countries with limited resources like Singapore and Malaysia have shown that this is not impossible. In fact, the goal of creating quality jobs can best be achieved if the country was to move towards a knowledge economy. Yet, such efforts are missing in the overall development and growth path debate currently raging in the country. What is also of worry is that the debt service of the country will rise to R77 billion next year and to R104 billion in 2013/14. The current debt burden is regarded as moderate. But the concern is that the present budget deficit will push debt services to rise faster than general spending in the years ahead. Such a scenario is not healthy for an economy just emerging from a recession. The growth at this point is fragile and gains achieved so far can slip.
in the end it is not really tax relief. It is more like one hand giving and another taking. Tax relief is given but the fuel price will increase and there will be an increase in sin taxes Some aspects of the budget that enthuse me are the measures the government is putting in place to combat fraud and corruption in the public procurement system through supplier collusion and tender-rigging, which has a direct impact on service delivery. The requirements put into place by government that now mandate government departments to establish rigorous demand management procedures are a step in the right direction. Benchmarking such demands to international standards and the requirement of companies bidding for tenders to disclose the identity of their directors or their tax non-compliance are also steps in the right direction. inspirational budget In a nutshell, the budget of 2011 is, in my opinion, an inspirational budget, which according to Pravin envisions “a country where millions more South Africans have decent employment opportunities, which has a modern infrastructure and vibrant economy and where the quality of life is high.” For sure, this vision is not going to be achieved by the reading of one budget but by the reading of numerous future ones which will build upon those that came before them. It will be achieved if the leadership of South Africa have the will to make tough decisions and implement them. It will also be achieved when all South Africans begin to feel and act on the fact that the growth and development of South Africa starts with them. For now, the 2011 budget is but one of the steps in a long walk to economic freedom.
Text: Professor David Abdulai CEO: Unisa Graduate School of Business Leadership Image © iStockphoto.com
MARCH 2011
15
Travel guide
Em i r ate s N a m e d
Airline of the Year 2011 Emirates, the Dubaibased carrier, was honoured by leading industry title Air Transport World as the airline’s President, Tim Clark, received the ‘Airline of the Year’ award at a gala dinner in Washington, D.C. Some of Emirates’ pioneering innovations include becoming the first airline to introduce individual seat back videos and to enable passengers to make authorised onboard mobile phone calls; and Emirates’ flagship A380s are the only commercial aircraft to feature onboard shower spas for first class passengers. Emirates currently flies to
110 cities in 66 countries across Europe, North America, South America, the Middle East, Africa, the Indian subcontinent and Asia-Pacific. So far this year, the airline has launched a new route to Basra, Iraq on 2nd February and will start new services to Geneva on 1st June and Copenhagen on 1st August.
O ne&O nly Spa
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Be a ut i f ul B e g i nni n g s fo r
Radisson Blu Blaauwberg
Named Favourite Spa in Africa
The brand new Radisson Blu Hotel Cape Town, Blaauwberg, which will be opened in the second quarter of 2011, enjoys a stunning location in the Blaauwberg district with 48 km of sandy beaches and beautiful views of Cape Town and Table Mountain. Within easy reach of central Cape Town and Cape Town International Airport, the hotel combines beautifully appointed rooms, extensive conference facilities, an award-winning restaurant
The Spa Finder Readers’ Choice Award has named One&Only Spa Cape Town, located at the One&Only Hotel at the V&A waterfront as their favourite Spa in Africa. “We’re tremendously proud of this achievement,” announced One&Only Spa’s Manager, Victoria Sutcliffe. Opened in April 2009, the One&Only Spa is a sanctuary located on its own private island, providing a range of tailored holistic experiences to unwind,
MARCH 2011
concept, a spa, fitness centre and swimming pool with pool deck area. Across the road from the hotel lies a superb beach with spectacular views, great for surfing, swimming and sunbathing. Guests will find plenty to keep them entertained with several tourist attractions and shopping centres all in close proximity. For more information, or to make a reservation, call +27 21 431 2906 or visit www.radisson.com.
balance and uplift – the three cornerstones of the spa’s philosophy. The 12 treatment rooms embrace local African influences and contemporary design. One&Only Spa also features a scenic relaxation room, sauna and steam facilities and two vitality pools. For more information or to make a reservation, please contact the spa on +27 21 431 5810 or visit www.capetown. oneandonlyresorts.com for more information.
Revved up
Alfa Romeo
The
Porsche 918 RSR Hybrid With the 918 RSR, Porsche is presenting a high-end synthesis of 2010’s successful hybrid concepts. It has a 563 hp engine and a pair of electric motors on the two front wheels which each contribute 75 kw, giving a peak drive power of exactly 767 horse power. The electric motors are not powered by a set of batteries, as they would be in a traditional hybrid, but they take their power from an inertial flywheel mounted where the passenger seat would be on a road car which spins at up to 36,000 rpm. That’s spun up by momentum when the car brakes and, when the driver hits a button, that momentum is converted to give the car a boost in acceleration. This additional power is available for around eight seconds when the system is fully charged. With the new 918 RSR racing laboratory, Porsche is now elevating this motor racing hybrid concept to an experimental level. In the 918 RSR, “Porsche Intelligent Performance” equates to research into methods for further sustainable efficiency improvement under the intensified conditions of the race track, lap times, pit stops and reliability. The two-seater mid-engine coupé 918 RSR clearly reveals what happens when the technology fitted in the 911 GT3 R hybrid and the design of the 918 Spyder are transferred to a modern, innovative super sports car.
Giulietta There is one thing that loyal drivers know for sure about Alfa Romeo; they know how to produce a machine with heart. We’re talking about the new Alfa Romeo Giulietta, quite possibly the most anticipated car to be launched in 2011. The Giulietta can comfortably seat four adult occupants and their luggage, while turning the heads of everyone they pass. The entry-level Progression offers climate control, Blue&Me connectivity, 6 airbags, stability control, hill holder Start&Stop and full electric windows, among many other features. The Giulietta is fitted with the award-winning 1.4 TB turbocharged engine in 88 kW (Progression) and patented Multiair 125 kW (Distinctive) guises. As a first for a premium brand, Alfa Romeo offers a five-year 150,000 km warranty on the new Giulietta. Linked to this are a sixyear/90,000 km service plan for the 1.4-litre models (with service intervals of 30,000 km) and a six-year/105,000 km service plan for the flagship 1750 TBi which features 35,000 km service intervals – a benchmark in the highly contested C-segment class.
Ducati South Africa has launched the mother of all bikes dubbed Diavel, pronounced Dee-ah-vel. Taken from the local Bolognese slang, the word simply means “devil” and this bike promises to be one on the road. “What set’s this bike from the rest has to be its electronics, style, killer looks and unprecedented comfort. 2010 was a big year for our country with the successful hosting of the World Cup, and equally exciting is the shooting of the Diavel commercial right here on home ground,” said Paul Phume, Ducati South AfricaCEO.Fortechnology enthusiasts, ABS, Ducati Traction Control and Ducati Riding Modes will deliver a confidence-inspiring sophistication, the superbike-derived Testastretta 11˚ engine and 207kg of authentic Ducati performance will drive a comfortable sport lifestyle that could only be dreamt of until now. For more information, visit www.ducati.co.za for more information.
The Devil in a
Ducati
MARCH 2011
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Cutting edge
Motorola ATRIX™ 4G, the Future of Mobile Computing The world’s most powerful smartphone packs the power and capabilities of a PC in your pocket through Motorola’s revolutionary webtop Motorola ATRIX™ 4G, the only smartphone that allows you to carry the power of mobile computing inside your pocket. Designed to bring unprecedented computing to your smartphone, Motorola’s webtop application runs a full Mozilla Firefox 3.6 browser and supports Adobe® Flash® Player to open up all the rich graphics, animations and video on the web. Motorola ATRIX 4G includes a dual-core processor with each core running at one GHz, delivering up to two GHz of processing power. Motorola ATRIX 4G is designed to become a user’s primary digital hub to create, edit and interact with documents, media and content. This is facilitated by Motorola’s webtop application and incredible new accessory docks, such as the Laptop Dock, that provides users with a larger screen, keyboard and trackpad enabling them to have an enhanced and more interactive computer-like experience with their devices. For more information visit www.motorola.com/atrix.
The New Canon EOS Rebel T3i Canon has launched the EOS Rebel T3i Digital SLR Camera, providing numerous intelligent highend features at attractive prices. The EOS Feature Guide is designed to help first-time users and beginning enthusiasts better understand each camera setting, with descriptions and recommendations about when to utilise the different options. Canon’s new EOS Rebel T3i DSLR gives creative photographers some fun in-camera tools that enable users to apply Creative Filters to images after they have been shot without altering the original file. Point-and-Shoot users looking to step up to a DSLR will enjoy the T3i camera’s Scene Intelligent Auto mode, the most intuitive automatic camera mode available in a Canon Rebel camera to date, providing complete scene analysis and optimised settings. It also boasts Canon’s three-inch VariAngle Clear View LCD screen, ideal for properly composing those difficult overhead shots. Available in stores from April 2011.
Beautifully Powerful The ASUS NX90 Bang & Olufsen ICEpower notebook is a handsome and functional laptop which was designed in conjunction with Bang & Olufsen’s lead designer, David Lewis. It features a smooth, polished aluminium body and palm rest that coordinate perfectly with the sleek dark keyboard and dual touchpads, which, together with the desktop software, are designed to be used much like a DJ’s mixing desk. The B&O ICEpower speakers sit on either side of the high-definition flat screen and are designed to produce flawless surround sound audio. And the specs don’t look too bad either! The NX90 laptop has a Core i7 processor, slot-in Blu-Ray combo/DVD super multi-drive, NVIDIA GeForce GT 334M graphics, dual HDD support for up to 1280GB of storage (with dual drives), 2 MP built-in video camera, is USB 3.0 ready and weighs 4.8kg - with a six-cell battery. The LCD screen has an 18.4” panel and with the addition of the speakers it becomes almost the size of a 22” LCD. The speakers sit close to the laptop hinge to reduce resonance noise and use exclusive sonic focus technology, which helps to produce flawless sound.
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Taste test
Jameson Select Reserve One special whiskey, one single-minded pursuit of perfection. Jameson Select Reserve is the latest expression from the Jameson Single Distillery. This exquisite small batch release has been hand-selected from limited whiskey stocks and triple-distilled in small batch quantities. It is then blended with a high proportion of single Irish pot-still whiskey and aged up to 12 years, following which the sumptuously rich blend is matured to perfection in Oloroso sherry and Bourbon casks, affording it inimitable smoothness and making for a powerfully bold finish. The Select Reserve is interspersed with layers of toasted wood, spice and vanilla as well as nuances of dried apricots, nectarines and papaya threaded throughout, making it multi-faceted and intoxicatingly exotic. The Jameson Select Reserve signifies the archetypal expression of all that is supreme about Jameson. Available from select retail outlets countrywide.
Knorhoek Estate sparkles with maiden Konfetti Brut rosé A new debutante has joined South Africa’s line-up of sparkling rosé wines with the arrival of the first pink bubbly from Knorhoek Estate – Konfetti 2010 – a frivolous, dry blush inspired by the superb wedding celebrations hosted at this hidden Stellenbosch gem at the foot of the Simonsberg. Toasting romantic affairs and self-indulgent moments, this intensely fruity Brut rosé is an exuberant medley of Pinotage (56%), Cabernet Franc (27%), Merlot (13%) and Cabernet Sauvignon (4%) to which this newcomer owes its cheerful, candy floss pink blush. Captivating with a refreshing berry infusion, Knorhoek Estate’s Konfetti 2010 displays perfect synergy between freshness and maturation and has an impressive mouthfeel that leads to a crisp aftertaste. For more information or to order a few cases of the new Konfetti 2011 contact Knorhoek Cellar on +27 21 865 2114/5 or visit www.knorhoek.co.za.
The Best of the Best Armand de Brignac is now rated the best champagne in the world, and its recent launch in South Africa will now give South African champagne connoisseurs a chance to discover what makes this champagne so special. The unique and luxurious packaging consists of distinctive bottles that have pewter labels applied by hand, and come in embroidered bags or in wooden boxes for gifting. It’s produced by the small, family-owned Cattier Champagne House whose goal is to produce the finest possible champagne with the strictest possible attention to quality and detail. Patriarch Jean-Jacques Cattier who oversees the production of Armand de Brignac, explains, “The goal in all this, is to present something authentically luxurious and which does justice to the once-in-a-lifetime events at which champagne is so often present. Armand de Brignac is not meant to overshadow these events, simply to commemorate them with a toast worthy of these special memories.” Armand de Brignac Champagne is available Nationally from CK House of Premium. For more information visit www.cksa.co.za
MARCH 2011
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Short-term
Navigating
Short-term Insurance If ever you are in an accident, whether injured or not, it is very difficult to think clearly about what you need to do immediately afterwards. We always hope it will never happen to us, but here are some tips and a handy cut-out-andkeep checklist to keep in your car, just in case.
Momentum Short-term Insurance suggests these 10 guidelines: 1. Stop Regardless of what is happening, stop immediately and check that you and everyone involved is okay. If you are involved in an accident, it is a criminal offence to leave the scene, so just stay put. 2. Secure The Scene Get everyone to safety and help anyone who is hurt. Call the emergency services, if medical assistance, police presence or traffic control is required. (National 24-hr emergency number is 084 124 or SAPS on 10111.) 3. & 4. Give And Get Contact Details Exchange full name and ID numbers of all drivers involved, as well as addresses and telephone numbers. Be sure to obtain vehicle details including registration, make, model, series and colour. It is also a good idea to write down Insurance and/or broker details. 5. Do Not Admit Cause Or Liability Do not admit that you might have caused the accident. The emotionally
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Always try to obtain contac t de tails of any independent witnesses. charged confusion of an accident scene is no place to start apportioning blame and admissions may expose you to lawsuits or even criminal prosecution. 6. Secure Witness Information Always try to obtain contact details of any independent witnesses. Write down their contact details, addresses and if possible, obtain their statements, and a sketch and description of the accident. Note the names and contact details of emergency personnel present. 7. Assess And Record The Situation – When, Where And How Confirm exactly when, where and how the accident happened, detailing street names, date and time of accident, faulty traffic lights or missing stop signs – anything that may be relevant later on. Most cell phones are able to, so take photographs or videos or draw a sketch of the scene. Note details regarding the other cars, especially if roadworthiness may be in question.
8. Ensure That The Towing Company Is Authorised Should your vehicle not be driveable, please ensure that the towing company is authorised by your insurer. It is crucial that you confirm where your vehicle will be towed to. 9. Report The Accident To The Police The next step is to report the accident within 24 hours to the South African Police Services. Obtain the accident report number and/or a copy of the accident report if possible. 10. Contact Your Insurer Call your insurer’s claims department and report the incident as soon as possible. * To get a quote on Momentum Short-term Insurance, speak to your Marketing Adviser or call the Momentum Short-term Insurance Call Centre on 086 000 6784.
Text: Pieter Erasmus Short-term Insurance Image: © iStockphoto.com
Wealth
Unpacking Living Annuities and the SLA … reassuring feedback for clients A living annuity is a special type of compulsory purchase annuity under which the income (or annuity amount) is not guaranteed, but is dependent on the performance of the underlying investments. The product allows the client to select an income level between 2,5% and 17,5% of the investment value per year.
Standard One: Appropriate drawdown Each member office of ASISA must ensure that the following (or similar) wording is disclosed to and seen by the client at some point during the sale of a living annuity, and at least annually thereafter: A living annuity allows you to set your income level subject to constraints imposed by the authorities from time to time and allows you to select from a wide range of investments for the capital that will generate the annuity. The level of income you select is not guaranteed for
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the rest of your life. The level of income you select may be too high and may not be sustained if: • You live longer than expected with the result that the capital is significantly depleted before your death; or • The return on the capital is lower than that required to provide a sustainable level of income for life. It is the client’s responsibility (in consultation with your financial adviser) to ensure that the income that you select is at a level that would be sustainable for the rest of your life. You need to carefully manage your income drawdown relative to the investment return on the capital in order to achieve this. The table below can be used as a guide.
It is the client ’s responsibilit y (in consultation with your financial adviser) to ensure that the income that you selec t is at a level that would be sustainable for the rest of your life. You need to carefully manage your income drawdown relative to the investment re turn on the capital in order to achieve this.
Years before your income will start to reduce
Annual income rate selected at inception
The client bears the investment and longevity risk in full, and the income over the annuitant’s lifetime will ultimately depend on lifespan, income drawdown level and the returns of the underlying funds. As a consequence of the factors mentioned above, it is imperative that living annuities are responsibly marketed and administered. The Standard on Living Annuities (SLA) applies to all living annuities marketed, administered or underwritten by member offices of ASISA and provides comprehensive product standards that will help to mitigate the risks of living annuities being exhausted during the lifetime of the annuitant.
2,50% 5,00% 7,50% 10,00% 12,50% 15,00% 17,50%
Investment return per annum (before inflation & after all fees) 2,50% 5,00% 7,50% 21 30 50+ 11 14 19 6 8 10 4 5 6 2 3 3 1 1 2 1 1 1
10,00% 50+ 33 13 7 4 2 1
12,50% 50+ 50+ 22 9 5 2 1
It is important to note that the table above assumes that you will adjust your percentage income selected over time to maintain the same amount of real income (i.e. allowing for inflation of 6% per year). Once the number of years in the table has been reached, your income will diminish rapidly in the subsequent years. The table is a general guideline and should be considered taking into account each annuitant’s financial situation and all other sources of income. It is an indicative guideline only, to assist you in making informed decisions in respect of your annuity. Standard Two: Appropriate Investments The Financial Services Board (FSB) has expressed the view that to ensure that undue investment risk is not taken at the point of retirement, member offices should include the following wording at inception of the living annuity, and at least annually thereafter. The purpose is to remind the client and/ or financial adviser to assess whether the investments selected in their living annuities are appropriate from a risk/return perspective. “The investments held in your living annuity are made up of underlying types of assets. These underlying assets have different levels of risk and return associated with them. You should consider the overall composition of your living annuity in terms of these underlying assets. Too high a proportion of risky assets means there is a risk of losing capital; too low a proportion of risky assets means there is a risk that investment returns will be too low to sustain your income. The following is a broad reflection of the provisions of the investment regulations under the Pension Funds Act, and can be used as a general guide to assess the overall asset composition of your annuity. It should be noted that the Financial Services Board is of the view that should your asset composition be at variance with this, your annuity may be at risk as explained above: • A maximum exposure of 75% to equity investment
• A maximum exposure of 25% to property investment • A maximum combined exposure of 90% to equity and property investments • A maximum exposure of 20% to assets outside South Africa Standard Three: Asset Composition Information ASISA member offices are required to communicate the actual asset composition of the living annuity to allow the client and financial adviser to assess this in the light of Standard Two above. The asset composition should be communicated at the inception of the living annuity, and at least annually thereafter. Standard Four: Industry-based Analysis and Monitoring Member offices are required at the end of each calendar year to provide a living annuity status report to ASISA. These individual reports will be made available to the applicable regulatory bodies for scrutiny, if requested. Contributing offices will also have access to a consolidated report (the aggregation is done by ASISA). The report will consist of the proportional split of clients categorised by age group and drawdown bands. Living Annuities with Momentum Wealth As a product provider, Momentum Wealth offers living annuities as part of a comprehensive product suite. A living annuity as part of the Wealth offering is known as a Wealth Retirement Income Option (RIO). Here are a few considerations when making use of a Wealth RIO: • Annual Fees: the table illustrated in this article refers to “years before income will start to reduce” and provides numbers that are after fees and before inflation. This means that if an income level of 5% is selected, a required investment return closer to 7% should form part of the financial planning discussion in order to cover annual fees typically associated with an investment. These annual
•
•
•
•
fees are an asset/fund management fee, an advice fee and a product/ platform fee. Reducing Annual Fees: in certain agreed circumstances, Momentum may receive a rebate from the fund manager. Momentum passes all rebates on all funds to clients, and uses the rebate to offset the annual administration fee charged on a contract. There is no annual administration fee (product/ platform fee) charged on funds from the Managed Solutions segment or on RMB Unit Trust Funds (except for the RMB Money Market Fund and Momentum Cash Management Fund). Core Portfolio: Momentum Wealth provides a comprehensive list of available funds that have been carefully screened from both a quantitative and qualitative perspective. This limited choice fund range includes low-risk, conservative funds and multi-asset class funds that clients may consider for living annuity purposes. Conversion to a conventional life annuity: where the living annuity is in the form of a long-term insurance policy, it may be converted to a conventional life annuity administered by the current insurer or by another insurer, if the living annuity policy is transferred to such other insurer for this purpose. This is typically a “one-off option” – i.e. the client cannot reverse this decision. Transferability: where the living annuity is in the form of a long-term insurance policy, the policy may be transferred from one insurer to another at the request of the client. Where the living annuity is provided directly by a retirement annuity fund, the annuity may be transferred from one retirement annuity to another at the request of the client. Source: ASISA Standard on Living Annuities (SLA)
Text: Ryan Jamieson Investment Marketing: Momentum Wealth Image © iStockphoto.com
MARCH 2011
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Risk & savings
How to weather the
Financial Storm... A focus on Momentum Investo’s Volatility Protector One of the main reasons people want to accumulate wealth is to ensure a comfortable retirement once they lay down the tools of their formal employment. One of the most effective ways for most people to accumulate wealth is to invest money on a regular basis from as early as possible in their lives. People who are formally employed are usually members of their employer’s retirement fund, which means that they are already regularly investing through their own as well as their employer’s contributions to the pension fund. When the time comes to retire, the intention is that the proceeds from the pension fund will fund income requirements from the retirement date.
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This is the intention. The reality, based on recent research by a relatively large retirement fund services provider is that 81% of retirement fund members will retire with a pension that will be insufficient to maintain their standard of living. Most of these members will actually face extreme poverty. The well-known fact that South Africans are just not saving enough is a major contributor to the dire financial situation many people find themselves in when they reach retirement. Those who are trying hard to put money away regularly, through the use of investment products such as retirement annuities and endowments, face the difficulty of implementing appropriate investment strategies and then sticking to those strategies through thick and thin. However, when the markets enter stormy waters, investors tend to panic and let their emotions get the better of them. They then try to be clever by getting out of growth assets, which is essential to enable wealth creation, to find shelter in fixed interest-type assets. This particular behaviour is often referred to as market timing. When emotion takes over, investors forget one of the most basic principles of successful investing: it is time in the market that delivers the returns, not timing the market. Towards the end of last year, Momentum became the first life insurance company to introduce a guarantee that has been specifically developed for recurring contribution investment products, offering real investment protection. Momentum Investo’s Volatility Protector is the perfect solution to facilitate time in the market. By adding the Volatility Protector to an Investo Retirement Annuity or Investo Endowment (certain investment funds only), investors effectively insure their investment contract’s maturity value against the potential negative effects of market volatility at maturity.
Conventional capital-type investment guarantees, available from most life insurance companies, may be appropriate for investors seeking absolute protection for a specific investment need, for example when it is imperative to realise a specific capital sum after a specified period of time. These guarantees, however, add little value for long-term investors when the primary focus should be on generating inflation-beating returns if the objective of the investor is to build meaningful wealth over time. With the introduction of the new and unique Volatility Protector, Momentum changed the face of guarantees for recurring investment products by eliminating market volatility risk at maturity in a simple and cost-effective way, without compromising your clients’ long-term investment strategies. In addition to providing real protection, the Volatility Protector also eliminates the unintended consequences of investment decisions that are based on emotion and usually driven by market uncertainty, thereby adding real value to your clients’ wealth-building activities. The Volatility Protector does this by tracking 100% of the highest investment value of certain Investo recurring investment products and protecting this value against the negative effects of a market downturn when the contract matures, without limiting upside potential. Hereby guaranteeing that the maturity value will not be lower than 100% of the highest investment value achieved on any contribution allocation date during the term. Momentum Investo firmly believes that it will assist you in helping your clients to stick to their savings and investment plans and avoid making the wrong calls that are usually based on emotion and driven by market volatility. For more detailed information on Investo, please contact your Momentum Marketing Adviser.
Suggestions: • Simple • Cost-effective • Relevant
Towards the end of last year, Momentum became the first life insurance company to introduce a guarantee that has specifically been developed for recurring contribution investment products, offering real investment protection.
Benefits of Investo Volatility Protector • Ensure alignment of investment strategy with investment objective • Reduce advice risk • Increase client retention
Investo Volatility Protector technical details: • Products: Investo Retirement Annuity; Investo Endowment • Funds: RMB Balanced; RMB Moderate; RMB Conservative • Minimum contract term: five years • Cost: 0,35% per year to 0,90% per year, depending on fund selected and contract term
Text: Pierre Jean Marais, Head: Savings Marketing Image © iStockphoto.com
MARCH 2011
25
Retirement
Will your
Nest Egg go the distance? Though not many clients will admit it, some of them are becoming increasingly concerned about their retirement. Will they have enough income? How long will their capital last? How long are they going to live? Perhaps a client’s father might already have had a heart valve replacement, and his mother might be on three types of chronic medication. Although they are still “going strong”, the same cannot be said about their bank balance. Your clients may also be heading there. Except in their case, they are likely to live even longer, as medical technology continues to improve. As if it isn’t difficult enough to save sufficiently for retirement, there is also the matter of spiralling healthcare costs. When last did your clients’medical savings accounts last them the entire year? When last did they upgrade their medical aid? Chances are that you actually had to help them downgrade, as medical aid contributions have continued to outpace normal inflation - and their salary increases. If affordability is a problem now, how bleak will this picture be during retirement? And with only a bare-bones medical aid to cover them, the prospect of either a hospital event wiping out a big chunk of their capital, or day-to-day expenses chipping away at their monthly budget, loom large. All of this highlights the need for critical illness benefits and, importantly, how it should form part of your clients’ retirement planning. It is time to change the mindset of viewing life insurance as short-term insurance, always going for the lowest possible premium due to the perception that a policy only stays on the books for a short period. Replacing risk benefits every two years or so invariably only leads to one thing: unaffordable premiums when your clients need it most – in their old age. Because the cost of new cover increases as one gets older.
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A critical illness benefit (ideally with a level-premium pattern) should form an integral part of your retirement planning, as it helps protect your capital from being eroded by a medical aid shortfall or other short-term expenses. However, conventional critical illness benefits are not ideally suited to protect clients against the long-term impact brought about by some illnesses, such as the longterm care of a spouse with Alzheimer’s disease or a spouse who is paralysed in an accident. Critical illness benefits are relatively expensive, so to purchase a benefit substantial enough to provide for an ongoing expense that may continue indefinitely may be an unaffordable option for most of your clients. A more affordable solution would be to consider a functional impairment benefit, in combination with a critical illness benefit. This way the critical illness benefit only needs to cater for short-term expenses, while the more cost-effective impairment benefit pays for long-term expenses. There are still two problems, though. One: since you do not know for how long your client is going to live, how do you know how much impairment cover is enough? Two: functional impairment benefits are not whole-life benefits. They typically cease at age 65 or 70.
Fortunately, other solutions are emerging to help protect clients against the risk of outliving their capital. The Functional Protector offered by Momentum takes away the guesswork of how much cover is enough. Myriad pays monthly benefits for the whole of life should the client become severely impaired. Myriad’s Longevity Protector works similarly; Critical Illness makes ongoing payments every five years in the event of a moderate to severe critical illness that has a long-term impact on lifestyle. It also offers a feature that pays 20% of the benefit amount if a client reaches age 80 without having claimed under this critical illness benefit. For clients who are facing the challenges of spiralling healthcare costs and increasing longevity, these are important innovations. Risk products can add extra mileage to a client’s retirement savings and can do so in a cost-effective manner...because every penny counts.
Text: Francois Tranter Head: Risk Technical Marketing Image: © iStockphoto.com
If affordabilit y is a problem now, how bleak will this pic ture be during re tirement?
MARCH 2011
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Wealth feature
Let the experts
advise you on choice
A new year is a time for excitement, optimism and of course, a time for making resolutions, but they are seldom acted on. My resolution for 2011 was to get fit, and I only put this in action a whole month into the year. On my first visit to the gym, I was confronted with many cardiovascular training machines and I struggled to make a choice on which one to use, since I didn’t know which one burned the most calories. Choosing a cardiovascular training machine may appear to be a straightforward choice, but when faced with so many options, I was suddenly confronted by “paralysis of choice.”
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If “paralysis of choice” had applied only to such mundane tasks as selecting which cardiovascular training machine to use, which jam or type of flat-screen TV to buy, it would not be something to worry about. The study of behavioural economics has demonstrated that people consistently act in a manner that defies rational decision-making, particularly when it comes to finance. One very specific finding of the relatively new discipline of behavioural finance is “paralysis of choice,” in which an abundance of options can overwhelm people, throwing them into a paralysis of indecision. Deciding to do nothing because of too much choice can significantly affect saving and investment decisions. At the start of each new year, many people decide to save more. With the amount of information available today, the choice of how much to save in order to have the ‘right level’ of post-retirement income is not an easy decision. One school of thought says that people should aim to have a retirement income that is at least as high as the income they enjoyed when working. Another says that retirees should lead a more economical lifestyle, so they should not require a lot of money in retirement. As if deciding on how much to save is not hard enough, the choice of how to invest the money is even harder. Even if an investor chooses to invest say 65% in shares and 35% in bonds, that choice still leaves open many specific questions about how the money is to be invested. Most investors do not choose shares individually but rather invest through unit trusts. Unit trusts differ in how risky they are and in the fees they charge. Some unit trusts are specialised while others invest broadly. Some funds blend shares and bonds together. The question arises, should
investors create their own blend or choose a unit trust blended for them? Investors cannot, unfortunately, relax and look forward to retirement after these choices. Decisions regarding the ongoing rebalancing of unit trust portfolios especially when investors have chosen to fashion their own blend, need to be made continually. In our current world of “too much” choice in financial products, it is critical that investors use the services of a reputable financial adviser whose financial planning and know-how can help them decide how much to save and, more importantly, how to invest the money. For financial advisers, it is important to choose an investment platform and product provider that provides choice and flexibility and which simplifies the complexities associated with investment choices. And, have I figured out which cardiovascular training machine burns the most calories? Yes, I eventually did, with the help of a qualified and reputable personal trainer...
it is critical that investors use the ser vices of a reputable financial adviser whose financial planning and knowhow can help them decide how much to save and, more importantly, how to invest the money.
Text: Frank Magwegwe Head: Platform Administration Momentum Wealth Image: © iStockphoto.com
MARCH 2011
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Investment
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In our quest for a prosperous and financially secure future, we must first review the potential roadblocks that could prevent us from succeeding. Thanks to the increasingly influential field of behavioural finance, we have now become aware that, as individuals and humans, the roadblocks come in the form of biases that cloud our financial judgement. These lead to poor decisions about when to buy or sell financial assets. It is therefore no surprise that the most important aspect of behavioural finance, as it applies to financial planning, is determining behavioural investor types and investor biases.
What drives investor choices? It has been said that the foundation of a successful adviser or client relationship is the clear definition of financial goals and needs. While this is true, I believe that it is more important for the financial adviser to understand what type of investor their client is and what biases drive their behaviour. Not only will this knowledge allow the adviser better to serve their clients, the clients themselves will be able to get a clearer sense of their own psychological and mental make-up and how to guard against the roadblocks that affect their long-term financial goals. Who’s in charge? Head or heart? The first task for any adviser hoping to implement the principles of behavioural finance successfully is to figure out what these biases are. Behavioural finance’s prominence has been steadily increasing since the decision by the Royal Swedish Academy of Science to award the 2002 Nobel Prize in Economics to Daniel Kahneman for his research into economic science, especially concerning judgement and decision-making during uncertainty. Research has identified more than fifty biases that drive investor behaviour. These characteristics belong to two broad categories of biases: cognitive and emotional. Cognitive biases are those that stem from faulty reasoning and can be rectified by simply providing better information to an investor. Emotional biases are those which come from impulsive feelings or intuition and as such, are harder to rectify. Examples of cognitive biases are representativeness (an over-reliance on stereotypes), availability (the tendency to rely on the most available information in decision-making) and overconfidence (the tendency to overestimate investment knowledge). Examples of emotional biases are loss aversion (the tendency to feel the pain of losses more than the pleasure of gains); regret aversion (the tendency to feel deeply disappointed for having made incorrect decisions)
and lack of self-control (the tendency to spend today rather than to save for tomorrow). Know thyself; know thy clients. A number of tests to determine what biases clients show have been developed. By administering such tests and asking clients to complete the standard financial planning questionnaires, an adviser can get to know his clients at a deeper level. Importantly, clients learn how their behavioural patterns may override even the best financial decisions. This knowledge can actually help them in the long term as they build their portfolios in the light of their biases and tendencies.
Research has identified more than fifty biases that drive investor behaviour. These characteristics belong to two broad categories of biases: cognitive and emotional. A word of wisdom from Warren Like successful investing, successful financial planning doesn’t require one to be a genius. It requires the ability to gain a deeper understanding of the client’s financial goals and needs, in addition to identifying and correcting biases that act as roadblocks to financial success. As Berkshire Hathaway chief executive and arguably one of the world’s most admired and most followed investors, Warren Buffett said in a 1999 interview with Business Week, “Success in investing doesn’t correlate with IQ once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
Text: Frank Magwegwe Head: Platform Administration Momentum Wealth Image: © iStockphoto.com
MARCH 2011
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Investment
Stock
Insight Standard Bank is one of the core shares featured in RMB Asset Managements portfolio over the last year. Given the recent weakness in the Standard Bank share price, we feel it is the right time to comment on the company’s longer-term prospects. The scale and implications of potential cost-cutting at the group’s London and SA operations have received much negative publicity. We still believe this share offers long-term fundamental value and that into an improving economic environment Standard Bank should deliver above-average earnings growth. We should separate the short-term noise regarding the share and focus on identifying the value in this specific counter over the longer run. The investment merit for Standard Bank adheres closely to RMB Asset Management’s (RMBAM) four pillars of stock selection: quality and risk, theme and valuation. These characteristics are discussed in more detail below. Quality asset with limited risks Consistent growth and added value Since 1990 Standard Bank has grown their Net Asset Value (NAV) per share by a compounded rate of 18% per year. As Chart 1 indicates, the business has consistently added value creation for shareholders by growing each of their individual business units. Chart 1 - Standard Bank NAV per share (cents per unit)
Text: Nesi Chetty Fund Manager and Head of Financials RMB Asset Management Image: © iStockphoto.com
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Source: Company Reports, RMBAM Research
Experienced management Standard Bank has a management team with a long and proven track record. The judicious use of their balance sheet and their ability to negotiate access to funding (ICBC transaction) at a time when this was quite scarce, adds credence to the view that the collective years of banking experience among senior management is positive for the company. Within the SA banking environment, the management of Standard Bank are viewed as conservative individuals who extract value by not overpaying for assets and ultimately redeploying capital where above-average risk-adjusted returns can be earned. Investment themes supporting Standard Bank Consumer recovery Although growth in advances has been declining at Standard Bank, it is now reaching a point of stabilisation. Historically the majority of SA banks have had a high level of growth in advances.. The current constraint in growth for Standard Bank’s asset portfolio is still high, household indebtedness (around the 80% level at current) and more stringent lending criteria apply. As consumers slowly deleverage balance sheets, one should see a resumption of higher credit growth. One area where most of the banks will see some immediate improvement in the quality of their own book is that recoveries will steadily improve as the National Credit Act (NCA) bottleneck unwinds. Bad debts Standard Bank recently saw an improvement in their bad debts as nonperforming loans have stabilised. As the financial state of the consumer is no longer deteriorating and advances have yet to start growing again, the bank did not have to add to existing provisions for bad debts. It therefore benefited from a lower income statement impairment charge, without starting to reduce its provisions on its balance sheet. As the condition of the consumer continues to improve, the bank will be in a position to start reversing out the cyclically higher provisions that have been created. International business (emerging markets) Standard Bank has a large international business, which we feel will be able to deliver high returns in the future due to improved activity levels and its ability to capture highermargin deal transactions. Being selective with transactions and having a large US dollar balance sheet will add to margins over time. Over the last three years the international
business has managed to generate profits of between $168 m and $178 m. The recent disappointing half-year reported number of $31 m is temporary, as evidenced by the lower flow of activity.
Chart 2 – Standard Bank US dollar earnings outside Africa (R’m)
Source: Company Reports
Standard Bank valuation Standard Bank currently trades on a price-to-book multiple of two and has a long run return on equity of about 20%. Notwithstanding the regulatory risks regarding Basel III and that structurally returns for banks will be lower, we believe that Standard Bank through the cycle should be able to generate a return on equity quite close to this level. Another important consideration is that Standard Bank’s stable return series doesn’t come with much volatility relative to other resources or industrial shares. Standard Bank has a historic price-to-earnings ratio (P/E) of around 13 times and a one-year forward P/E to December 2010 of 9.86 times. Given the anticipated acceleration in earnings in financial year 2012, we expect this multiple to unwind quite quickly to a two-year forward P/E of 8,74 times. The oneyear forward dividend yield is 3,8% into an improving capital position.
Standard Bank recently saw an improvement in their bad debts as nonperforming loans have stabilised.
Standard Bank: a long-term investment opportunity for our clients Given the investment characteristics of Standard Bank highlighted above, and that it fulfils our four pillars of investing, we continue to hold it as a core share in our portfolio.
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Investment
Investment themes for the next three years
The fundamentals driving our economic view essentially incorporate our driving investment themes. We discuss some of the key themes that we expect will play out over the next three years below.
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The Sustained Developed Market (DM) is deleveraging, as private households seek to improve their balance sheets and governments rein in their budget deficits. A focus on demographic demands, given the front-and-centre issue of ageing populations, will also drive the desire for more private savings. Equally, governments are under enormous pressures to put public finances on a sustainable path to meet rising future pension and welfare liabilities associated with ageing populations. Continued rotation of the world’s centre of economic gravity from DMs to Emerging Markets (EM). This will take several forms, most notably a further rise in commodity prices, as EMs enjoy a significant growth premium and associated above-trend capital allocations. As a result, EM currencies and bonds will probably appreciate. Asset valuations are also likely to become more demanding, but supported to some degree by lower discount rates and higher growth. EMs should continue to absorb a greater proportion of global savings through firms and households taking on more debt. As a result, EM domestic demand is likely to remain strong. It is quite possible, indeed probable, that EMs will constitute the next investment bubble. For SA the substance in the above theme extends to Africa. Africa is the only region with which South Africa currently runs a trade surplus. Typically, investment flows
follow trade flows, and here it is no different. As a result, bulky foreign direct investment (FDI) into African oil and gas, together with investment from South African companies, are the largest source of FDI in Africa. Moreover, since these investments are across a wide range of industries and products, this makes South African FDI an important source of economic diversification and more sustained growth prospects in Africa. The final theme we would highlight is one of risk arising from unresolved global imbalances. It is possible that the upside prospects for the world economy based on the further emergence of EMs could yet be scuttled. The most likely course for this risk outcome is highlighted by the current tensions accompanying the shift in the world’s economic centre of gravity to EMs. Current global currency tensions are very real as country after country, especially China and other EMs, attempt to hold back exchange rate appreciation to preserve their competitiveness. It is entirely conceivable that political pressure to preserve jobs and incomes could see DMs put up trade barriers. Since open borders have been the hallmark of globalisation, any attempt to reverse this trend of the last 20 years could potentially be hugely damaging for world economic prospects.
What does deleveraging actually mean? Deleveraging is the process by which an individual, company or even country, decreases its financial leverage by paying off any existing debt on its balance sheet. Cutting one’s debt load relative to one’s asset base generally means shedding assets in the financial sector, thus reducing credit.
Since open borders have been the hallmark of globalisation, any at tempt to reverse this trend of the last 20 years could potentially be hugely damaging for world economic prospec ts.
Text: Gordon Smith, Chief Strategist RMB Asset Management Image: © iStockphoto.com
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RMB Small/Mid-Cap Fund The RMB Small/Mid-Cap Fund continues to generate the highest returns in its sector over two, three, five, seven and ten years, with performance well ahead of the total market return. It was also placed in the top five best-performing unit trusts in the country over two, five and ten years.
The fund received Raging Bull Awards for two years in a row (2008 and 2009) in the “Domestic Equity Smaller Companies Fund” category. This award recognises the fund with the top outright (best overall) performance over three years. In addition to the Raging Bull awards, the RMB Small/Mid-Cap Fund received the Morningstar Award for 2009, for “Best Fund in Sector” in the “Domestic-EquitySmaller Companies” sector. The RMB Small/Mid-Cap Fund invests in all shares that fall outside the ALSI 40. Many mid-cap stocks are substantial and wellknown businesses which may be under-appreciated by the market compared to better known ALSI 40 stocks. These include Adcock, Steinhoff, Pioneer Foods, Foschini, Spar, Woolworths and Imperial, which are all held in the fund. The fund has a “local is lekker”
flavour as the investment universe currently excludes any stocks that have offshore operations like resource counters and other rand hedges. We like to boast that the RMB Small/Mid-Cap Fund performance is a feather in the cap for truly South African companies. Mid-cap returns for most periods have beaten the ALSI. The RMB Small/Mid-Cap Fund continues to remain moderately overweight in resources, significantly overweight in industrials and underweight in small-cap financials. It continues to focus predominantly on mid-cap shares, limiting its exposure to illiquid smallcap shares to 30% of total equity. Smaller stocks held include Hudaco, Howden, Africa Media Entertainment and Adcorp. The philosophy and success of the RMB Small/Mid-Cap Fund have been premised on investing and holding
Investment
predominantly mid-cap shares that continue to reward investors with high dividends and strong cash generation. This has enabled many of the invested companies to not only protect but grow their current operations through diversified acquisitions and strong organic growth. Selected small-cap shares have periodically complemented these returns. The fund will continue to limit its smallcap holdings in order to manage the associated liquidity and volatility risk. A significant focus on maintaining stock with high forward dividend yields in the fund in order to protect and grow capital will also manage the risk of the fund.
Text: Evan Walker Fund Manager Retail Analyst: RMB Assest Management Image: © iStockphoto.com
The philosophy and success of the RMB Small/Mid-Cap Fund have been premised on investing and holding predominantly mid-cap shares that continue to reward investors with high dividends and strong cash generation.
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MARCH 2011
Spending or saving
Let’s
educate them! Save, Save, Save If it’s the first quarter of the year, then it must be time to revisit New Year’s resolutions past and present. Eat better and exercise? Take care of your money? Save money? Invest?
Thrifty. Frugal. Economical. Practical. Whatever you call it, taking control of your money all comes down to separating your needs from your wants. By keeping your spending in check, and holding back on the splurges and impulse buys, you’ll learn how to save money not only while you’re in college or when you
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graduate, but when you are finally earning enough to save. Money is not everything but can go a long way... It’s essential to know how to run your life in an economic yet elegant way. And remember that frugality doesn’t mean stinginess. Saving money is one of those tasks that is so much easier said than done. There’s more to it than spending less money (although that part alone can be challenging). How much money will you save, where will you put it, and how can you make sure it stays there? The maths: It is much easier to spend one rand than earn one rand. If you save 10 percent of your daily expenses, your life has not been changed. Compared with earning money, thriftiness is much easier. It doesn’t mean advocating that you’ll lower your goals in life. What we need are just some small skills. Make sure you spend time and money on something that is really valuable, rather than wasting it on something useless. Once you do it, you will find that thrift is happy earning. You may be asking yourself why there is so much pressure to save money. If you have enough to pay for everything you need, why should you worry about putting any aside each month? Here are some reasons for you to consider saving. 1. Save for emergency funds: it is important to have an emergency fund set aside to cover unexpected expenses. 2. Save for retirement: another important reason to save money is your retirement. The sooner you start saving for retirement, the less you will have to save in the future. 3. Save for a house: cash is king! If you have cash or a down payment, your negotiating power goes a lot further. You will receive better interest rates, and be able to afford a bigger home. 4. Save for luxuries: a fourth reason to save money is to have fun. You can save up for your tour of Europe or that Caribbean cruise. Additionally, you can be saving for fun largeticket items or a new boat. Holidays and entertainment should always be paid in cash! 5. Save for a new car: do you know a
person who has the buying power to purchase a car cash? You will be amazed at how much money you can free up in your budget if you do not always have a car payment. You can also negotiate the price of the car much lower if you are willing to pay cash at the dealership. 6. Save for sinking funds: a sixth reason is to build up your sinking funds. A sinking fund is money you set aside for future repairs or improvements on your car, home or other possessions. This planning can help you to stop using your credit cards, loans or an overdraft. 7. Education: one of the most important reasons to save is to further your education or that of your sibling or child. Each year more people return to university to earn their masters or doctorate degrees. You may also consider saving for your child’s education when the time comes. So, all in all, saving money is very important – since it has been said that cash is king! How do you start? On payday, when you receive your salary, the first thing you need to do is save part of your salary in the bank. How much you save will depend on your life expenses, but at least twenty percent of your wages should be saved. Yes, you need to spend money on food, clothing, petrol, house repayments, car repayments and so on, but never spend more than 80% of the total amount. Economists recommend strongly going shopping only once a month. When you stroll down a street or through a shopping mall, you will find something you fancy, and if you can’t control the impulse to buy, you will be spending money. All shopping must be planned, which is the classic strategy of economy. Shopping without planning means you purchase unnecessary items. So it is necessary to make a reasonable, detailed shopping plan according to the needs of your family every month.
Text: Alisea Chetty Editor Image: © iStockphoto.com
Saving money is one of those tasks that is so much easier said than done. There’s more to it than spending less money (although that part alone can be challenging). How much money will you save, where will you put it, and how can you make sure it stays there?
Saving tips summarised: Spend less than you earn – saving part of every rand is the foundation of financial independence. Take care of the things you have – you work hard for your possessions. Don’t make them disposable.
Since open borders
Make your money grow – it’s not have been the enough just to have money in the hallmark bank. Put it where itof can grow.
globalisation,
Defend your creditworthiness any at tempt to – good credit is precious.
reverse this trend
Don’t borrow – borrow of the last 20what years you need and if you can do could potentially without it then so be it.
be hugely
Weigh credit card for options – damaging do you really need one? You world economic might want to explore your prospec ts.in case of options, especially emergencies. Know the cost of borrowing – find out how much interest you will owe. Invest for the long term – understand where you are investing. Use your home as a savings account - a house provides equity. Broker advice: Set realistic goals, keep your spending in check, and get the most for your money.
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Feature
Gautrain
reach your destination at a faster pace!
The Gautrain offers commuters a safe, quick and comfortable way to commute in Gauteng. Phase 1 of the Gautrain system opened on 8 th June 2010 with two different services - the “airport service” and the “commuter service”. The “airport service” operates exclusively between Sandton station and OR Tambo International Airport while the “commuter service” is targeted at general commuters who need to travel between Marlboro, Rhodesfield and Sandton stations regularly.
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It takes less than 15 minutes from Sandton to the airport, 12 minutes from Rhodesfield to Sandton and about four minutes from Marlboro to Sandton. It travels at speeds of up to 160 km/h with quick stops at stations.
place. This enables commuters to leave their vehicles at the provided parking areas within the station precinct, board the train to their destination, and later pick up their vehicles on their return from the trip.
surfaces, tactile surfaces, audible as well as visual announcements. Deaf passengers and those hard of hearing are assisted through visual as well as audible announcements, induction loops and clear signs.
Operational times The Gautrain service operates from Monday to Sunday between 05:30 and 20:30. Trains and buses are available every 12 minutes during peak times (05:30 to 08:30 and 16:00 to 19:00), and every 20 minutes during off-peak times. On weekends the train service will be available every 30 minutes, while the bus service does not operate on weekends.
Ticketing What makes using the Gautrain system so easy is that the Gautrain train, bus and parking fares are charged on the same cashless smart card system. So commuters can transfer easily between the different services using the same, reusable smart card – the “Gautrain Gold Card”. Only valid Gautrain gold card holders are allowed on the Gautrain system as automated technology is used to verify tickets – no cash is accepted. Customers are able to load a variety of different journey products, ranging from single trips to monthly tickets, onto the same credit card-sized card and to reuse the same card over and over again without having to buy a new ticket for each journey. Customers using more than one service within a single journey enjoy a reduced fare. Customers are also able to register their cards with the Gautrain operator, which will enable immediate blacklisting of the card should it be lost or stolen. Any unutilised value on the lost card can then be transferred to a new card. Gautrain gold cards may be purchased (or topped up) at any ticket office or ticket vending machine at any Gautrain station. There is a onceoff fee of R10 when you purchase your gold card.
Fares Airport passengers can board at any station and pay R100 for a single train trip to the airport. A single train trip from Sandton to Marlboro will cost R16,50, from Sandton to Rhodesfield R21,00, and from Marlboro to Rhodesfield R18,50. Commuters who combine a bus trip or parking usage with a train journey enjoy reduced rates on the bus and parking components. Special weekly and monthly packages are also available for regular users.
Airport service The airport service is a premium service offered exclusively between Sandton and the airport. It is aimed at offering commuters an efficient and costeffective way to connect to the airport. All trains to the airport go through Sandton station. Airport service coaches offer more luxurious seating, extra legroom and additional baggage space to suit the needs of airport travellers. Each train on this link has two slightly more spacious cars that will be used by airport-bound passengers. The doors of the last two carriages in the trains, reserved for non-airport commuters, remain closed at the airport station and allow entry and exit only at Sandton, Marlboro and Rhodesfield stations. A dedicated luxury bus fleet that transports passengers between stations and surrounding suburbs and business nodes complements the train service. The bus stops are about every 500 m, along seven bus routes initially, within a 15 km radius of Gautrain stations. The bus schedules are designed to match the train schedules. The routes available from the Sandton and Rhodesfield stations are: Sandton CBD, Wendywood, Rivonia, Randburg, Fourways, Rosebank and Rhodesfield. Park and ride For commuters who still need to rely on their cars to drive to a Gautrain station, a park-and-ride facility is in
For the disabled Wheelchair access is provided to all trains, 50% of the buses, stations, toilets, lifts, fare gates, ticket offices and vending machines. The system has accessibility features to aid people with difficulties in walking, gripping, reaching or balancing (including non-slip surfaces, handrails and handholds). Blind and partially sighted people are assisted through the consistent use of colour contrasts, clear signage and lighting, non-reflective
Safety and security System safety and security are Gautrain’s highest priority. Over 700 closed-circuit television (CCTV) cameras keep a watchful eye on the entire system with over 400 security guards employed for the security of the system. In addition, the police are present at each station. Only valid Gautrain smart card (Gautrain Gold Card) holders have access to station precincts, buses, car parks and trains. The automatic fare collection system electronically scans tickets and smart cards swiped at station access gates. Once inside the train, additional security systems further ensure that passengers reach their destinations safely. Gautrain buses are also continuously monitored through satellite tracking and radio communication. Station platforms are monitored by CCTV systems, while thermal cameras, as well as alarms, prevent any unauthorised entry into tunnels or on to the tracks. The rail reserve is also secured by a threemetre high steel palisade fence, which is closely patrolled by security to prevent unauthorised access and vandalism.
Text: Alisea Chetty Editor Images: © Wilma den Hartigh
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41
Regulatory examinations
How to conquer the
Regulatory
Examinations
Text: Financial Services Board Images: Š iStockphoto.com
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Background The amended fit-and-proper requirements announced in 2008 introduced the financial services industry to a new concept – “regulatory examinations”. These examinations were introduced together with stricter minimal formal qualifications in order to better serve clients’ needs across the financial services industry in South Africa. The regulatory examinations are being developed and delivered under the direction and management of the FSB. Four examination bodies have been appointed to assist with the development of the regulatory examinations questions and the delivery on a national basis. The approved examination bodies are as follows: • Financial Planning Institute (FPI) • Leselo • Moonstone • SAIFM (South African Institute for Financial Markets) Type of examination The regulatory examinations will consist of multiple-choice questions based on specified qualifying criteria. Examinations are closed book and no material will be allowed in the examination room. There will be no limit on the number of attempts made in order to achieve competence. There will be one national version of any regulatory examination for any category or subcategory. There is only one right answer to each question, so please read the questions and answers carefully. You can choose to write examinations electronically or on paper. Examination bodies will indicate on their registration pages what method will be available. The regulatory examinations test the application of factual knowledge of: • the relevant legal provision as contained in the legislation, subordinate legislation and codes of conduct – level 1. • the rendering of financial services applicable to specific categories and subcategories of clients – level 2. Qualifying criteria The qualifying criteria provide the basis of knowledge and skills against which the regulatory examinations are set. The
qualifying criteria were developed in a process of consultation between the FSB and industry representatives, spanning from 2006 to 2008. Only questions based on these criteria will be included in the examinations. How do I read the qualifying criteria? Each set of qualifying criteria is displayed in a table format with headings. Underneath the headings, you will see the details.
Question development Individual questions are based on one or more knowledge criteria, also taking into account the applicable skill. Every task will be covered at least once in an examination. Therefore do not skip any of the tasks or the underlying knowledge criteria and skills, even if you do not think it is relevant to how your FSP operates. It is important to ensure that you understand every task, and the knowledge and skill criteria related to it. Each exam will contain questions at four levels of complexity: • Knowledge: test the recall of factual knowledge. • Comprehension: test the understanding and interpretation of factual knowledge and concepts. • Application: test the ability to apply factual knowledge to real-life situations. • Analysis: test the ability to analyse factual knowledge presented in a situation and to decide on the best action to take. Each question has four options, and you must selec t the correc t option. Questions can be posed in the following styles:
Th e r e g u l a t o r y e xami n a t i o n s ar e being de veloped and delivered u n d e r t h e d ir e c t i o n a n d ma n a g e m e n t o f t h e FSB .
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Regulatory examinations
• A direct closed-ended question: the question must be answered by choosing the correct option. • An incomplete sentence: the sentence must be completed correctly by choosing the correct option. • The negative question: the negative option needs to be chosen. The applicant must be aware that these type of questions will be asked and therefore must read questions carefully. • The most/best/least format: the applicant must choose the most applicable option to the question. • Roman numeral format: a closedended question where applicants must choose more than one correct option from a list of options. • Sequencing: the options should be listed in the correct sequence. Question examples Example of a knowledge question: Within how many days must a financial services provider inform the Registrar of the debarment of its representative?
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A. 14 days B. 7 days C. 30 days D. 15 days Example of a comprehension question: Jane Chetty is a sole proprietor and has no representatives. What are the requirements regarding the compliance function of the FSP? A. Jane must appoint an external Compliance Officer B. Jane doesn’t need to appoint a Compliance Officer C. Jane must appoint an internal Compliance Officer D. Jane must be appointed as the Compliance Officer Example of an application question: Jean Hill, the representative of DCB Investments, must advise a client, who is retiring, on specific investments. Which of the following aspects is Jean NOT obliged to disclose about a recommended financial product unless enquired about by the client? A. The risk of possible capital loss in future, due to fluctuations in the
financial markets B. Information and graphs to illustrate the product’s performance at intervals over a period C. Any income and other relevant tax issues of a material nature that need to be considered D. Any material illustrations about the product provided by the product supplier Example of an analysis question Consider the following events that occurred on the same day. Each of these events has, in terms of the relevant legislation, varying periods during which the FSP must respond to the event, or otherwise adhere to the legislation. Arrange the events in order of shortest to longest applicable period and select the CORRECT option. i. The FSP uses a new postal address and must inform the Registrar of the change ii. The FSP received cash funds, exceeding the cash threshold reporting requirement, and must inform the Financial Intelligence Centre
iii. The Registrar has requested that the FSP provide certain documents pertaining to a client’s advice record iv. A client terminated a financial product and the FSP is now required to maintain records of advice associated with this client’s purchase for an additional period v. The FSP received client funds and must pay the funds into the bank account designated for client funds vi. During an office meeting, the FSP provided a client with the details of the product supplier, and must now provide the details to the client in writing A. (i) then (iii) then (ii) then (vi) then (v) then (iv) B. (v) then (ii) then (iii) then (i) then (vi) then (iv) C. (ii) then (vi) then (v) then (i) then (iii) then (iv) D. (iii) then (v) then (ii) then (i) then (iv) then (vi) Reference material The following material was used in the development of the questions for the Regulatory level 1 examinations; please refer to appendix B for a mapping of criteria to relevant material: • The FAIS Act • General Code of Conduct • FIC Act (FICA) • Board notices Preparation It is essential to start preparing for the regulatory examinations at least three months before your examination date. Although attending workshops and training will certainly be helpful, this is no replacement for extensive studying of the required material. Steps to follow: 1. Identify the regulatory examination(s) that apply to your situation. 2. Find the corresponding sets of qualifying criteria for each of the relevant regulatory examinations. 3. Work through the qualifying criteria and make sure you understand them against the relevant acts and legislation. 4. Use of additional study material is advisable but optional.
Study material and training Numerous training materials have been developed by various training providers for the purpose of the regulatory level 1 examinations. Note that the FSB does not endorse any of these training materials. It is advisable to still refer to the relevant legislation as contained in the acts and regulations in order to eliminate differences in terminology use, if you decide to use designed study material and/or training.
What to expect when writing these examinations Strict examination procedures will apply at all times to help ensure that the integrity of the examinations is protected. You will have to identify yourself before the examinations start, using a photo ID document. Examination tips for multiple choices: Read carefully and pace yourself. Try to answer all the questions but do not procrastinate on a question – rather return to the question later. The following is a guideline for the allowable time per type of question: • Knowledge: ½ - 1 minutes per question • Understanding: 1 - 1½ minutes per question • Application and analysis: 1½ - 2 minutes per question Do not mark the first option that you think may be correct. Do not assume facts. The only facts that you have to take note of are the facts given in the question. If the question tells you that unicorns exist, do not argue with the question. Do not expect a certain pattern to answers. Just because you have answered “C” for ten consecutive questions, it doesn’t mean the next answer will be “C”. Finding results The examination bodies will make the examination results available on the FSB website. Please check the FSB website six weeks after the examinations, on the FAIS page. You will use your ID number to access your results. FAQ • What is the difference between a key individual and a
representative examination? The key individual level 1 examination addresses the tasks, knowledge and criteria that are relevant to the role and function of a key individual (KI). Remember that the KI is responsible to “manage and oversee” the rendering of financial services within an FSP. The questions will thus be aimed at finding out whether the KI understands the aspects he/she is held accountable for in terms of the legislation.
Numerous training materials have been developed by various training providers for the purpose of the regulatory level 1 examinations. Note that the FSB does not endorse any of these training materials.
The level 1 regulatory examination for representatives focuses on those tasks, knowledge and skill criteria that describe what they are held responsible for in terms of the legislation. Remember that the representative actually gives advice and/or renders the intermediary service. The questions will thus focus on the activities that are performed by the representative. • When will the regulatory examinations be updated if the legislation is changed? The regulatory examinations will be updated within six months of the publication of the amendment to the legislation. • What do I do if I have special needs? Candidates with special needs must contact the examination body when they are registering, to arrange for any assistance they require. For a full list of the examinations a n d a s t u d y g u i d e, p l e a s e v i s i t www.momentarily.co.za
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Healthy habits can lead to a
Healthy
bank balance Getting paid for being aware of one’s health status, and for trying to improve it by being active and following prescribed treatment protocols (if applicable), may have sounded a little suspicious to you and your clients a year ago. However, participation levels in the HealthReturns programme show that Momentum Health members are increasingly pursuing the potential R3 600 a year that can be earned, and reaping all the benefits of doing so.
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Health
In fact, the health assessment open days held to date have been oversubscribed. Members have been monitoring their HealthReturns payouts very closely since Momentum announced that in 2011 they could double the available R1 800 per year by also joining Multiply, and maintaining activity levels in the top two tiers. Since payments in 2011 will be more frequent as well – every three months, as opposed to the previous one payment per year – members can now remain motivated. They will experience the rewards and advantages of participating in this programme on a more regular and ongoing basis. Members can do Health Assessments at Clicks, Dis-Chem, Atlas, Sparkport, Umhlatuze, Tzaneng and Pelican pharmacies, and the results remain valid for 12 months from the date of assessment. While Clicks and DisChem will automatically forward the health assessment results to us, members can also personally log on to www.momentumhealth.co.za to log results obtained from other pharmacies or their general practitioner. The HealthReturns programme is open to all members on Momentum Health’s Access, Custom, Incentive, Extender and Summit Options. Members qualify for one free Health Assessment per year as part of their Health Platform benefit, measuring: • Blood pressure • Body mass index (BMI) • Cholesterol test (finger prick) • Blood sugar test (finger prick) The above tests will serve to evaluate their general health status. Where results of the health assessment show elevated risk levels, Momentum Health may recommend further testing by the
Text: Lee Ann du Toit, Chief Marketing Officer Momentum Medical Scheme Administrators Image: © iStockphoto.com
treating doctor. Thereafter, members may be advised to register on a Chronic Disease Management Programme and to fully adhere to prescribed treatment protocols. For many members, however, once they have been for their health assessment, the only step that remains is to be active. Momentum assesses members’ activity levels according to: • the outcome of a fitness assessment completed at a Virgin Life Care or Wellness Coaching Network facility (R195 cost of fitness assessment can be paid from Health Saver), the results of which are valid for six months; • their pedometer steps, if they own a Momentum pedometer and download their steps on the pedometer website (pedometer can also be paid from Health Saver); • Multiply membership is not a prerequisite for participating in the HealthReturns programme. However, for members who do belong to Multiply, their gym visits, at a Virgin Active or Planet Fitness gym will be used as a third qualifying measurement to earn HealthReturns. If a member owns a Momentum pedometer, has completed the appropriate fitness assessment and belongs to an appropriate gym through Multiply, their HealthReturns will be calculated on the highest of the three results. Not only do they get three options for earning HealthReturns but, Multiply members who are on the top two activity levels will also receive double the amount in HealthReturns! The number of steps, gym visits or fitness level required to reach each activity level and the related amount in HealthReturns that can be earned, are as follows:
Momentum Health sends a monthly SMS to the members, indicating the amount they will be accumulating in HealthReturns for that given month. Actual payment of the HealthReturns takes place every three months and can now also be made directly into their Health Saver account – thereby extending access to day-to-day benefits even further.
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Legislation
How to Claim a
Foster Child as a Dependant
What does the law say regarding foster children as beneficiaries in the event that their caretaker passes away? We help you navigate this complicated legislation.
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LEGAL UPDATE 1/2011: A FOSTER CHILD MAY BE CONSIDERED A FACTUAL DEPENDANT In the Adjudicator’s determination of A Gerber (the complainant) v Aberdare Cables (Pty) Ltd Provident Fund (the Fund) and NBC Fund Administration Services (Pty) Ltd (the Administrator), the matter dealt with the way in which the death benefits were allocated and distributed under section 37C of the Pension Funds Act (the Act). Background The complainant is the surviving spouse of the deceased member, Mr E Gerber, who passed away in August 2008. At the time of Mr Gerber’s death, he was a member of the Fund. He was also living with the complainant and a minor child from a foster home, Ms Angelique Lombaard (Angelique) at the time of his death. Complaint The complainant is upset that the Fund considered Angelique a dependant of the deceased, as she is of the view that Angelique is a foster child who was only placed in the care of the deceased and, as a result, cannot be seen as a dependant of the deceased. The complainant further alleges that – • A foster child cannot qualify as a dependant, as foster care is only temporary; • Foster care cannot be seen to give rise to continuing maintenance obligations; • The deceased member never intended to continue maintaining Angelique indefinitely; and • Angelique has been returned to her previous care as from 23 October 2008. It would be unjust and inequitable if she received a death benefit while in fact she was maintained throughout by the Christian Social Service Council. Since the deceased’s death she has been in the care of MTR Smith Children’s Home. Response The Fund and Administrator listed the following reasons for considering Angelique a dependant of the deceased – • The trustees must be satisfied that the beneficiary was either a factual or a legal dependant of the deceased at the time of his death. The dependant does not have to be the biological child of the deceased. • Upon investigating the circumstance the trustees discovered that Angelique lived with the deceased at the time of his death and she was a registered dependent on the deceased’s medical aid fund. • The investigation revealed that Angelique was financially dependent on the deceased in terms of the definition of dependant in the Act which includes a person for whom the member (i.e. the deceased) is not legally liable for maintenance, if such person, in the board’s opinion, is in fact dependent on the member for maintenance at the time of the member’s death. • The investigation also revealed that the deceased intended to adopt Angelique as he considered her to be his own child. This was revealed during interviews with friends and family.
Sec tion 37C
Minor foster child considered a dependant Reasons the complainant alleges the minor foster child cannot be seen as a dependant
The Fund and Administrator’s response
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Legislation
The law “Dependant”, as defined in the Pension Funds Act, in relation to a member, means – a. a person for whom the member is legally liable to pay maintenance; b. a person for whom the member is not legally liable for maintenance, if such person – i. was, in the opinion of the board, at the death of the member in fact dependent on the member for maintenance; ii. is the spouse of the member; iii. is the child of the member, including a posthumous child, an adopted child and a child born out of wedlock; c. a person for whom the member would have become legally liable for maintenance, had the member not died; (Their emphasis) Application of the law The above definition is divided into three categories. Paragraph (a) requires a legal duty, arising from legislation, to be present before the beneficiary can be regarded as dependent on the member for maintenance. Paragraph (b) governs the position of beneficiaries that are dependent on the member in circumstances where there is no legal obligation on the member for maintenance, like a self-supporting major child (i.e. factually dependant). Paragraph (c) refers to persons who are presently not dependent on the member for maintenance but who might have become dependent on the member at some point in the future had the member not died. Determination The court held that factual dependency is a factual inquiry that is dependent on the facts of each case. The factors that the court took into account included the fact that the deceased was a primary care-giver to the minor child, the deceased included her as a beneficiary on his medical aid fund, the deceased provided her with shelter as she was residing with him at the time of his death and the deceased treated her as his own child and had the intention of adopting her. In coming to the above conclusion, the court also considered Coetzee v Toyota South Africa Pension Fund and Others where the Adjudicator ruled that although the parties
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Definition of “dependant”
Legal dependant Fac tual dependant Future dependant
Fac tors taken into account
were divorced, the surviving ex-spouse was recognised as a “qualifying spouse” as she was still financially dependent on the deceased and that the deceased was legally liable for her maintenance, albeit that the maintenance was in an unusual form. The former spouse therefore qualified as a dependant in terms of paragraph (a) of the definition of “dependant”. The court also considered the interim ruling of Thabethe v SACCAWU National Provident Fund and Others where it was ruled that in excluding the factual dependant (an “informally adopted” child of the surviving spouse and regarded as a stepson by the deceased) from the distribution, the fund had failed to effect an equitable distribution of the lump-sum death benefit. The trustees therefore correctly considered Angelique to be a dependant of the deceased in terms of the definition of dependant in section 1 of the Act. Relevance For BenefitsAtWork BenefitsAtWork should be aware of the different circumstances around factual dependency. As stated above, factual dependency is determined on a case-by-case basis and it is the duty of the trustees to investigate the circumstances of each case. Factors to consider in determining factual dependency may include, amongst others, • Reliance on the deceased for maintenance even though the person is not the biological child of the deceased; • The deceased is regarded as the primary care-giver; • The deceased included the person as a beneficiary on their medical aid fund; • The deceased provided shelter for the person; and • The deceased treated the person as their own child, with the intention of adopting the child. Therefore the person must be able to prove a reliance on the member at the date of death for the necessities of life. Examples of factual dependants can therefore be any of the following: • A person with whom the member lived as man and wife, including same-sex partners; and • An indigent relative of the member, i.e. a brother, sister, uncle, aunt and the children or grandchildren of such relatives.
Coe tzee v Toyota SA Pension Fund
Thabe te v SACCAWU National Provident Fund
Fac tors to consider to de termine fac tual dependency
Text: Anthea Mara Legal Adviser Images: © iStockphoto.com
MARCH 2011
51
Wealth: portfolio construction
Why
Structured Products?
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MARCH 2011
In this article Mickey Gambale assesses the reasons for using structured products in portfolio construction.
Structured p r o d u c t s hav e a ma j o r r o l e t o p l ay i n t h e i n i t ia l construc tion and subsequent mai n t e n a n c e o f a p o r t f o l i o, a s t h e y ca n b e u s e d to address some o f t h e t y p ica l ly c o n f l ic t i n g i n v e s t o r w i s h e s o f ca p i ta l protec tion and equit y-t ype grow th.
Text: Mickey Gambale Stuctured Products and Annuities Momentum Wealth Image: © iStockphoto.com
Structured products have often been the topic of heated discussion with many investors adopting a love or hate relationship. When structured products first appeared in the South African retail market, investors and financial advisers alike rushed to place investments, thinking they could have their cake and eat it. In what seemed to be “too good to be true investments” with capital protection and market upside, it was an easy decision. The result was that the majority of investors and advisers did not fully understand what they were investing in and on maturity, when the product delivered on its “payoff profile” investors were disgruntled as this payoff did not match expectations. Structured products offer a predetermined redemption formula or payoff profile for a given maturity. This takes into account the performance of one or several underlying assets such as equities, indices, funds, etc. For example, a typical three-year equity linked redemption formula could run as follows: 100% capital protection with 100% participation in market growth to a maximum of 35% of the FTSE/JSE Top 40 price return index. In laymen’s terms this means that on maturity the investor would have participated in 100% of the growth of the FTSE/JSE Top 40 price return index (if any) to a maximum of 40% growth with the benefit of capital protection should the market performance have been negative over the period. So how is this achieved? Generally speaking, the above investment product will make use of a bond (this provides the guarantee) and derivatives instruments in the form of a call spread (this provides the market upside). There is thus no smoke and mirrors and the economics of the product are fully market-related. As with any investment, it is critical that investors are fully aware of what they are investing in, as it is this lack of a proper
understanding of the payoff profile that results in expectations not being met and the structured product then receiving criticism. Structured products are in most cases formula-based and cannot offer any payoff profile other than the one agreed on. In this way the method of calculating returns is completely transparent and investors know upfront what they are investing in. Structured products are particularly attractive for investors with specific investment periods, at the end of which they need to recover their assets for another use such as purchasing an annuity. By matching the investment period with the product maturity, assets are managed in optimal fashion during that time. Most structured products offer capital guarantees. This feature has become so common that its importance is often overlooked. During the market crash of late 2008 and early 2009, for example, the FTSE/JSE Top 40 Index lost roughly 45% of its value. It was no small thing to be able to recover 100% of one’s capital and in fact the FTSE/ JSE Top 40 Index has still not yet fully recovered. Structured products with clearly identified maximum loss limits are therefore attractive to investors. In conclusion, portfolio construction must reflect the investor’s risk appetite and investment objectives and the instruments chosen must be understood by the investor. Structured products have a major role to play in the initial construction and subsequent maintenance of a portfolio, as they can be used to address some of the typically conflicting investor wishes of capital protection and equity-type growth. Their popularity is on the increase and many studies have shown the benefits of their use in portfolio construction. Structured products as an “asset class” is thus not an area anyone involved in investing or even developing client portfolios can afford to ignore.
MARCH 2011
53
Profile
Serving
Two Worlds
Text: Albert Roux, an MDS GM shares his successes
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“The man who makes a success of an important venture never waits for the crowd. He strikes out for himself. It takes nerve, it takes a great lot of grit; but the man that succeeds has both. Anyone can fail. The public admires the man who has enough confidence in himself to take a chance. These chances are the main things after all. The man who tries to succeed must expect to be criticised. Nothing important was ever done but the greater number consulted previously doubted the possibility. Success is the accomplishment of that which most people think can’t be done.” CV White.
Albert Roux, Momentum Distribution Services (MDS) general manager (GM), started with Momentum as a health specialist marketing adviser for the Pretoria region on 1st August 1996 and then transferred to the Tshwarane region in 1997 as a retail marketing adviser with a strong focus on healthcare business. In 1999 Jannie Coetzer promoted him to regional manager for the Mpumalanga region where he was groomed for eight years. His responsibilities have been made easier since. As the GM of NEOS Province; Albert Roux has huge responsibilities and tasks set out for him. As a multidistribution channel in diverse market segments, the task is twofold: firstly, to understand the needs, dreams and goals of our intermediaries and secondly, to exceed their expectations and deliver on achieving company targets, i.e. production, product-specific needs, as well as the key element of growing MDS “and taking it to greater heights”. What is the key to growing MDS? “The key drivers to achieve this lie in our relentless focus on intermediaries through strategic relationships, passion for service excellence and our highly skilled regional managers, marketing advisers and administration staff. Human dynamics intrigue me,” says Roux. In line with Momentum’s values – “Innovation is a huge passion of mine – the art of creativity! The freedom within the Momentum structure and culture is very conducive to innovation.” He is an adventurer by nature. On life… “My wife would tell you that there is just about nothing that I haven’t done or at least tried, so that means I never say NO, I never doubt myself and I
tend to try harder. Life is full of challenges; initially it was a huge challenge to sell new-generation healthcare products to what seemed at the time a very stagnant and boring industry. However, later as a regional manager, the challenge was to find and appoint the right people not only for their skill but also to match personalities to the roles.” Roux feels the only way to deal with challenges is through faith and belief: “To believe in yourself, your people and your product. To live life passionately and constantly challenge yourself to seek new and exciting opportunities, as this is a catalyst for personal growth,” he says. His interests and hobbies include playing golf (handicap 11), venturing into Africa annually on 4x4 safaris with friends, mountain biking, fly fishing and cycling. He has eight Cape Argus and two Momentum 94,7 chellenges under his belt. He used to play provincial rugby but for the sake of nor getting hurt he now shouts from the sidelines and is a staunch Stormers and Western Province supporter. What he loved about his previous position was to give someone an opportunity and see them use it to grow stronger and become successful. “The opportunity to harvest wisdom from your past is a golden gift to be prized.” What he hated most was being away from his family for so many nights. Albert is seen as inspiration in a bottle! “Momentum’s people take responsibility and ownership for their actions and their consequences.” This is one of the values that he is most proud of, especially because Momentum’s business values are based on integrity and accountability. The reason he has
been with Momentum for 14 years is due to the alignment of his personal values with those of the organisation. “I love the Momentum culture,” he says. The biggest accomplishment in Albert’s life is making an impact on and a difference in some people’s lives. Order and organisation is not an end that you kill yourself to reach or maintain - it is a way to function effectively. The two aspects that help Albert organise are proper planning and an “angel” called Daphne Apollos. We all have ways in which we handle pressure, and Albert says that he is an adrenalin junkie, so pressure is second nature to him. However, he does believe in balance and that one should make time to stand still and reflect. What motivates him is to give of himself, giving others opportunities, seeing them grow and become successful. “Life is all about what you give, not materially and financially but of yourself, your gifts and talents,” Albert says, “we have a choice regarding the attitude we will embrace. We cannot change the past nor the inevitable, however, we can play on the one string we have, our attitudes.” Albert.
“ To be l i e v e i n yo ur s e l f, yo ur p e o pl e a n d your p r oduc t. To l i v e l i f e pa s s i o nate ly a n d con s ta n tly cha l l e n g e yo ur s e lf to s e e k n e w a nd e xci t i n g o p p o r t u nitie s, i s a catalys t f or p e r s o na l g r o w th.”
MARCH 2011
55
FundsAtWork
Momentum Asset Consulting
A closer look at
Replacement Ratios
Momentum FundsAt Work provides its consulting service to clients and brokers to help them understand their abilit y to retire, and to provide a process of how to compile an investment strategy for the fund and, ultimately, the members.
Momentum FundsAtWork now offers asset consulting services to further enhance what financial advisers can offer their clients through FundsAtWork.
Text: Ferdi van den Berg, Head: Asset Consulting Analyst Momentum FundsAtWork Asset Consulting Image: Š iStockphoto.com
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Research has shown that members want to make their own investment decisions, but they do not really understand the implications of their choices. Asset consulting provides employers, retirement fund board members and financial advisers with comprehensive advice through bespoke, liability-driven investment strategies, to help members achieve their desired investment objectives. We also help them to understand their members through an annual asset and liability process and express this understanding as a replacement ratio. Replacement ratios are closely linked to the question most members ask; do I have enough money to retire? This seems to be a loaded question, because people are so different. To help people understand how much they will have relative to their salary when they retire, we calculate a replacement ratio. To calculate your replacement ratio you need to know your projected salary as well as your benefit amount at retirement. The calculation in a defined contribution fund is more subjective than a defined benefit fund, due to the variables used for the annuity calculation. Because replacement ratios depend
on subjective inputs that can significantly affect the pension amount and replacement ratio, these ratios cannot predict but merely project, based on your current situation. The idea of retiring on 75% of your final salary might seem worryingly low for some people who would expect to have at least the same income level that they had before retirement. However, we tend to forget that when we retire, our financial needs and requirements change. So what happens if a member’s replacement ratio is dangerously low? The answer is either to postpone retirement and contribute more or to take more investment risk to improve the ratio. Momentum FundsAtWork provides its consulting service to clients and brokers to help them understand their ability to retire, and to provide a process of how to compile an investment strategy for the fund and, ultimately, the members. Here is a quick way to determine if a member is on the right replacement ratio path: members must contribute 15% (net after all costs) for 27 years at a real return of 6% to retire at 75% of their final salary.