Thursday, November 14, 2013

Chasing performance - A sure-fire way to lose money in the long-term

Source:
Money Matters
Author: Warren Ingram*|
05 November 2013 23:47
Chasing performance

A sure-fire way to lose money in the long-term.

The stellar performance of the JSE over the last two years is creating understandable anxiety about a potential market crash. At the same time, it is also luring some investors into dangerous territory as they start to follow funds and shares that have already performed brilliantly in the hope that this performance will continue. As history has repeatedly taught us, chasing performance is a sure-fire way to lose money in the long-term.

THESE HAVE BEEN THE “GOOD TIMES”

The All Share Index has grown by more than 25% per year for the last two years and by 17% per year for the last five. In anyone’s books this is a great return for equity investors and represents some of the best growth we have seen for a long time. This performance has created some major pitfalls that will catch unsuspecting investors so you need to exercise caution with your next investment decision.

DANGER: POTHOLES AHEAD

To illustrate these dangers, Resources unit trusts (those that invest in the mining sector) have averaged 4% growth for the year ending September. Over the same period, unit trusts investing in the Industrial sector have averaged 35% - a brilliant return. When investors start reviewing the most recent unit trust performance rankings, funds that have had a major exposure to mining houses will look very sickly compared to those that are invested in Industrial shares.

Investors will therefore be tempted to move out of funds with poor performance into those that have shown recent growth of 30% to 40%. Unfortunately, this is likely to be a bad investment decision. The valuations of the shares in the Industrial sector are way above their long-term fair value. As an example, Naspers and Remgro are more than double their long-term PE’s. This is not sustainable and what goes up eventually comes down again. With shares, the correction is often brutal. So if you decide to invest new money into a fund that has just achieved a return of 35%, you need to be sure that you are not being overinvested in shares that are completely overvalued.

WHAT STRATEGY TO FOLLOW

If you are invested in a fund that has delivered a return of 20%, you might feel hard done by as the average equity unit trust has delivered a return of 22% over the last year. However, you need to understand how your fund is invested. You might be in a well-diversified portfolio with shares that are trading below their long-term value. If that is the case, a return of 20% is brilliant because your potential losses are limited and you might see great growth going forward.

Successful investing is about consistent returns – the more consistent your growth the better. Here is an example, if you had invested R100 into two funds for the last three years:

 
Fund 1
Fund 2
Year 1
20%
35%
Year 2
15%
-20%
Year 3
10%
35%
Value of R100 after 3 years
R152
R146

 

Fund 1 has never achieved a return of more than 20% but it has also did not lose money. It is this consistency of returns that enabled Fund 1 to outperform Fund 2. Over the longer term, greater consistency will ensure even more outperformance. This does not mean you should invest all your money in a money market fund which delivers VERY consistent but poor returns. Rather aim for funds that have a long track record of delivering growth that comfortably exceeds inflation.

Tuesday, November 12, 2013

SA Retail Estate have given the best returns over 10 years

Below is the Asset Class Performance table from Old Mutual Wealth. It makes for interesting reading.
 
 
Over the 5- and 10-year periods, SA Properties have been the top performer, followed by SA Equities.
 
It demonstrates properties and equities as long-term growth assets.

Thursday, October 10, 2013

Elias Mnyandu, Editor Business Report, SACCI Convention 2013

Elias Mnyandu, editor business report
SACCI Convention 2013

reflect issues facing our country
Africa is on the move, let's get down to business

South Africa in the age of resurgent Africa

president zuma says South Africa is a special place
bordered by two oceans
triumph of human spirits

South Africa is the only country in Africa that has Africa in its name

1 million readers. with social media, the media industry is turned upside down

We are in an age of experimentation and change

we are witnessing history in the making
there are immense opportunities for us to impact
We either embrace change, or become irrelevant and die

The potential of South Africa lies in its people.
heartening to see close the gap in infrastructure on the continent
private sector will play a bigger role in infrastructural development.

Nearly half of the continent faces water scarcity

Technology: increase broadband penetration by 10%
Africa has enormous arable land

Mauritius is the only African country to rank in the top 50 in terms of maximising human resources

Chinese proverb says a man is most tired when standing still

WEF human capital index






Elias Mnyandu, Editor Business Report, SACCI Convention 2013

Elias Mnyandu, editor business report
SACCI Convention 2013

reflect issues facing our country
Africa is on the move, let's get down to business

South Africa in the age of resurgent Africa

president zuma says South Africa is a special place
bordered by two oceans
triumph of human spirits

South Africa is the only country in Africa that has Africa in its name

1 million readers. with social media, the media industry is turned upside down

We are in an age of experimentation and change

we are witnessing history in the making
there are immense opportunities for us to impact
We either embrace change, or become irrelevant and die

The potential of South Africa lies in its people.
heartening to see close the gap in infrastructure on the continent
private sector will play a bigger role in infrastructural development.

Nearly half of the continent faces water scarcity

Technology: increase broadband penetration by 10%
Africa has enormous arable land

Mauritius is the only African country to rank in the top 50 in terms of maximising human resources

Chinese proverb says a man is most tired when standing still

WEF human capital index






Elias Mnyandu, Editor Business Report, SACCI Convention 2013

Elias Mnyandu, editor business report
SACCI Convention 2013

reflect issues facing our country
Africa is on the move, let's get down to business

South Africa in the age of resurgent Africa

president zuma says South Africa is a special place
bordered by two oceans
triumph of human spirits

South Africa is the only country in Africa that has Africa in its name

1 million readers. with social media, the media industry is turned upside down

We are in an age of experimentation and change

we are witnessing history in the making
there are immense opportunities for us to impact
We either embrace change, or become irrelevant and die

The potential of South Africa lies in its people.
heartening to see close the gap in infrastructure on the continent
private sector will play a bigger role in infrastructural development.

Nearly half of the continent faces water scarcity

Technology: increase broadband penetration by 10%
Africa has enormous arable land

Mauritius is the only African country to rank in the top 50 in terms of maximising human resources

Chinese proverb says a man is most tired when standing still

WEF human capital index






SACCI president Clive Manci speaks, SACCI Convention 2013

SACCI president Clive Manci speaks.
SACCI Convention 2013

Believe a lot can be done.

Focus on education, reduce cost of doing business

SACCI plays an active role in BBBEE codes of good practice. Believe can achieve this without additional cost of compliance

MOU designed for businesses to engage with governments of all levels

Challenging labour environment, SACCI raises issues with labour minister.

untenable:
intimidation by striking workers
protected nature of industrial action
adversarial statements arising from industrial action. not conducive to job creation.

We need to ensure abiding by the provisions of law.

Advocacy into 2014, need for SA to become an attractive investment destination

As we take on 2014, SACCI seeks to pursue 5 strategic areas, with the theme of driving investments to grow SA economy

1. Clear policy direction, through NDP
2. work with like minded organisations, like brand SA
3. work with DTI to reduce cost of doing business

Wednesday, October 9, 2013

Business Partners, Leading Investor in SMEs, SACCI Convention 2013


Business Partners
Leading Investor in SMEs

David Morobe, Regional General Manager
SACCI Convention 2013

Economic trends & discontinuities
Global
Africa - booming economies; is the 21st century the dawn of Africa era?
South Africa:
  • fragile recovery from the 2008 GFC and 2009 recession
  • vulnerable to European economic malaise and slow growth in North America (which, together accounts for >50% of SA exports)

Overview of the SA SME market
1.5 - 2 million SME and SMMEs operate in South Africa
Confidence level: 35% extremely confident

Business Partners is a specialist investment group, providing finance and mentorship for small and medium enterprises in South Africa. Now growing to English speaking parts of the continent
A risk financier, founded in 1981 by Anton Rupert
31 offices around the country
300 to 600 investments per annum in SA

Offers:
Financing
Mentorship
Property finance and management
Manage funds

69,000 businesses financed
R12.5bn rotated
R1bn finance available

The target market:
Mainly family owned, SME
E.g. Wimpy franchises, manufacturing plant

Procedures we follow:
  • work in small teams
  • Do proper due diligence
  • Prepare an approval report
  • Committee decision
  • Implementation follow
  • Post investment action

Viability based financing:
Focus on business
Entrepreneurial ability

Business Partners Venture Fund (R400 million)
Early stage investments, after research
investment period: normally 5 years
Exit strategy: preferably trade sale

Buying vs renting:
Decide to buy own premises
Normal bank principals
Entrepreneur has no deposit
can lose opportunity

Normally bank will require 30% deposit, Business Partners fund 100% of building. By year 4 to 5 break even

Investment capital of between R500,000 and R25million

George, lab doing tests for foodstuffs

Property investments: R787 million with 2,000 tenants

Graduate internship program
Schools entrepreneurship program
SME Tool kit
Business Mechanics and home website

Deal generation:
accountants, bankers, brokers, consultants, attorneys, agents as intermediaries 54.5%
Existing clients 36.3%
Marketing action 9.2%

What makes us different?
The approach
Personal contact
Funding flexibility

SACCI Convention 2013, Productivity SA


Productivity SA
SACCI Convention 2013

Vision
Our vision is to lead and inspire a competitive and productive South Africa.

Mission
To improve productivity by advising, implementing, monitoring & evaluating solutions aimed at South Africa”s competitiveness

Stages of interventions:
Emerging
Stable
ICU

Productive capacity building SMME Programme:
Business start-up training, partnership with SETA, funding by DTI
Business improvement workshop
Coaching and after-care programme, incubation projects

October is the month of productivity in South Africa

Customised capacity building approach - SMME

Scoping - business analyst measuring
Determine baseline
Design proposal/indicate cost sharing/benefits
Sign agreement/MOU/implementation plan
Phased approach/early warning methodology
Showcase outcome/lessons learned

Partnerships are key, cooperative developments

Schools programme:
Principal training awareness

Productivity awareness & advocacy

SACCI Convention 2013, A new take on tech in the SME Journey, Vodacom

A new take on tech in the SME Journey

Vodacom Business
SACCI Convention 2013#sacci2013

Concerns on education
Focus on SME by Vodacom

  1. Moving with the times

Running a small business is no easy fate
Business a few years ago was easier
Now clients become more sophisticated, need for robust ICT solutions. One size doesn't fit all
Each business has different IT needs

  1. Taking on the journey together
Analogue to digital
Buzzword now is cloud computing
Voice messaging
SMEs look for partners to develop and implement technology, Vidacom vie to become virtual CIO to small businesses
23% people use own device to work
32% of people routinely check email before going to bed

SME connectivity: First Mobile PABX, virtual switchboard, mobile and fixed convergence
Vodacom One Net Express
011 seen as bigger business

SME transformation:
voice
mobile email and mobile applications
data
fixed solutions
convergence 
unified telecommunications
cloud - getting solutions from the cloud
MS office 365 solutions, SAP

Vodacom Business Product stack:
Converged comms
Machine 2 Machine

  1. Evolving with the SME environment
SME starter
SME Business Progressor
SME Business Accelerator

Business applications: CRM ERP, Fin, HR

SACCI Convention 2013, Make Business Growth Happen, Nedbank

Make Business Growth Happen
Adrian Dubru Nedbank
adriandub@nedbank.co.za
Tel 011 294 0050
simplybiz.co.za

Focus on:
start-up business
franchises
Profesional entities
Established businesses

Challenges faced by entrepreneurs:
Access to markets
Financial acumen
Business formalisation - close to 1m SMEs in South Africa, but most not in formal sector - to run business finance separate from personal finance
Access to support services
Lack of collateral

Business constraints:
Crime and corruption 47%!!!
Fear of failure 38%
Electricity issues 15%
Access to finance 7%
Inadequate skilled labour 6%
Labour regulations 5%

Nedbank's approach:
The centre as your business
Bank and Transact
Finance your business
Invest and protect

Nedbank's philosophy
A focused client driven approach
We understand the unique challenges
A credit philosophy aligned to your focus
Service efficiency and excellence

Small Business Friday 6 Sep 2013 - focusing and supporting local businesses
It's my biz flighted on eTV, creating awareness
Mobile app to help people find businesses on the map, simply register business on simplybiz.co.za, don't have to be a nedbank business client
PocketPOS app on mobile device, need cellphone signal, enabling e-commerce, process transactions while moving - card transactions

Finance options:

Short term - working capital, debtors, stock, overdraft facility, debtor finance, guarantees

Medium term:
  • Fixtures and fitting
  • Renovations of premises

Long term:
  • Property finance

SACCI Convention 2013, Supplier Management by Ntabiseng Dube, ABB

Supplier Management by Ntabiseng Dube, ABB
SACCI Convention 2013

ABB Quality Policy
ABB an electrical engineering company based in Zurich. ABB SA 80% owned by ABB Group and 20% by Wiphold

Supplier Process:

  1. Supplier identification
  2. Qualification - company management, sustainability, product / process design, operational excellence, continuous improvement, costs. If score is above 50%, put on a development programme; if 80%, then onboard
  3. Onboarding - onboarding form to complete, mandatory info: BBBEE, tax clearance, bank details, company reg.
  4. Performance evaluation: to evaluate suppliers, to supply to ABB around the world.
  5. Classification - FLOP 10 worst of the worst, cost of poor quality (COPQ)
  6. Development, or de-sourcing

Advanced Supply Chain Collaboration (ASCC)

Opportunities to building a strategic partnership:
turn key solutions
Leveraging

Neels de Jager: Country Supply Chain Manager
neels.de_jager@za.abb.com
Tel: 010 202 6066

ABB has lots of programmes, serving Southern and Central Africa
Solar, green projects
Education, FET colleges, take students to premises to expose them to technology, even working with lecturers to impart the right knowledge

SACCI Convention 2013 - Neotel and SME development


Neotel and SME development
SACCI Convention 2013

SA economy R1.6 trillion
SME account for 34% of SOuth Africa's GDP
The internet economy: a 10% increase in internet penetration leads to a 1.3% increase in GDP

Neotel's contribution:
Metropolitan networks 8500km
National long distance 15,000km
Fibre, Wimax, LTE in Gauteng
Neotel LTE specifically targeted for SME
Neotel academy - full SETA accreditation, 12 month programme with option for extended training
N2 education hub

SACCI Convention 2013 - Business in a New Africa Paradigm


SACCI Convention 2013

Business in a New Africa Paradigm
by Sisa Sishona, ABSA
SA spends the highest dollars on education on the Africa continent
Education a key driver, but education system has failed
Lowest results in numeracy ability in Africa

25% unemployment rate

Tax base:
15 million citizens on welfare, but only 6 million taxpayers - unsustainable

Amendments to BBBEE scorecard - 2013
Consists of 
ownership 20%
Management (Board/Exco) - consolidated with EE
Employement equity 15%
Skills development 15%
Preferential procurement 25%
Enterprise development 20%
Socio-economic development 5%

  1. Compliance elements reduced from 7 to 5
    1. Introduction of priority elements - ownership, skills development etc
  2. EME increased to R10m turnover p.a. - default Level 4 100% contributor
  3. QSE R50m
  4. Fronting to be a criminal offence - 10 years imprisonment

Is BBBEE relevant?
 South African context:
poverty and unemployment
education
localisation

Europe - Africa's primary trading partner
SMEs are among the major drivers of the economy
Top 4 economies in the world share a passion for entrepreneurship: US, China, Japan and Germany
SMEs drive innovation and productivity
SMEs employ in excess of 60% labour force in SA

Africa window of opportunity:
Booming population - electricity need
Rising incomes
Rapid urbanisation
Opening trade

Demand will create itself
The Economist: the changing sentiment: The hopeless continent in May 2000, to Africa rising in Dec 2011
Does SACCI have network with other chambers of commerce in other African countries?

Intra-Africa Business: low and slow, more likely to find Kenyan products in London for example
Need to remove visa barriers and infrastructure challenges

Addressing the three key challenges of small businesses
  1. Access to Markets - if have a certain market, the money will find you
  2. Access to Funding - each province has its own development agency
  3. Access to Business Support

Do not have an entrepreneurial culture in SA - rather study, work your way up, and become an important person one day
Banks traditionally want collaterialised lending. But many people have no assets, on the other hand also need responsible lending
People who are technically good are lousy businesspeople.

ABSA Procurement Portal: A virtual market place for SMEs and Corporates - supply chain network, to be launched in January 2014
Big businesses want to do business with SME, but can't find them
12,000 SMEs onboard at the moment, want to grow to 100,000

Access to markets, makes SMEs visible; company information
Buyers can advertise tenders
Suppliers receive notifications of new tenders by E-mail
Access to Non Traditional Funding, to bridge the gap, as government pays eventually, in 6 months
Australia has strict 30 day policy to pay SMEs
ABSA offers procurement finance

Why small businesses fail:
34% poor financial management
16% lack of management competence
12% poor book keeping and records
11% sales and marketing problems

ABSA offers access to non-financial support:
ABSA entrepreneurship centres, with access to computers, softwares and coaches

Globally, businesses are started by 3F's: families, friends and fools!!!
Venture capital or equity lending is in short supply in Africa. Stellenbosch is such incubator

Wednesday, September 4, 2013

The Best Domestic Asset Manager in South Africa

According to the latest Plexcrown ranking method:

Total OverallPlexCrownsRank
Coronation4.6571
Allan Gray4.5232
Nedgroup Investments4.1523
PSG3.6984
Investment Solutions3.6185
Marriott3.5246
Prudential3.5087
Absa3.2998
Sanlam Investment Management3.2129
Old Mutual3.20010
Discovery3.08511
Investec2.95612
STANLIB2.90813
Momentum2.65114
Prescient2.59315
Oasis                             2.520  16

Friday, August 30, 2013

Wollies shoppers still splash out


Woolies shoppers still splash out

Cape Town - “We find the market is moving to us. We understand who we are and will stick to that,” said Ian Moir, CEO of Woolworths[JSE:WHL] after the company released it latest results on Thursday.

"The 27.3% increase in full-year profit is encouraging. It is not just based on one thing, though."

Woolworths had good growth in sales in clothing and market share gains in food sales were well above market.

It has been very profitable in South Africa and its acquisition in Australia and its financial services section have contributed as well.

Moir said the bulk of Woolworths business still very clearly evolves around the LSM 8 to 10 income groups.

High income consumers continue to splash out on upscale groceries and apparel.

“We saw consistent sales growth and do not see an impact of the economic situation on our customers at the moment,” said Moir.

Food sales were up 15.4% and Moir credits the company’s strategy of expanding its options and offering more bulk. The promotional and rewards programmes also worked well.

“We have grown our market share each month since September 2011, because we have the right offering for LSM 8 to 10,” he said.

“So we shall continue to expand our catalogue, open more stores and offer more promotions and price cuts. Woolies is a lot about quality and innovation with regard to prepared foods and we want to make sure we own the fresh side of the market.”

As for future plans, Moir said the company will look at opportunities as they arise.

"The rest of Africa will become an increasing power in our business," said Moir.

He is excited about growth in other African countries like Namibia, Botswana and Kenia. Sub Sahara Africa and the Southern Hemisphere remain the company’s focus.

As for challenges, Moir said these are very much what businesses are facing in general at the moment. It includes changes in the rand, increasing competition, especially in the clothing sector, and the difficulty of doing business in Africa.

Wednesday, July 17, 2013

Unit trusts industry

As of 17 July 2013, there are 123 asset management companies offering 988 unit trusts in South Africa.

Tuesday, May 28, 2013

Unit trust inflows top R47bn Asisa

Unit trust inflows top R47bn Asisa: SA’s Collective Investment Schemes industry attracted net inflows of R47bn in the first quarter, the Association for Savings and Investment SA says.

Tuesday, April 30, 2013

Largest unit trust funds in South Africa

Below are the 10 largest unit trust funds in South Africa, by total assets:

1. Allan Gray Balanced Fund - R61.6 billion
2. ABSA Money Market Fund - R57.8 billion
3. Standard Bank Money Market Fund - R35.7 billion
4. Allan Gray Equity Fund - R32.4 billion
5. Investec Opportunity Fund - R29.6 billion
6. Allan Gray Stable Fund - R29.0 billion
7. Coronation Balanced Plus Fund - R28.3 billion
8. Standard Bank Corporate Money Market Fund - R27.5 billion
9. Investec Money Market Fund - R21.6 billion
10. Stanlib Income Fund - R20.7 billion

These figures are as of 1 February.

It is clear the largest funds are dominated by money market and income funds, as well as Allan Gray funds.

Best performing sectors and funds over 5 years

Over the last five years, the best performing sectors are:
Property funds
Industrial funds

the best performing funds include:
Marriot Dividend Growth Fund
36ONE MET Equity Fund
Coronation Top 20 Fund
36ONE Met Flexible Fund
Foord Equity Fund
Momentum Small Mid-Cap Fund

the worst performing sector: Resources

Will the resources sector make a comeback? At the moment with the subdued global economic outlook, it is not going to happen any time soon.

Tuesday, April 16, 2013

Discovery Funeral Plan

Discovery Funeral Plan
 
Would you be able to give your loved ones the funeral they deserve?
 
Even though death may not cross your mind everyday it is important to consider if your family will be able to cope financially with a death.
 
Discovery Life is one of South Africa's fastest growing life insurers and you and your family will have peace of mind with their funeral cover. For as little as R55 per month you can receive this comprehensive funeral plan from Discovery Life, providing cover for your family.
 
You can select funeral cover from R10 000 all the way up to R60 000, depending on your individual needs. You can select funeral cover for you, your spouse, children, parents as well as extended family members.
 
In the event of an accidental death of you or your spouse, Discovery will automatically pay double the cover amount. This benefit is included free of charge and will apply for your whole life.
 
To find out more on Discovery Funeral Cover, contact Kevin Yeh or Aviwe on 011 658 133 or you can e-mail them on life@daberistic.com.

How to select the right investment manager

How to select the right investment manager

 
It is challenging for investors and their advisers to differentiate between investment managers in an ever-changing landscape. When assessing who is best placed to manage your investments it pays off to gather as much information as possible upfront and to ensure that the evidence is relevant to future outcomes, not past returns. Ultimately, selecting the right investment manager is more of a consistency contest than a talent or intellectual evaluation. A good acid test is to ask: will the asset manager likely be doing the same thing in 10 years’ time? By answering this, you need to look at the incentives, the business structure, the team stability, experience, breadth and evidence of past investment conviction and temperament. These types of questions avoid the natural inclination of anchoring on past performance when it is the future that matters.
An extension of this thinking is to avoid focusing on funds: rather see a fund as an underlying business, team and process.
So, what evidence is at your disposal and what should you be looking for?
There are generally two types of information. First is the external message: you can source the information that the investment manager presents to the outside world. This is fairly straight forward and is usually available on their website and via newsletters. Second, and more complicated, is to source evidence that evaluates whether or not the manager actually does what it says. There are a few ways you can assess this, for example, you can evaluate their investment holding period and portfolio turnover by assessing the frequency with which their portfolios or top 10 holdings rotate. Are they long-term investors or do they respond to short-term events? You can also see if the top 10 holdings align with those in the index, which may give you further insight into their investment style. In addition, you can look at team changes: stable teams often result in more investment consistency. Websites reflect core people – you can track them and gauge their experience: how long have they been managing this mandate and do they have the requisite experience?
Key criteria
These are a few high level ideas. But complete research involves examining the business and the team and, if done properly, will take time and involve several rounds of information gathering. While it is not recommended to adopt a ‘tick-box’ approach, there are some key criteria which, if fulfilled, can bring you comfort that an investment manager will most likely deliver on its obligations:
1. A business and shareholder that understands asset management. Look into the intent behind the shareholders. Are they likely to overload their investment team with too many offerings? Will they grow assets beyond what is digestible for active management to thrive? How do they measure themselves? And do they support their portfolio managers during periods of underperformance?
2. One or two individuals who drive the investment process and who love investing (and who are, therefore, often averse to marketing).
3. A team that has significant experience with the specific asset class and has sufficient depth in resources. There is, at times, an odd anomaly with South African asset managers who seem to have far more people allocated to SA investments than global, yet there is materially more work to do in global. Always ask: is the ratio of people to investment ideas appropriate, given the mandate? More often than not, an analyst cannot adequately research more than 15 investment ideas.
4. A low staff turnover environment of senior investment people. Can you trust the track record if the team changes frequently? Also look at the calibre of people who are joining; peer endorsement is a good sign.
5. A clear investment process that is deeply engrained into all corners of the team. It needs to outlive any individual and make intuitive sense.
6. They do what they say they do. It is important to look inside portfolios to see whether past actions are consistent with what is written on the tin. Different people in the same business should be giving the same message.
7. Appropriate incentives: do they align with the client’s promise? Are fees appropriate? Are they invested alongside the client? It is usually a red flag when an investment business sees financial rewards as the key determinant of behaviour and culture.
In the end, the selection of an appropriate investment manager is always going to be a judgment. There is no perfect answer. But we think that if you look for consistency (and the drivers of consistency) above all else, you will likely select a manager who delivers on their obligations.
If you lack the time and/or appetite to perform your own due diligence and make your own assessment, you may want to make use of the services of an independent financial adviser. Independent advisers do regular research and can assist you in putting together a portfolio based on your needs and your risk appetite.
SourceAllan Gray GrayIssue

Wednesday, April 10, 2013

Pravin’s big retirement changes on track

You won’t lose your rights to your savings

You need to gear up your retirement planning to meet T-Day and P-Day, when government will implement major changes to the R3-trillion retirement savings industry.

T-Day and P-Day are days when retirement fund reforms are scheduled to be implemented in or after 2015, with legislation based on government’s latest proposals for retirement reform being put before Parliament this year. The proposals are outlined in a discussion paper titled “2013 Retirement reform proposals for further consultations”.

This latest discussion document, released this week with the Budget, consolidates reaction to four discussion documents published last year on various aspects of retirement reform, including the preservation and taxation of retirement savings.

Apart from T-Day and P-Day, a number of other reforms will be implemented to boost the protection of your retirement savings, including the enforcement of better behaviour by your retirement fund trustees and measures aimed at reducing costs. The reforms also propose to bring statutory funds, such as the Government Employees Pension Fund and the Transnet funds, under the ambit of the Pension Funds Act, giving members the rights enjoyed by members of non-statutory pension funds.

T-Day

The recommendations for the still-to-be-set T-Day will affect the taxation of your retirement fund contributions. The recommendations change those made last year by Finance Minister Pravin Gordhan, which were scheduled for implementation on March 1, 2014. The latest recommendations are:

* Your employer’s contributions will be added to your taxable income as a fringe benefit;

* You will be able to deduct both your and your employer’s contributions to a pension fund, provident fund or retirement annuity (RA) fund up to 27.5 percent of the greater of remuneration or taxable income;

* The premiums you pay on group risk insurance will be included in the amount you may deduct from your taxable income;

* There will be a rand cap of R350 000 on the total amount you may deduct from your taxable earnings in any tax year;

* Contributions in excess of the annual cap may be rolled over to future years when you may not reach the cap amount;

* Any non-deductible contributions will be added to your tax-free lump sum at retirement; and

* From T-Day, any new contributions made to a provident fund will be subject to the same annuitisation rules as pension funds, namely that at least two-thirds of the savings must be used to purchase a pension at retirement. Any provident fund savings made before T-day, and any investment growth on those savings, will not be subject to the new pension purchase requirement.

P-Day

Government is proposing tighter controls on preserving retirement savings, but it will allow you to access savings before retirement during periods of unemployment.

However, vested rights will be protected to avoid a repeat performance of people resigning their jobs or getting divorced to get their hands of their retirement savings.

Recommendations for the preservation of retirement savings are:

* From P-Day, all retirement funds will be required to identify a default preservation fund to which members’ savings can be transferred if they withdraw from the fund before retirement. The use of an existing retirement fund to preserve savings for retirement is already a no-cost option for members who, if the fund rules allow, can stay on as deferred members with their savings protected and growing until normal retirement age. However, currently, no withdrawals are allowed. This will change with the new withdrawal rules.

* Currently, you are limited to one withdrawal from a preservation fund before retirement, but the withdrawal may be 100 percent of your savings. The new proposal is to allow for an income stream in periods of unemployment, allowing for one withdrawal a year.

* Withdrawals will be based on a formula. The proposed annual withdrawal will allow members of preservation funds to withdraw an amount that is the greater of the state old age grant (R1 260 from April 1) or 10 percent of their initial preservation fund deposit, excluding any portion to which vested rights apply. Any unused withdrawal amounts may be carried forward to future years.

* From P-Day, retirement fund divorce settlements will be subject to the proposed new preservation withdrawal rules allowing for a limited income stream.

Consideration is also being given to relaxing the preservation requirements of RA funds, from which you currently cannot make any withdrawals before the age of 55. (When you do reach 55, two-thirds must be used to purchase a pension).

Treasury is considering allowing RA fund members to transfer their balances to preservation funds, under conditions that will prevent them from seeking out additional tax advantages. The conditions may include preventing individuals who have transferred money out of an RA fund from rejoining that fund, or, alternatively, from receiving a tax deduction in respect of any RA contributions, for a period.

TREASURY INTENT ON OVERHAUL OF LIVING ANNUITIES

Investment-linked living annuities (illas) are due for a major overhaul to ensure that pensioners using them are not left financially destitute before they die because of high costs, poor advice, wrong investment choices and drawdown rates that are too high.

Life assurance companies are set to lose their stranglehold on the provision of illas, with government proposing that the requirement of a life assurance licence to sell illas be dropped.

It is proposed that collective investment scheme management companies such as unit trust and exchange traded fund companies be allowed to sell illas without, as they currently need to do, registering as a life assurance company or renting a life assurance licence.

National Treasury hopes this will increase competition and bring down costs.

It says most respondents to an earlier discussion paper pointed out that an important factor underlying the choice of annuity at retirement was that people with a low level of savings tended to choose illas in the hope that, because they allow for higher initial pension payments than conventional annuities, they could maintain their living standards.

Most respondents were in favour of reforming, rather than replacing illas.

Treasury says:

* Many of the difficulties associated with illas may be direct or indirect consequences of the ways in which intermediaries, including investment platforms, are paid. The Financial Services Board (FSB) is already investigating these costs as part of its Retail Distribution Review on commissions paid for financial products, including illas. This review will include an investigation into the payment of rebates by collective investment schemes to linked-investment service providers, which are currently the main source of illas.

Illas are also part of the scope of the Treating Customers Fairly initiative.

* Consideration is being given to easing rules on using multiple types of pensions to allow retirees to choose different combinations from existing, relatively well-understood pension products.

* Proposed default illas, whether provided within or outside a retirement fund, will be permissible as a default option only if they meet strict conditions, including design criteria and limits on investment choices, drawdown rates and costs. Collective investment scheme managers will also be able to provide retirement funds with default illas, provided they meet the conditions.

Treasury says the progress of these reforms will be monitored through detailed compulsory reporting by product providers on annuity (pension) purchases made by individuals retiring from funds, investment charges and the asset mix of illas, and the purchase prices and terms of conventional annuity policies.

GOVT PONDERS COMPLEXITY OF SECURITY FOR LOW EARNERS

Government must still spell out the details of how it intends extending the retirement system to all employed individuals, particularly those in low-income groups and in irregular employment, who are mainly excluded from the current system and rely entirely on the social old-age grant, which will be increased from R1 200 to R1 260 a month.

The Budget Review says the retirement reform proposals released with the Budget “will lay the foundation for the eventual introduction of a mandatory tier of a comprehensive social security system that provides death, disability and retirement cover to all workers”.

The backbone of the extended system is likely to be the proposed National Social Security Fund (NSSF).

Patrick Craven, spokesperson for trade union federation Cosatu, in reacting to the Budget proposals, says the federation is increasingly frustrated by government’s failure to introduce comprehensive social security that will ensure that nobody falls through the safety net.

Cosatu also rejects the piecemeal reforms of the retirement funding system and wants retirement reform to be part of comprehensive social security reform.

But in its discussion paper, Treasury says the situation is complex. Currently, about half of formally employed workers are members of an employer-sponsored retirement fund. An analysis based on a labour force survey carried out in 2010 by the Centre for Research into Economics and Finance in Southern Africa indicates that 86 percent of workers who don’t belong to retirement funds earn less than the tax threshold, indicating that they receive no tax benefit for saving for retirement. Of these, nearly 40 percent work in sectors where employment can be erratic.

Source: IOL personal finance