nfb sensible finance magazine issue 23

Eastern Cape's Community...

PERSONAL FINANCE

A FREE publicationdistributed Private Wealth Man gementby NFB a

p r i v a t e w e a l t h m a n a g e m e n t

Issue 23March 2013

NFB

PERSONAL FINANCEMagazine

Eastern Cape's Community...

the silent killerthe silent killerthe silent killer

GLOBAL INDEX FUNDSnow available to

local investors


local investors


local investors

“MIND THE GAP”the risk of beingunder assured



INFLATION ANDRETIREMENTINFLATION ANDRETIREMENTINFLATION ANDRETIREMENT


contact one of NFB's :private wealth managers

East London tel no: (043) 735-2000 or e-mail: @nfbel.co.zainfo

Port Elizabeth tel no: (041) 582-3990 or email: @nfbpe.co.zainfo

Johannesburg 11 895 8tel no: (0 ) - 000 or email: [email protected]

Web: www.nfb .co.zaec

NFB is an authorised Financial Services Provider

fortune favours the well-advised

Providing quality retirement,

investment and risk planning

advice since 1985.

“The best way of preparing for the future is to takegood care of the present, because we know that ifthe present is made up of the past, then the futurewill be made up of the present.

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

- Buddha

editorBrendan Connellan

[email protected]

ContributorsTravis McClure (NFB East London),

Michelle Wolmarans (NFB

Insurance Brokers), Glen Wattrus

(NFB East London), Grant Berndt

(Abdo & Abdo), Glacier

International, Andrew Duvenage

& Grant Magid (NFB Gauteng),

Shaun Murphy (Klinkradt &

Assoc.), Old Mutual International,

Debi Godwin (IE&T), Momentum

Investments, Nicole Boucher (NFB

East London), Robert McIntyre

(NVest Securities)

AdvertisingRobyne Moore

[email protected]

layout and designJacky Horn DesignTA Willow

[email protected]

AddressNFB Private Wealth Management

East London Office

NFB House, 42 Beach Road

Nahoon, East London, 5241

Tel: (043) 735-2000

Fax: (043) 735-2001

E-mail: @nfbel.co.zainfo


The views expressed in articles by

external columnists are the views

of the relevant authors and do not

necessarily reflect the views of the

editor or the NFB Private Wealth

Management.

©201 All Rights Reserved.3

No part of this publication may be

reproduced in any form or

medium without prior written

consent from the Editor.

sensible finance ED’SLETTERED’SLETTERED’SLETTER

1

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another aspect of our comprehensive service

sensible finance march13

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a sensible reada sensible read

Iam a fairly law abiding citizen and have been brought up to

(within reason) respect authority, rules and the value that structure

adds to society.

What I have noticed lately though is a prevailing disregard for

rules and structure and it makes me question why this is the case. Is it

that our law enforcement is so poor that people are taking risks that

they usually wouldn't? Is it that our leadership across all levels

(private and public) is providing poor example? Is it that people are

losing general respect for one another and themselves? Is it that

greed and materialism have taken priority over common decency

and basic moral value? Is it all of the above?

Personally, I would argue that it is the latter and that we are all

guilty to some degree – it is just so much easier to look for those

more blameworthy than ourselves and to see ourselves in a positive,

comparative light than to objectively assess our contribution to the

growing problem.

Have you ever noticed how many people nonchalantly drive

through red traffic lights? Offenders don't seem to even give a

second thought to the fact that their impatience is endangering

lives. In addition, these basic contraventions of traffic laws seem to

receive no policing whatsoever – if we can't police such simple

infringements, how are we to deal with more complex ones?

I believe that we can all contribute towards positive change.

Start by stopping at red lights and not rushing to beat them. Smile at

people, be more respectful than usual, think twice before you

submit a false or exaggerated insurance claim, don't drive home

drunk, take the time to help out or get to know someone that you

usually wouldn't. Slowly but surely, these little gestures will lead to

large strides!

And in order to relate this to your financial matters…it also just

takes consistent and small habit changes and sacrifices to begin

making a large contribution over time. Take the time to look at your

finances, your unnecessary spending, whether or not you can afford

to retire given your current savings, whether your life cover is

adequate to provide for your dependents were anything to happen

to you and so on. Don't disregard your finances any more than you

shouldn't disregard the law – both have serious and negative long

term implications.

Brendan Connellan - Editor and Director of NFB

SENSIBLE CONTENTSSENSIBLE CONTENTSSENSIBLE CONTENTS

nfb sensible finance March 2013March 2013March 2013

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4 GRADUATES AND THE IDEA OF SAVINGThe time is now! By Nicole Boucher, Paraplanner - NFB East London.

6 2013 TAX RELATED BUDGET PROPOSALSSubmitted by Shaun Murphy, Klinkradt.CA (SA), Partner

8 GLOBAL INDEX FUNDS NOW MADE AVAILABLE TO LOCAL

INVESTORSA case for diversifying internationally. Contributed by Glacier International.

9 “MIND THE GAP”The risk of being under assured. By Travis McClure, Private Wealth Manager - NFBEast London.

11 DISCOVERY INSUREAn innovative and unique approach to short term insurance. By MichelleWolmarans, Manager - NFB Insurance Brokers (Border).

12 INFLATION AND RETIREMENT: THE SILENT KILLERWill you be able to afford retirement? By Andrew Duvenage & Grant Magid, PrivateWealth Man gers - NFB Gauteng.a

14 POOR SERVICE DELIVERY: TO PAY OR NOT TO PAYAwaiting judgement from the Constitutional Court. By Grandt Berndt - Abdo &Abdo.

17 OMI INVESTMENT PORTFOLIOA new era in investment choice. Contributed by Old Mutual International.

18 NEW YEAR - WILL POWER?Resolving to update your Will. By Debi Godwin, Director - Independent Executor &Trust.

19 RETIREMENT REFORM: WHAT IT MEANS TO YOUA look at the proposed changes to legislation. By Glen Wattrus, Private WealthManager - NFB East London.

22 AN INVESTMENT PHILOSOPHY DELIVERING CONSISTENT

OUTPERFORMANCEContributed by Momentum Investments.

23 Q &AYou ask. We answer. Advice column answering your investment, personal finance,life and/or risk insurance questions with Travis McClure, Private Wealth Manager -NFB East London.

24 SPOTLIGHT ON BLACKSTARAn interesting long-term asset play. By Rob McIntyre, Portfolio Manager - NVestSecurities..

4

The time is now! By ,Nicole Boucher

Paraplanner - NFB East London.

SENSIBLE SAVINGSENSIBLE SAVINGSENSIBLE SAVING

As we enter the second month of the new

year, school and university graduates

have started working for the first time and

receiving their first salary. It is important to have a

“healthy” approach to our newly established bank

balance and put a small portion aside as

retirement saving.

For a 20-something saving for such a distant

time in the future does not seem such a great

priority; buying a new car, clothes, etc. seem far

more attractive. But it's worth noting that the very

fact that you're young gives you a huge edge if

you want to be rich in retirement. The reason being

is because in your 20's, you can invest relatively little

for a short period of time and wind up with far more

money than someone who is much older and is

saving more.

As I am a 20-something I can relate to the fact

that saving is not the easiest thing to do; we prefer

to spend on clothing and entertainment. I have,

however, taken my own advice and put a small

amount away every month into a retirement

annuity to subsidise my employer provident fund.

Institutions have minimum amounts that can be

invested per month. For example, Allan Gray has a

minimum investment amount of R500.00 per month;

Investec has a minimum of R1 000.00 per month. In

the grand scheme of things this is a small piece of

your pay cheque and if you start this from the first

month you won't notice the contribution as you

have never had a monthly income before.

Being in your 20's you have less financial

commitment and minimal expenses, and therefore

you have a greater savings capacity. Once we

start a family and buy a home there is less money

to put into a savings/retirement vehicle. Often

individuals look back and wish they had started

saving when they were younger, but were ignorant

to the power of compound interest and time value

of money, which can grow the small monthly

saving to become a substantial amount during

retirement. Each month that you put off saving in

favour of spending, either increases the amount

that you will have to save in the remaining months,

or pushes out the date at which you will reach your

goal.

An additional savings would also be a good

idea, in the form of a separate bank account or

even a unit trust investment. This way you can set

aside for that “rainy day” and not have to

overextend yourself and go into debt. Ideally, an

amount equal to 3 months living expenses should

be available for emergency circumstances; having

this will hopefully eradicate unnecessary

expenditure on credit cards and falling into debt.

Once we start paying off debt there becomes little

or no room for saving in any form.

Once you make the decision to start saving,

your ability to make the most of it depends on

whether you are able to remain committed for

long enough to benefit from the potential returns,

ride out the short-term ups and downs and allow

the power of compound interest to increase the

value of your money.

Should you be young and starting out in your

working life and need advice or assistance in

planning out your financial future, please contact

an NFB advisor.

GRADUATESAND THE IDEA OF

SAVING

GRADUATESAND THE IDEA OF

SAVING


2013 TAX RELATED BUDGET PROPOSALS

BUDGET HIGHLIGHTSThe main tax proposals for 2013 are the following:� An employment tax incentive targeted to supportyoung workers and those employed in specialeconomic zones.� Individuals whose taxable income is from oneemployer and is below R250 000 a year are not requiredto submit income tax returns.� Levies on fuel increase by 23c per litre from 3 April2013.� From March 2014 an employer's contribution toretirement funds on behalf of an employee will betreated as a taxable fringe benefit in the hands of theemployee. Individuals will from that date be allowed todeduct up to 27.5 per cent of the higher of taxableincome or employment income for contributions topension, provident and retirement annuity funds with amaximum annual deduction of R350 000. Contributionsabove the cap are carried forward to future tax years.� Streamlining registration with SARS and reducingcompliance requirements for the submission of taxreturns by businesses.� Requiring foreign businesses supplying e-books, musicand other electronic services in South Africa to registeras VAT vendors.� Several measures are proposed to limit the deductionof interest on specific types of debt to protect the taxbase.� An automated tax clearance system will beimplemented this year.� Policy paper on carbon emissions tax to be publishedin 2013 with the view of introducing a carbon tax from2015.

INDIVIDUALSRelief for individualsPersonal income taxThe 2013 Budget proposes direct personal income taxrelief to individuals amounting to R7 billion.

Other relief in a form of adjustments to the medicaltax credit and other monetary thresholds amounting toabout R350 million

The tax threshold for individuals younger than 65 willbe R67 111 and for individuals 65 up to 75 will be R104611 and individuals 75 and older will be R117 111.

Exemption for interest and dividend income� The annual exemption on interest earned forindividuals younger than 65 years increase to R23 800(R22 800 prior year).� The exemption for individuals 65 years and olderincrease to R34 500 (R33 000 prior year).

Medical expenses� Monthly tax credits for taxpayers below the age of65:

� R242 for the taxpayer and first dependant, and

� R162 for each additional dependant.� Taxpayers under 65 may claim, as a deduction,medical scheme contributions exceeding four times theamount of the medical scheme credit and any othermedical expenses, limited to the amount which exceeds7,5% of taxable income.� Taxpayers 65 and older may claim all qualifyingexpenditure.

COMPANIESCorporate tax ratesNo change is proposed to corporate tax rates.

Small business corporationsThe tax-free threshold for Small Business Corporationsincrease from R63 556 to R67 111, and taxable incomeup to R365 000 will be taxed at 7%. A new tax bracket oftaxable income up to R550 000 has been introducedwith the applicable rate being 21%. For taxable incomeabove R550 000, the normal corporate tax rate of 28%applies.

TAX ADMINISTRATIONPermanent Voluntary Disclosure ProgrammeAs part of the Tax Administration Act (2011), apermanent voluntary disclosure programme becameeffective as from 1 October 2012.

REFORMING THE TAXATION OF TRUSTSTo curtail tax avoidance associated with trusts,government is proposing several legislative measuresduring 2013/14. Certain aspects of local and offshoretrusts have long been a problem for global taxenforcement due to their flexibility and flow-throughnature. Also of concern is the use of trusts to avoidestate duty, which will be reviewed. The proposals willnot apply to trusts established to attend to thelegitimate needs of minor children and people withdisabilities. The proposals are as follows:� Discretionary trusts should no longer act as flow-through vehicles. Taxable income and loss (includingcapital gains and losses) should be fully calculated attrust level with distributions acting as deductiblepayments to the extent of current taxable income.Beneficiaries will be eligible to receive tax-freedistributions, except where they give rise to deductiblepayments (which will be included as ordinary revenue).� Trading trusts will similarly be taxable at the entitylevel, with distributions acting as deductible payments tothe extent of current taxable income. Trusts will beviewed as trading trusts if they either conduct a trade orif beneficial ownership interests in these trusts are freelytransferable.� Distributions from offshore foundations will be treatedas ordinary revenue. This amendment targets schemesdesigned to shield income from global taxation.

submitted by Shaun Murphy, KlinkradtCA (SA), Partner

TAX GUIDEIndividuals and trusts

Income tax rates for natural persons and special trustsYear of assessment ending 28 February 2014

Taxable income Taxable rates0 – 165 600 18% of each R1165 601 – 258 750 29 808 + 25% of the amount above 165 600258 751 – 358 110 53 096 + 30% of the amount above 258 750358 111 – 500 940 82 904 + 35% of the amount above 358 110500 941 – 638 600 132 894 + 38% of the amount above 500 940638 601 and above 185 205 + 40% of the amount above 638 600

Natural personsTax thresholds

2013 2014Below 65 years of age R63 556 R67 111Aged 65 and below 75 R99 056 R104 611Aged 75 and over R110 889 R117 111

Tax rebates2014

Primary – all natural persons R12 080Secondary – persons aged 65 & older R6 750Secondary – persons aged 75 & above R2 2506 sensible finance march13

GLOBAL INDEX FUNDS

Glacier International, a division of Glacier

by Sanlam, has launched a range of

global index funds within their Global

Life Plan. The daily priced funds,

available from BlackRock and based on principals

pioneered in their popular iShares ETF (Exchange

Traded Funds) range, are offered at an annual

management fee of 0.55%, substantially less than

most active funds on offer.

An ETF is a passive investment product that

tracks a particular index. It is listed and investors

can trade the investment as they would a normal

share. An index fund also tracks a particular index,

but it is daily priced which makes it available to

investors without requiring them to open a

stockbroking account to purchase the product. This

makes it an ideal investment for those looking for

cost-effective international exposure.

There has always been a case for diversifying

internationally, but even more so now as

expectations are that global equities will

outperform the local market over the next few

years. Many clients know they need international

exposure, but don't know where to start, due to the

sheer number of available funds, managers and

investment strategies. Buying an index is not only

cost-effective, but simplifies some of the decision-

making. In addition to the diversification benefits,

investors are protected against weakening of the

rand.

“Investment opinions differ, but we believe that

active and passive funds both have a place in a

diversified investment portfolio,” says Andrew

Brotchie, head of product and investment at

Glacier International. “A core-satellite strategy can

help investors achieve cost-effective long-term

growth with a level of outperformance,” he says.

There are a vast number of international ETF's

and they all have variations in terms of the indices

they track. Some are physically-backed, buying the

underlying components of the index, while others

are synthetically-backed and may not necessarily

buy the actual index. They could, for example, buy

derivatives, which introduces a level of complexity

that many investors may not be familiar with. All of

this means the ETF market can be as daunting as

the collective investment scheme landscape.

Glacier International helps investors and their

financial advisers to select the appropriate fund for

their particular circumstances. This is especially

attractive for those who are not necessarily

seasoned offshore investors.

Glacier International was launched in January

2010 as part of Glacier by Sanlam's strategy to

expand its solution set to meet the needs of its

affluent client base. In addition to now offering

cost-effective passive funds, they are also the only

company in South Africa to offer P2 Strategies, an

innovative investment strategy that protects on the

downside, cushioning returns in collective

investment funds in volatile markets. These

strategies are managed by USA-based Milliman,

one of the top risk management companies in the

world.

Glacier International was also first to market last

year with its “Navigate” fund range – a simple and

cost-effective way to invest offshore. The solution

comprises a range of carefully selected, actively

managed funds across different investor risk

profiles.

The new range of index funds is available as an

investment option within the Global Life Plan,

thereby giving investors all the associated benefits

of investing within a life plan. “There are estate

planning advantages too,” says Brotchie. “By

investing via an offshore life plan issued by a South

African life company, investors ensure that the

investment forms part of their South African estate,

thus avoiding the complications of having part of

their estate located offshore.”

8

AVAILABLE TO LOCAL INVESTORS

SENSIBLE DIVESIFICATIONSENSIBLE DIVESIFICATIONSENSIBLE DIVESIFICATION

A case for diversifying internationally.

Contributed by .Glacier International

GLACIER INTERNATIONAL MAKES

GLOBAL INDEX FUNDS


“MIND THE GAP”T .he risk of being under assured

By , NFB East London,Travis McClure

.Private Wealth Manager

SENSIBLE COVERSENSIBLE COVERSENSIBLE COVER

“MIND THE GAP”

9

Those of you who have been on the London

Underground will be familiar with the term,

“Mind the Gap”. It is a simple and nauseating

reminder of the risks when boarding the train. One

can't ignore the famous underground sign that is

placed in every tunnel reminding you of “the gap”.

We all know it is there, we all understand the

risk of not minding the gap, and yet we all carry on

with the daily routine and board the train while

nonchalantly stepping over the gap. There is

certainly no way that anyone can say that they

were not warned.

Similarly, one of the biggest concerns financial

advisors have for their clients is that they have

insufficient cover because of affordability. The

Actuarial Gap Study undertaken by True South

Actuaries, in collaboration with the Association of

Savings and Investment SA (ASISA), highlighted the

extent to which South Africans are under-insured in

case of a life-changing event and put the gap

between actual cover and required cover at R18

trillion. The Insurance Gap is a measure of the

difference between the amount of cover someone

needs and the cover that they actually have.

On average, South African earners are under-

insured by 62% for death and 60% for disability. This

means that the average family would have to cut

living expenses significantly if the main earner of a

household dies or becomes disabled.

So how does one bridge this gap?

Discovery Life aims to reduce this major

problem of underinsurance by developing

products to leverage the efficiencies within the

products to provide clients the opportunity to

access additional cover as efficiently as possible.

Discovery Life's product innovations provide new

benefits that allow for substantial increases in

benefits linked to one's cover, at no additional cost.

Discovery Life is in a unique position to provide

clients, who have fully integrated their Discovery

policies, with additional life cover through the Life

CoverBooster™ for a period of three years at no

additional premium. By adding the Life

CoverBooster™ you can get up to 32% additional

life cover at no additional premium for three years.

After three years, the client can buy this cover free

of medical underwriting at a reduced rate of up to

15%, based on their Vitality status during the three

years. At age 65, clients will also receive a 5% Cash

Conversion of the Life CoverBooster™.

If you have Vitalitydrive, you could get the

Drive CoverBooster™ which increases the

additional life cover to 50% at no additional

premiums for five years. After five years, you have

the option to buy this cover at a reduced rate of

up to 35% – based on your annual Vitality status

and Vitalitydrive status over the period (see related

article in this booklet).

The “but wait, that's not all” third option that

Discovery Life also offers is the BenefitBooster™

which provides up to 40% additional cover on

certain ancillary benefits at no additional premium.

Policies will qualify for the BenefitBooster™ if the

principal life has accelerated Capital Disability

Benefit of at least 70% of the LIFE FUND.

If you choose any of the accelerated benefits

listed below, you can receive additional cover

through the BenefitBooster™ – at no additional

premiums:

� Principal Severe Illness Benefit

� Spouse Severe Illness Benefit

� Spouse Capital Disability Benefit

� Spouse Life Cover.

The amount of additional cover will depend on

the benefit amount as a percentage of your LIFE

FUND.

This extra 32% or 50% cover, as well as up to

40% extra on ancillary benefits, ensures that you will

not be under-insured, without increasing your

premium.

Keep in mind that the best way to determine

the level of financial security you need is to

examine the different types of insurance available

with a financial advisor. It is also essential for you to

have a to ensure that youfinancial needs analysis

and your family are sufficiently covered.

To remind you, it is estimated that South Africa's

insurance gap is currently approximately R18 trillion.

So, sorry to state the obvious, but do “Mind the

Gap”!

Should you like further information about this

product or if you would like to check whether you

are adequately covered, please contact one of

NFB's financial advisors on 043 – 735 2000.


Discovery Insure

11

It's estimated that more than 14 000 people die onSouth African roads every year. Apart from thistragic loss of life, the unacceptably high accidentrate has an economic cost estimated at R306 billion

a year, which is equal to 10% of gross domesticproduct, Transport Minister Ben Martins announcedearlier this year. Costs include emergency services,hospital care, loss of earnings, future claims against theRoad Accident Fund and care for the disabled.

Discovery Insure's philosophy behind thedevelopment of their short-term insurance product is tomake South Africa's roads safer by creating a nation ofbetter drivers. They aim to do this by offering theirclients incentives to become better drivers. Byimproving their clients' driving ability, they want toreduce the number of car accidents and so have apositive impact on society. This will also decrease thefinancial burden on our economy.

Discovery Insure called on Rory Byrne, one of themost successful Formula 1 engineers of all time, to assistthem in their quest to create a nation of better drivers.Formula 1 uses an engineering process known astelematics to provide drivers and engineers withfeedback to improve lap times within the strictest safetyguidelines by understanding the car's performance andthe driver's ability. Discovery Insure uses telematics toshow drivers how they are driving and then incentivisesthem to improve their driving behaviour.

How exactly does this work in practicalterms?Discovery Insure installs a small electronic device knownas a DQ-Track in your car when you sign up for theirdriving programme, Vitalitydrive. DQ-Track measuresyour driving behaviour according to braking,acceleration, cornering, speeding and late nightdriving. DQ-Track sends this data to a central stationwhere it is processed. Discovery Insure uses thismeasurement to award you Driver Quotient (DQ)Points. DQ Points can also be earned by completingonline quizzes, completing a proactive driving courseand ensuring your car is roadworthy and your servicehistory is up to date. The DQ Points determine yourVitalitydrive status. The higher your Vitalitydrive status is,the greater the rewards you'll earn.

How are you incentivised to improve yourdriving?You can earn up to 50% of your BP fuel spend backeach month. The amount of fuel spend that is refundedis based on the number of DQ Points you have earnedin that month.

You also receive an Excess Funder Account (EFA),where a percentage of your premium is allocated toan account. Your Vitalitydrive status determines thispercentage. The funds that accumulate in this accountcan be used to fund the excess for any valid car claim.

As this fund grows, you can increase your plan

excess which may reduce your premiums. After threeyears, you can withdraw up to 50% of the fundsavailable.You can also choose to have your fuel rewardsdoubled, up to 100%, and paid into your EFA.

With the Young Adult Plan, drivers aged 18 to 25can get up to 25% of their premiums paid into a specialfund every six months. They can boost this fund by up toR200 per month, depending on how well they drive andby completing their online quiz and other activities. Thefund pays out every six months.

As a Vitalitydrive member, you'll also qualify for adiscount off purchases at Tiger Wheel & Tyre.

How does the DQ-Track protect your car?The DQ-Track ensures real-time communication withDiscovery Insure. This means that if you inform us thatyour car has been stolen, Discovery Insure will track andrecover it.

The DQ-Track also provides you with the DQMapper, an interactive online tool that allows you toview real-time car location information and see yourpast trip information. The DQ Mapper also allows you togenerate reports on your trip information, which youcan use for your log book. Another feature of the DQMapper allows you to map out a preferred area ofmovement and receive an alert if one of your insuredcars drives outside this area.

How does the DQ-Track protect your family?The DQ-Track measures the G-force of any impact tothe car. If the G-force is above a certain reading,Discovery Insure will call you to see if you need medicalassistance. If needed, emergency medical assistanceproviders will have access to your medical informationif you are a member of the Discovery Health MedicalScheme.

You receive several other benefitsThe other benefits include no excess for theft, hijack,hail, storm or fire claims, car hire at no additional costfor up to 30 days, emergency roadside and homeassistance, and a smartphone app that takes thehassle out of claiming. To read more about the benefitsand features, please visit www.discovery.co.za

Sign up todayWith all these rewards and benefits, Discovery Insure isdefinitely the smart choice for comprehensive short-term insurance.

For more information, please call NFB InsuranceBrokers personal lines marketer, Debbie Bieske, on043 - 735 2000.

Limits, maximum fuel limits, terms and conditions apply. Go to

www.discovery.co.za or contact Discovery on 0860 751 751 for

additional information. Discovery Insure Ltd is an authorised

financial services provider. Registration number 2009/011882/06.

An innovative and unique approach to short term insurance. ByMichelle Wolmarans, Manager - NFB Insurance Brokers (Border).

Discovery InsureDiscovery InsureDiscovery Insure


INFLATION AND RETIREMENT

While many of us sit and contemplate thereality that we may have to retire at somepoint in the future, statistics show that inreality not many South Africans can actually

afford to retire when that day does arrive. This is oftenbecause of:� not starting to save early enough for retirement� not saving enough during our working careers� using previously saved retirement assets for livingexpenses before retirement� poor investment returns� poor financial planning strategies� with increased life expectancies, funds available atretirement need to provide income for longer periods.

The focus of this article is to illustrate the effects ofinflation on both retirement assets as well as retirementincome requirements. The points mentioned above area few reasons that can significantly impact the amountof income that can be drawn during your retirementyears. In many instances, the impact of inflation oninvestment returns and the future cash flow that yourretirement portfolio can generate is not well understood,or is completely ignored. This lack of understanding ofthe impact of inflation during retirement can bedisastrous as it can result in an unrealistic expectation asto what type of income a portfolio can generate andsustain. This in turn lulls investors into a false sense ofsecurity prior to retirement in terms of the amount ofmoney investors save, and can result in unsustainablyhigh drawings during retirement.

When reviewing and recommending retirement andinvestment products and anticipated investment returnsfor these vehicles, we often come across the question of“how much income can an investment generate,without eroding the capital of the investment?”. Theanswer to that question is simple. If one draws at a rateequal to the return on the investment, the capital valueof the investment will remain intact. There is, however, amassive problem with this line of thinking in that it doesn'ttake inflation into account – and this is one of thebiggest problems that a retired investor faces.

Let's start off by explaining what inflation isWhen we talk about the rate of inflation, this refers to therate of inflation based on the consumer price index, orCPI for short. The South African CPI shows an indexedlevel of the prices of a standard “basket” of goods andservices which South African households purchase forconsumption. In order to measure inflation, anassessment is made of how much the CPI has risen inpercentage terms over a given period compared to theCPI in a preceding period. If prices have fallen this iscalled deflation (negative inflation). So if the rate ofincrease in the CPI is 5%, this means that the price of thebasket of goods and services (as determined by StatsSA) has increased by 5%. It is important to note that thisis simply a barometer to indicate general price increases

in the economy. One's personal household's inflation willbe different from official CPI and is determined by whatthat specific household consumes. In many instances,CPI may in fact understate the rate of price increasesthat households experience. For the purpose of thisdiscussion, we will stick to the official CPI measure.

So why is inflation a problem?We all know that the cost of living increases every yearas a result of increases in things such as food prices,electricity prices, fuel prices, and the like. Thus it is logicalthat in retirement, our income needs to increase in linewith inflation to ensure that we can afford to meet ourexpenses as they increase every year. And this is wherethe problem lies.

If we were to subscribe to the logic of drawing at alevel that equals the rate of return, we would have thesame amount of capital invested at the end of the year.But in reality, the value of that investment, whenadjusted for inflation, has in fact decreased. Similarly,while the amount of income that is drawn may stay thesame each year, after the effects of inflation are takeninto account, the “real” (or inflation adjusted) value ofthe income diminishes year on year. This is illustrated bythe example below:

Client age 55Initial investment R4,000,000Rate of return 10%Drawing Rate 10%Inflation 5%

INFLATION AND RETIREMENT

The effects of inflation on both retirement assets as well as

retirement income requirements. By Andrew Duvenage &

Grant Magid, NFB Gauteng, Private Wealth Managers

THE SILENT KILLER

As can be seen by the two graphs above, while thevalue of both the capital and income stay constant (inwhat we call nominal terms), the real (or inflationadjusted) value falls year after year. In this example, thereal value of the investment, as well as the real value ofthe income that it generates halves in 12 years.

Thus it is clear to see that while at face value,drawing at the rate of return will protect the capital andincome, this is not the case when inflation is taken intoaccount. Mathematically this is explained as follows:

Nominal Return 10%Less: Drawing 10%= Net Nominal Return 0%Less: Inflation 5%= Net Real Return -5%

It is clear then that in order to protect both income andcapital against inflation, it is necessary to draw at a ratethat is lower than the return. In fact, if one wanted tofully protect an investment and the income it generatesagainst inflation, it is logical to suggest that the rate ofreturn less the rate of drawing, should be equal toinflation. Using the same assumptions as above:

Nominal Return 10%Less: Drawing 5%= Net Nominal Return 5%Less: Inflation 5%= Net Real Return 0%

In this instance, while both the capital and income levelsgrow from year to year, when inflation is taken out, thevalues in real terms stay constant protecting the clientagainst inflation. Thus the initial R4,000,000 investment ismaintained (in real terms), while the sustainable incomelevel of R18,000 per month is protected. This scenario isillustrated below:

What does this tell us:The most important lesson that we learn from all of this isthat the rate of return on our investments is not the same

thing as the sustainable drawing level on the investment.In fact, to determine the sustainable drawing level of aninvestment, one needs to take the expected return andsubtract the expected rate of inflation. This will allow thenet growth on the investment to be in line with inflation,thus protecting the real capital and income levels of theinvestment.

If one assumes an expected rate of return is 10%,and inflation of 5%, a sustainable drawing level is atmaximum 5% per annum.

In practical terms, this means that R1,000,000 ofcapital can sustainably generate around R50,000 ofincome per annum. While this is far lower than manyinvestors would like to believe, it is a reality that we needto face.

In order to increase this income, one would have toachieve higher rates of return. To achieve this, higherlevels of risk need to be taken within a portfolio.Investors, however, need to carefully consider andunderstand the implications of risk – especially onceretired, as the consequences of capital loss areexacerbated by the fact that during retirement incomeis being drawn from the portfolio. That is to say that ifone draws 10%, and the investment loses 15% (by virtueof being in an aggressive portfolio), the capital value willbe down by 25% in nominal terms, and 30% in real(inflation adjusted) terms (assuming inflation of 5%). Tothen get the same amount of income in rands andcents, the drawing rate has to be pushed up to around15% as a result of the lower capital value of theinvestment. This scenario can result in massive capitalerosion in a very short space of time.

How much is enoughSo back to the issue of “how much do I need to retire?”.Unfortunately, there is no universal answer to thisquestion, as it is specific to one's personal circumstancesand needs, and is reliant on uncertain factors such asexpected rates of return, and future inflation rates.

While the discussion above is sobering, it does,however, empower us with knowledge that we canapply, in that it informs us of what a sustainable drawingrate is. So when answering the “how much is enough”question, we need to consider some of the followingfactors:� What is the value of your current investable assets?� How much does one contribute to these assets on amonthly basis?� How much income do you need in retirement tomeet your monthly requirements?� What are the current and expected rates of return onthe portfolio?� What is the expected level of inflation?

Prior to retirement these questions can help investorswith decisions around savings rates, the risk profile oftheir investments, as well as around managing theirexpense levels more effectively so that at retirement,their expenses and sustainable income arecommensurate.

When closer to retirement, understanding theimpact of inflation on capital and drawings can helpinvestors carefully consider the level of drawing theyselect to ensure that their savings are managed in sucha way as to provide income sustainably into the future.

Retirement planning and the impact of inflation arevitally important aspects of financial planning. Westrongly suggest that you discuss these issues with yourNFB advisor.

sensible finance march13 13

TO PAY OR NOT TO PAYPOOR SERVICE DELIVERYTO PAY OR NOT TO PAYTO PAY OR NOT TO PAYTO PAY OR NOT TO PAY

The Constitutional Court is currently

considering the issue of a municipal rates

boycott. The issue of ratepayer's associations

withholding rates due to poor service delivery is

something which has been discussed at length

over the past years.

Now an elderly Kroonstad resident, Olga

Rademan, a member of the Moqhaka Ratepayers

and Residents Association, withheld her payment

of property rates, as a protest against poor service

delivery. She did, however, maintain prompt

payment of all other services, including electricity.

The municipality nevertheless advised her that in, ,

terms of its Credit Control Bylaws and the Municipal

Systems Act, they were allowed to disconnect her

electricity for non-payment, even though she had

paid for the electricity. Upon her electricity being

disconnected, Mrs Rademan brought an urgent

application out of the Kroonstad Magistrate's Court

for the restoration of her electricity. This was

granted. The municipality then appealed to the

High Court against this decision, and were

successful in their appeal. Mrs Rademan then

appealed to the Supreme Court of Appeal, but it,

in turn, upheld the High Court's ruling, thereby

allowing the municipality to disconnect electricity,

or other services, when the full account was not

paid.

The Court held that in terms of the Municipal

Systems Act, the municipality has the option to

consolidate its account for various services it

provides and that the unilateral refusal to pay for

services which people enjoy cannot be condoned.

Further, the Court held that the municipality did not

need to obtain a court order before disconnecting.

Mrs Rademan has now taken the matter to the

Constitutional Court where, amongst others, two

interesting questions were raised:

1. Should ratepayers be expected to continue

paying municipal rates and taxes forever, even if

they receive poor services?

2. Could ratepayers stop paying or turn "to protest

in the streets" against poor service delivery?

The Judges questioned what remedies are

available to ratepayers when a municipality, which

bears a constitutional and legal duty to provide

services, only provides electricity satisfactorily and

nothing else. In terms of the ordinary law of

contract, if the service provided is not satisfactory,

the law is clear that one is not obliged to pay for

such poor service. The current laws make no

specific provision for allowing unhappy ratepayers

to refuse to pay, if dissatisfied with the services

provided by a municipality.

Mrs Rademan has argued that in terms of the

Electricity Regulation Act, municipalities are only

allowed to cut electricity in defined circumstances

and only if the ratepayer had not paid for the

electricity. She is also arguing that the municipality

is not entitled to cut her electricity because its Debt

Collection Bylaws are in conflict with the Electricity

Regulation Act. The municipality have again

argued, as was accepted by the Supreme Court of

Appeal, that it can consolidate all amounts owed

into one account and if any portion remains

unpaid, cut the electricity and that this is part of

the agreement the ratepayer entered into with the

municipality to receive services. They have argued

further, that unhappy ratepayers could approach

the court for an order, exercise their rights through

the ballot box or demonstrations. They argue that

the withholding of payment would be a recipe for

chaos.

The judgment of the Constitutional Court is

eagerly anticipated, and should the Court rule

against the municipality, it could set a precedent

for disgruntled ratepayers withholding certain

payments from the municipality until satisfactory

service delivery is achieved.

14

SENSIBLE EXPECTATIONSSENSIBLE EXPECTATIONSSENSIBLE EXPECTATIONS

Awaiting judgement from the Constitutional Court.

By - Abdo & Abdo.Grandt Berndt

POOR SERVICE DELIVERY


New Year - will power?New Year - will power?Resolving to update your Will. By Debi Godwin,

Director - Independent Executor & Trust.

18

From quitting smoking to taking up a new

hobby, the New Year is often a time when

many people will consider making changes in

their lives. One popular resolution is conducting a

'spring clean' of personal finances and might

involve changing a credit card, mortgage or utility

supplier, in order to save money. Other goals may

be to obtain peace of mind and financial

certainty. This is likely to be even more applicable

during 2013, given the current economic climate.

Yet, a recent 2012 survey on wills conducted in the

UK suggests that 61% of adults have not made a

will.

Given that a will usually deals with key issues

such as the distribution of a lifetime's worth of

assets, funeral wishes, and the election of

guardians for minor children, the statistics are

worrying. Especially when you consider that the

most popular reason given by those surveyed

(around 31% of people), was ” I just haven't got

around to it yet”. In fact, over half of those within

the 55 – 64 age group surveyed gave this as their

main reason for not having made a will.

The unusual case of the will of Cecil George

Harris, a Canadian farmer, is a stark reminder of the

fact that the time available for making a will is

always limited. Mr Harris was injured in a tractor

accident and he was pinned by the vehicle.

Thinking that he would not be rescued, and

realising that he did not have a will, Mr Harris

decided to scratch his last wishes into the tractor

using a pocket knife, namely "In case I die in this

mess, I leave all to the wife. Cecil Geo. Harris."

Although Mr Harris was eventually rescued, he

later died from his injuries. Incredibly, the section of

the tractor where he had written was held to be a

valid holographic (handwritten) will and was later

admitted to probate. The entire fender of the

tractor was even kept on file in a courthouse for

many years, until it was eventually transferred to a

Canadian university where it is now on permanent

display.

Mr Harris' wishes were therefore carried out, but

this was an extreme case. Although not always

possible, dealing with will/tax planning whilst the

testator has time to fully consider their wishes and

are not suffering from ill health is always,

preferable. Yet, it is equally essential that those

who have made a will also remember to review

and update the will as their circumstances change.

Around 83% of those surveyed who had made

a will had said that they had reviewed their will

within the last 3 - 10 years. But, when you consider

what can happen during a 10 year period, there is

still room for improvement.

One of the main reasons why wills are

amended is because the testator's circumstances

have significantly changed. This may be due to a

birth, death or marriage but, increasingly, children,

siblings and sometimes even spouses are being left

out of wills as a direct result of family disputes. If a

dispute arises between family and there has later

been a reconciliation, but no corresponding

update to a will to reflect this, the implications

could be tremendous.

An outdated will is only a “snapshot” of a

person's circumstances when it was made, rather

than as they were at the date of their death.

Making a will should therefore, only be considered

the first step, followed by regular reviews. In some

cases, a will might be complex and need to be

updated frequently but, in others, this might not be

necessary. For example, the last wish of German,

Karl Tausch, made it into the Guinness Book of

World Records for being the world's shortest will. His

testamentary document only contained two words

namely "Vse zene”, which is Czech for "all to wife”.

So, as we enter into 2013, perhaps one

resolution to consider should be "New Year - new

will!”

SENSIBLE RESOLUTIONSENSIBLE RESOLUTIONSENSIBLE RESOLUTION

49 Beach Road, Nahoon, East London, 5241 | PO Box 8081, Nahoon, 5210

Telephone: Fax: ( ) | e-mail:(043) 735 4633 086 693 3356 / 043 735 3942 [email protected]

At Independent Executor Trust we are committed to personalized service and&

individual attention. With combined experience of 65 years, we specialize in the

Drafting of Wills, Administration of Estates Testamentary Trusts.&


National Treasury has recently tabled

discussion papers on legislation surrounding

retirement reform. Why are they seeking to

introduce these changes? Do you wait until

the legislation is promulgated to plot your future

contributions or do you proactively seek a solution to

the proposed changes? Do you now channel more of

your savings to your personal investments or do you

increase your contributions to your retirement funds

given the envisaged tax benefits? Nothing is always as

easy as it seems and the downside to the tax benefits is

the increased level of government control over the

funds upon retirement. It is impossible to capture the full

scope of these changes in a single article, but I will

deal with a few pertinent issues.

It is important to bear in mind that feedback has

been invited from the public at large, but it is clear from

the tone of the documents that the ruling party has set

a course for major changes, not only in the rules

pertaining to pension provision, but also looking at

incentivising individuals to increase their non-retirement

savings provision. We have repeatedly heard calls from

Government that South Africans have a poor savings

culture and we should be doing more to provide for our

golden years. The immediate knee-jerk reaction from

the public would be that everything has become more

expensive and we as citizens have to provide out of our

own pocket for necessities and services that should be

paid for out of taxes.

Why is National Treasury proposingthese changes?

Government has a serious problem as more

individuals turn to social welfare departments when

their retirement nest egg has been depleted by

excessive drawdown of capital, poor investment

performance and the cost of running a portfolio. Part of

the problem has been that many people have not

contributed adequately to their pension or provident

fund by way of their employer pension/provident fund

or by way of retirement annuities if self-employed. The

announcements in Budget 2012 regarding future

contributions are as follows:

1. Employees under age 45 will be allowed to

contribute 22.5% of the greater of employment or

taxable income up to a maximum of R250 000 per

annum.

2. Over age 45 will be allowed to contribute up to

27.5% p.a. to a maximum of R300 000.

3. Any contributions exceeding the above-

mentioned limits form part of the tax-free lump sum

upon retirement. A further point under discussion is

whether this excess contribution will remain as an

aggregation of the contributions or whether the growth

on these contributions will be factored in upon

retirement.

Few people stay with the same employer

throughout their working life nowadays. Upon

resignation or retrenchment the employee usually

transfers whatever funds have accumulated into a

preservation fund in the hope of leaving these funds

untouched until age of retirement. Alternatively, these

funds are taken as a cash payout less tax and are used

immediately to either settle debt or used to start a new

business or buy an existing business in which the person

has little experience or acumen. The consequences are

usually disastrous and years of retirement provision are

lost when these business ventures fail.

To counter this depletion of funds, punitive taxes

were introduced to prevent the early withdrawal of

funds, but this has had very little effect when individuals

face very trying economic times and the lure of that

money “just sitting there” is more difficult to resist than

that apple was to Eve. Treasury is thus looking at further

deterrents such as pension funds directing

accumulated benefits into funds to which the

employee would not have access prior to retirement.

Bear in mind though that vested rights appear not to

be under scrutiny and these reforms would target future

employees.

Of more importance though to the majority of

contributors to retirement funds will be the proposals

put forward to rationalise the differences between

pension, provident and retirement annuity funds. Each

of these has been treated differently with regard to

deductibility of contributions and withdrawal on funds

19

Retirement Reform:what it means to youRetirement Reform:what it means to you

National Treasury has recently tabled discussion papers on

legislation surrounding retirement reform. Why are they

seeking to introduce these changes? By , NFBGlen Wattrus

East London, Private Wealth Manager

continued on page 20...


either on death, disability or retirement. National

Treasury appears to be moving towards a position of

treating these all in the same manner, a proposal that

will not be welcomed by most provident fund

members. Cosatu has, in fact, threatened to take to

the streets if these changes are implemented

regarding Provident funds as they are particularly

annoyed at not having been consulted during this

process. The underlying reason for this is that funds

were available in total upon retirement to provident

fund members, less tax of course, whereas the other

two vehicles provided for a maximum of one third

being taken in cash, less tax, with the remaining two

thirds being used to purchase a compulsory annuity.

Treasury has noted that since 2003 retirees electing

to purchase a compulsory annuity guaranteeing an

income stream until the death of the retiree (or their

partner) have dropped from approximately 50% down

to 14% whereas the annuities market has grown from a

level of R8 billion in 2003 to R31 billion at the end of

2011. Treasury obviously favours a compulsory annuity

with a guaranteed income for life as the likelihood of

these annuitants looking to the State for financial

assistance is less likely than retirees who elect to

purchase a living annuity in circumstances that are

unsuitable to that option. The statistics showing the

drop-off in income upon retirement can be

manipulated any number of ways to suit any viewpoint,

but it is fair to say that most retirees' income will drop by

approximately 50% upon retirement, with an income

level of 40% on average being one that is most often

quoted. The obvious downside to the living annuity

option is that it gives the annuitant the ability to draw

an income level at a far higher rate than what can be

reasonably achieved in terms of after cost investment

returns.

What does Treasury envisage?One of the proposals from National Treasury is that

the first R1 500 000 be used to purchase a life annuity

which guarantees an income for life and any funds

over and above that amount be utilised in a living

annuity type vehicle with funds similar to unit trusts, but

called retirement investment trusts. The choices

available to those entering the living annuity

market now are much wider than the

envisaged options down the line should

these proposals be implemented.

Realistically, though, our

legislation regarding retirement

funds and the financial

planning environment closely

follows the UK and Australian

models. The provision enforcing

the purchase of a compulsory

annuity with 75% of the retiree's

available funds fell away in the

United Kingdom at the end of

2011 as it did not end up adequately addressing the

reason for its incorporation into applicable legislation. It

thus follows that this particular provision will probably

not see the light of day in the South African

environment.

A further concern for National Treasury is that the

living annuity is not always properly understood by the

purchaser of the product, particularly in the case of

where the annuitant's exposure to financial products

may have been rather limited prior to retirement. The

underlying funds used are not always understood by

the purchaser in instances where the advisor may not

have taken the time to explain the selection of funds

and the manner in which they complement each other

to achieve the requirements set by the client. Treasury

feels the wide array of options is confusing and

unnecessary. The retirement investment trusts being

mooted will be far fewer in number than the current

selection of funds, but one needs to question where

this intervention by government might end. Some

readers of this article may well remember the days

under the Nationalist government where pension funds

were forced to invest in certain assets such as

government bonds that were used to fund projects of

the state and it may well be the case that this is where

we may end up too. First world countries are not

immune to this kind of scenario. Japan, for instance,

requires that the vast majority of pension contributions

find their way into government bonds as a means of

financing its debt. One should note, however, that

whenever new bonds are issued by government they

tend to be over-subscribed so perhaps this scenario will

not be relevant in SA.

Practical questions to considerSo where does this limitation of choice and

government intervention in options leave you in terms

of future contributions? Do you reduce your

contributions to the retirement fund vehicles and

increase your discretionary savings to move as much

money as possible out of the government's net? The tax

advantages are significant in terms of an impact on

investment returns within a retirement vehicle, but this

must be weighed against fund choice allowed in

discretionary savings which is not subject to Regulation

28 (Prudential investment guidelines for retirement

funds). Your desire for personal control over your

money may outweigh the afore-mentioned tax

advantages. Additional considerations are that there is

no taxation on interest, dividends, estate duty,

executor fees or Capital Gains Tax issues to consider

with retirement funds which may well sway the

argument in your particular case.

Financial planning is not a one-size-fits-all science

so it is important that you consult with your advisor as to

the best option for you once clarity is reached on the

proposed amendments and how they affect your

existing or future options.

Retirement Reform: what it means to youRetirement Reform: what it means to you

CONSISTENT OUTPERFORMANCE

The most noteworthy development has been the

increasing number of highly-skilled and

experienced equity managers, who boast some of

the strongest track records in the industry, leaving the

large and medium-sized investment houses to set up

their own small/boutique investment consultancies.

Most of these managers now have solid reputations of

at least five years and are proving to be significant

competition for the more established industry

participants in terms of investment performance and

their ability to attract both retail and institutional assets.

Small and innovative investment managers,

otherwise referred to as boutique managers, are

becoming increasingly popular due to this talent

migration. Rising cost pressures, declining margins and

regulatory challenges, which are negatively impacting

remuneration structures in larger investment houses,

have added to boutique manager appeal as these

managers typically offer substantial compensation in

the form of aggressive share ownership programmes,

significant annual, biannual (and, in some cases,

quarterly) cash bonuses and market-related salaries.

The investment experts leaving the larger asset

management houses also often have diverse

backgrounds that span specialist, non-traditional asset

management areas such as investment banking,

alternative investments, hedge fund management

expertise and so forth. Many have played pivotal roles

in establishing the sound investment philosophies and

processes that currently characterise the larger,

established companies.

The on-going exodus of these individuals to join or

set up boutique investment houses is thus resulting in

the loss of substantial resources within larger and

medium-sized investment firms. Extensive research

conducted by PricewaterhouseCoopers suggests that

one of the biggest challenges faced by larger and

medium-sized investment houses is the difficulty

associated with replacing these 'precious resources'

due to the scarcity of their skills. Also worth noting is that

a review of South African investment manager track

records revealed that a significant number of the

smaller, pioneering entrants/boutique asset managers,

as mentioned previously, now have very strong five-

year investment performance track records. Taking

into account that the last five years have been

characterised by a bear market environment, a bull

market environment and, more recently, a side-ways

market environment, this statistic provides material

insight into the ability of these boutique managers to

manage money under different market conditions.

“With the number of large investment manager

houses in South Africa totalling just eight, and the same

number applying to medium-sized investment

companies, investors focusing purely on the larger and

medium-sized investment firms have a rather restricted

universe from which to identify solid investment talent,”

says Tavonga Chivizhe, who manages the Momentum

Best Blend Specialist Equity Fund at Momentum

Investment Consulting. “It has therefore become

increasingly important for the innovative multi-manager

to focus their manager research efforts on the much

broader boutique manager universe.”

The Momentum Best Blend Specialist Equity Fund

has been designed specifically to benefit from this on-

going evolution within the South African asset

management industry. The fund is managed

according to a multi-specialist approach, where

specific manager selection criteria are used to screen

candidate managers in order to identify a minimum of

three strong investment professionals from boutique

houses to independently co-manage the portfolio.

Please see table 1 below.

An investment philosophy which is based on sound,

practical and relevant investment principles is essential

to delivering absolute returns. “A multi-specialist

approach to active portfolio management, where the

underlying manager selection is based on rigorous

research aimed at identifying the best investment

talent available, forms a key component of this

thinking,” concludes Chivizhe.

The last five to 10 years have seen South Africa's asset manager landscape undergosignificant evolution. Related developments include an increase in the number of localmanagers moving into specialist asset classes such as Africa equities, emerging marketequities, developed market equities, offshore fixed income and global property.Contributed by Momentum Investments

AN INVESTMENT PHILOSOPHY DELIVERING

Table 1: The Momentum Best Blend Specialist Equity Fund has delivered annualised alpha of 4% since its inception in

2007. This has resulted in the portfolio delivering consistent top-quartile performance (as at 31/12/2012):

One year Rank (quartile) Three years Rank (quartile) Five years Rank (quartile)

BB Specialist Equity 26.99% 1 19.99% 1 9.54% 1

Average Equity General 17.82% 13.88% 5.85%

FTSE/JSE All Share 21.71% 15.88% 6.64%

Alpha 5.28% 4.00% 2.90%

Source: Morningstar

CONSISTENT OUTPERFORMANCE

23

Q: I have heard that you are able to move orconsolidate your retirement annuities onto oneadministration platform. What are the advantages ofdoing this, and is there any other information I need toknow?

The Retirement Annuity is a great investmentvehicle for retirement funds. Recent changes to feestructures and fund choices have made it a muchbetter investment vehicle than in the past. This hasresulted in a lot more flexibility to the investor. Thesenew RA structures are mainly offered by the unit trustadministration companies, but can also be accessedthrough the life companies.

A: In the past many life assurance companies offeringRA's did not permit you to transfer your RA to otherfunds or administration platforms. In 2007 the PensionFunds Act made it illegal for the companies to preventtransfers. You may now move from one productprovider to another should you wish to do so. This isknown as a section 14 transfer.

Although you may move your retirement fundsfrom a life assurance RA to another RA, you may facepenalties. These penalties arise from the historicalcommission and cost structures that these productscharged. These penalties can be as much as 30%. It is,therefore, very important to first get a section 14transfer quote to assess what the penalty is beforedeciding to move to another platform. Terminationpenalties are usually for unrecovered expenses whichwould still be charged over the life of the policy if leftwhere they currently are. A section 14 transfer movesretirement funds from one administrator platform toanother at no initial fee.

By moving to a new updated administrationplatform it provides fee transparency and better fundmanagement. On these newer structures there is no setterm and therefore no termination or alteration costsshould you wish to transfer to another platform at anystage.

Your individual circumstances would have to beassessed carefully. You would want to retire with thehighest capital sum possible and, therefore, you wouldneed to consider the following:� Costs: The lower your fees, the more capital youhave to grow your retirement funds.� Flexibility: The freedom to reduce monthlycontributions, make the RA paid up or transfer your RAto another fund, without facing penalties.� Potential investment return: This depends on factorssuch as the fee structure, underlying investments andthe portfolio manager's skills.� Investment term of the RA: You need time in the

market to recover from the transfer penalties on lifeassurance RA's.� Life assurance: Some traditional RA's are bundledwith life assurance and should you move, you need tomake provision for this.You may be tempted to transfer to a unit trust RA if youbelieve that it will provide you with better returns thanyour life assurance RA. However, the transfer penaltiescould make such a move unattractive.

Number of years to recoverExpected Transfer Penalty and MVA

outperformance10% 20% 30%

1% 12 years 25 years 40 years2% 6 years 13 years 20 years3% 4 years 9 years 14 years

Source: Investec Asset Management

The calculation assumes that the life assurance RA returns

10% per annum, while the unit trust RA returns either 11%, 12% or

13% per annum, net of fees. Therefore, the assumed

outperformance of the unit trust RA is 1%, 2% or 3%, depending

of the investor's expectations.

The more years that you have before retirement,the more opportunity you have to recover from atransfer penalty, eg: if you believe that the unit trust RAcan deliver 2%pa more than your life assurance RA,and the penalty is 20%, then a transfer only makessense if the remaining term is 13 years or more (see theabove table).

Your private wealth manager will be able tocontact the relevant life assurance company and findout what your transfer penalty and market valueadjustor (MVA) will be if you are considering movingyour life assurance RA to another fund.In respect of unit trust RA's no penalties are payable ontransfer from a unit trust RA. You benefit from onlypaying fees as and when costs are incurred, asopposed to having to pay costs upfront over the entirecontract period as is the case with most life assuranceRA's.

The new generation RA's are very flexible andtransparent and are well worth considering moving to,even if it means that your existing RA may incur apenalty. Looking forward, your investment options aregreater and fee structures less.

Travis McClure

Please address all Questions to: Travis McClure, NFB

Sensible Finance Q&A, Box 8132, Nahoon, 5210 or

email: @nfbel.co.zainfo

SENSIBLE Q A&SENSIBLE Q A&SENSIBLE Q A&

“Sensible Finance - Questions and Answers” is an advice column that willallow our readers the opportunity to write to a professional andexperienced financial advisor for advice regarding investments, personalfinance, life and/or risk cover. Travis McClure will be answering anyquestions that you may have.


BLACKSTARSPOTLIGHT ON

24

BLACKSTARBLACKSTARBLACKSTAR

In this article, we discuss one of the companies

that is on our investment radar. In previous

articles, I have typically covered the core

holdings that form the backbone of our managed

general equity portfolios, but I will discuss one of the

more interesting companies that we have

confidence in buying. For portfolios that do not

need a regular income to be produced, we might

include a 2.5% exposure to such a company.

Blackstar Group SE ("Blackstar") is an

investment company whose objective is to gain

exposure to the growth on the African continent

largely through companies in South Africa with the

underlying themes of strategic market position and

strong cash flow.

Blackstar was incorporated in England and

Wales and is listed on the Alternative Investment

Market, operated by the London Stock Exchange

and the Alternative Exchange operated by the

Johannesburg Stock Exchange (JSE). The company

is domiciled in Malta. On 12 August 2011 the

company raised R100 million at R9.53 per share

through a placing on the JSE, which allowed a

reasonable free float in South Africa.

The company is headed by Andrew Bonamour.

Andrew previously worked at Brait S.A. Limited (a

very successful South African private equity group)

where he held positions in Investment Banking,

principal investment divisions and Corporate

Finance. At Brait, Andrew originated and played a

lead role in a variety of transactions ranging from

leveraged buyouts, mergers and acquisitions,

capital replacements and restructurings.

Much like Remgro Limited, given that the

company is an investment holding group, it should

be measured on its Net Asset Value (NAV) and not

primarily on its earnings. At 30 November 2012 (the

last published NAV), the company reported an

NAV of R14.27 per share. Given the manner in

which it is structured, there is limited tax leakage to

this NAV number. The ruling price per share on 5

February 2013 was R11.45 and this equates to a

market capitalisation of R940 million. This implies a

discount to NAV of almost 20%. Further, on 5

February 2013 the company announced that it had

bought back 2.92% in London of its shares in issue,

which is immediately NAV accretive. Final results to

31 December 2012 are awaited.

At 30 November 2012, 30% of the company's

net assets was held in cash, 25% in Litha Healthcare

(a JSE listed company that Blackstar had put

together and previously part exited through

introducing a Canadian company, Paladin), 21% in

various industrial holdings (Robor, Stalcor, Global

Roofing etc.), 17% in Times Media Group (the

previous Avusa Group, the publisher of the Sunday

Times, of which Blackstar engineered the buy-out

and subsequent relisting) and 7% in other

investments.

Andrew Bonamour has recently been

appointed the Chief Executive of the Times Media

Group and we believe that he will get stuck in and

administer the necessary medicine to extract the

inherent value that is trapped in this media group.

The company has stated that it intends re-

investing the majority of its cash into new

investments and we believe that given its contacts

and history of acquisitions, that it has a pipeline of

attractive deals available to it.

The company does not pay out regular

dividends, but returns cash to shareholders from

time to time as investments are realised. In

December 2011 the company returned 80.53 cents

per share as a special dividend to shareholders. In

our view, this return of cash, coupled with the

opportunistic share buy backs, adequately

compensates shareholders.

Blackstar has an enviable track record of

consummating deals in South Africa. Its latest deals

include the acquisition and value extraction of the

Mvelephanda Group, buy out and relisting of Times

Media Group (previously Avusa) and the reshaping

of Litha Healthcare.

Blackstar is a well managed investment

holding company that has a history of successful

investing and is trading below fair value. We

believe that for these reasons, Blackstar merits

inclusion as a long term holding in any general

equity portfolio.

An interesting long-term asset play.

By , Portfolio Manager - NVest Securities.Rob McIntyre


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25

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Nahoon East London 5241

PO Box 8041, Nahoon 5210

(043) 735-1270,Tel:

(043) 735-1337Fax:

[email protected]:

www.nvestsecurities.co.za

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