2019 – The year ahead

2018 landed up being one of the worst investment years we have had since 2008. No matter how we try to look at it, no matter where you were invested, the negativity remained. With the yearend statements coming out, it has been dismal reading. The question now is, what will 2019 bring and how do we plan for the year ahead?
Unfortunately, there is no easy answer to this question. The investment philosophy and processes of the past no longer apply in our ever changing world of politics and economics. However, in saying this, there is one rule that still remains, and that is stick to the goal and time horizon you have. Let’s start with the year ahead and what we need to bear in mind.

Read More about what lies in the year ahead:

The Year Ahead

Buy and Sell/Key Person Insurance

It is essential in the successful operation of any business that continuity and succession planning be addressed in the event of a member dying or becoming disabled. Very often, the most effective way to achieve this is with Buy and Sell and/or Key person insurance. However, many members, attorneys and advisors alike misunderstand the implications of the different policies and shareholding structures.

Key Person

Generally, Key Person insurance (Key-man cover), can be described as an insurance policy taken out by a business to compensate that business for financial losses that could arise from the death or extended incapacity of an important member of the business. This type of policy foresees that it may take some time to find and adequately train a new person to function in the same capacity as the previous member.

Buy and Sell

A Buy and Sell Agreement, which usually goes hand in hand with Key-man insurance, is also known as a Buyout agreement. The provisions of a Buy and Sell arrangement may be contained in a traditional shareholders’ agreement or a separate contract.

Essentially, it is a legally binding agreement between shareholders of a business that governs the situation if a shareholder dies or is otherwise forced to leave the business due to incapacity caused by accident or disease. In terms of a Buy and Sell agreement, the contract creates an obligation on the deceased/incapacitated shareholder to sell shares, and an obligation on the remaining shareholders to buy the shares, which transaction is funded by a life insurance or disability policy. In this context and for purposes of this article, the example used will be that of a deceased member.

It is important to note that on the death of the shareholder, shares held do not pass into the estate of the deceased, but are deemed to be sold preceding the date of death. Thus the remaining shareholders never relinquish their control of the deceased shareholder’s shares. It is an essential part of a Buy and Sell arrangement to understand that control of the business remains with the remaining shareholders at all times.

Death and Taxes

On death specifically there are a number of tax implications for business owners generally, as the life insurance policy or key-man policy may form part of the deceased’s estate as “deemed property” in terms of section 3 of the Estate Duty Act 45 of 1955.

However, if these policies meet certain requirements they are exempt from Estate Duty:

  • If the policy was acquired by a person who was, at the time of the deceased’s death, a member or shareholder or partner in the business with the deceased;
  • In case of a Buy and Sell policy, a valid and binding Buy and Sell contract, or similar provision in terms of the Shareholders Agreement;
  • If the policy was taken out for the purpose of acquiring the deceased’s share in the business;
  • If no premium was paid or borne by the deceased.

Thus if the policies are structured correctly, taken out on the life or a member, partner or shareholder who holds shares in his/her personal capacity and, essentially, paired with a correctly drafted Buy and Sell Agreement, the proceeds of the policy will be exempt from the claws of the Estate Duty Act.

However, what about the tax implications where a shareholder in a business is a trust?

The situation according to the South African Revenue Services tax directive, 27/5/20078, where shareholders are trusts, is that the exemption regarding estate duty will not apply, because the shareholder is not the trustee on whose life the policy will be taken out, but the trust. Accordingly, the proceeds of the policy paid in terms of a Buy and Sell Agreement where shares are held in trust will not be exempt from Estate Duty, meaning the amount will be included in the deceased’s estate for estate duty calculation.

The result of this is that, should shares be held in trust, the financial advisor will need to include in his/her calculation of requisite policy proceeds, an amount for estate duty.

It is therefore of fundamental importance that where trusts are used for estate planning, clients are advised by attorneys specialising in the field in order to facilitate the most suitable solution and avoid unforeseen consequences.

 

Moving to Canada – Hereford

Moving to Canada can be exciting but also a daunting experience. We lived in Durbanville (Cape Town) with a lovely surrounding of vineyards and mountains but that does seem very distant now to the big city of Toronto. There are so many things to consider during a time of transition and your financial planning is one of them. Your financial well-being and planning in Canada does not have to be complicated if you follow a structured process.

It is important to consider some of the main points as you settle down in Canada. Here are a few things to consider along the way:

  1. What options do I have with my South African pension, preservation and retirement funds?
  2. What happens to my life cover in South Africa as I move to Canada?
  3. When should I become tax resident in Canada? How flexible is this choice and what is the impact on my South African assets?
  4. What about financial emigration? Should I do it?
  5. What about my remaining investment portfolio in South Africa? How do I move that over to Canada and what is the tax consequences?
  6. How do I commute my financial goals from a high interest rate (i.e. SA) to a low interest rate environment (i.e. Canada)?

There are many other questions but let me dive into the last point.

The prime lending rate in SA is 10% while in Canada it is 3.95%. A perpetual annuity (without expenses and profit margin etc etc) will cost you R10 in SA for every R1 of payment per annum. In Canada a $1 payment per annum will cost you $25 (or then R25 in ZAR terms for R1 per annum). This means, in simple terms and only based on low interest rates, you need 1.5x to 2.5x more assets in Canada to fund the same level of income at retirement. That excludes the fact that places like Toronto is between 50% and 75% more expensive than Cape Town

The same differential then goes for life insurance and disability cover. It is therefore unlikely that a financial goal will remain static. Let’s consider the following:

If you were targeting a R100 000 ($10 000) income per month at retirement you would need to have around R18m ($1.8m) at retirement. If you have say an investment portfolio currently of R2m ($0.2m) and expect that to be $1m at retirement then the summary is:

Targeted goal amount at retirement – $1.8m
Current value plus growth to retirement – $1m
Shortfall – $0.8m

If you now move to Canada your income requirement as per the link above should be 50% to 75% more. This means you are going to need $10 000 x 1.5 = $15 000 per month. But because of the low interest rate environment the targeted amount to fund this increased amount will also be more. Therefore, the summary of your retirement goal in Canada will be as follows:

Targeted goal amount at retirement – $3.2m
Current value plus growth to retirement – $1m
Shortfall – $2.2m

Read more

You now sit with a potential retirement shortfall of $2.2m as opposed to $0.8m. Again, one does not have to afraid of all this. Instead, with diligent planning with risk products, investment portfolios and tax planning this is achievable.

If we achieve our financial goals then maybe we can even still enjoy those visits back to the vineyards in the Cape.

Greed

Greed

On a recent trip to Zululand, I found this interesting flyer on my car. “What does the good Doctor have to do with finance?” I hear you ask. Well, a few natural herbs can help you attract customers, win the lotto and even
pass exams!

Now I can hear a few people giggling nervously, whilst the cynics among you will be asking yourselves why, if the good Doctor can do all the above plus lots more with a few 100% natural herbs, why does he need to
waste his time and money littering cars with his flyers?

What does a herb doctor have to do with a finance column? Well, just like the good Doctor, who makes seemingly ludicrous claims and people believe him, some very astute and intelligent investors believe that returns of 20% per month are achievable on a regular basis and they are taken aback when they hear that the investment was actually quite “risky”.

From Madoff to Tannenbaum and everything in between “Ponzi Schemes” seem to pop up with regular monotony. Sometimes Ponzi Schemes are more regulated (Think of Enron or Steinhoff). In December 2017, when Bitcoin was approaching the stratospheric level of
$20 000, I was getting calls almost every week asking how my clients could invest in Bitcoin, or even why I hadn’t invested them into Bitcoin. Strangely, now at levels of just over $3000, I am getting almost no questions about Bitcoin. The new kid on the block is Cannabis shares, everybody wants a share of this pot.

Why do so many people, who should know better, get caught? Greed leads people to believe that “this time it is different” and they tend to forget the tried and trusted adages that “if it looks too good to be true it usually is” and “there is no such thing as a free lunch”. People tend to forget that the law of supply and demand dictates that higher returns will have higher risks associated with them.

Now the question needs to be asked. Who is more gullible, the good Doctor’s patients or the investors that believe in “the next good thing”?

Emigration and your retirement fund

There is ongoing uncertainty on how retirement investors can access their savings on emigration. Given our country’s history of exchange controls and the restrictions that apply to retirement savings, concern on this matter is understandable.

In the past, the South African assets (including retirement savings) of persons emigrating from this country were ‘blocked’ and had to be handed over to an Authorised Dealer. These assets could not be taken out of South Africa without Reserve Bank approval, only the income earned on these assets.

These rules no longer apply. Nowadays, an emigrating family unit will qualify for a foreign capital allowance of up to R20 million per calendar year, in addition to a travel allowance applicable to each member of the family unit (R1m per individuals over 18).
The cash transfer to an overseas account still requires Reserve Bank approval. You must send a request addressed to the Reserve Bank that includes your emigration number (per your emigration approval), the amount to be transferred, the balance of your remaining assets in South Africa, and the name of your authorised dealer. Any assets exceeding the above limits must still be held in a non-resident bank account.

Even without formal emigration, individuals in good standing and over the age of 18 years can invest up to R10 million in their name outside the Common Monetary Area (CMA-Lesotho, Swaziland and Namibia), per calendar year, on top of their the R1 million annual travel allowance available to all persons over the age of 18.

Presently, cashing in your retirement savings is relatively simple if you belong to your employer’s pension or provident fund. On resigning, you simply withdraw from your employer’s pension or provident fund. The proceeds will be taxed according to the withdrawal lump sum tax table, and you may then invest the balance outside South Africa, according to the above exchange control limits.

If you have reached the minimum retirement age stipulated by the fund rules or legislation, you can also choose to retire at that point, and benefit from the more favourable retirement lump sum tax table. But matters may then become slightly more complicated, depending on whether you are a member of a pension or a provident fund.

If you belong to a provident fund, it remains straightforward as you have the option to take the entire amount as a cash lump sum. But if you retire from a pension fund, you are obliged to invest at least two-thirds into an annuity, either a compulsory or a living annuity.

If you purchase an annuity – either a living or guaranteed annuity – the underlying assets cannot be converted back into a cash lump sum. (A guaranteed annuity can never be converted back into the cash, ever; with a living annuity, any balance can be paid out as a cash lump sum to the nominated beneficiaries only when the annuity holder dies). You will therefore be left with an annuity that pays out in South Africa. The annuity income is deemed to be from a South African source and will therefore be taxed locally per the standard income tax tables. The onus will then be on you to expatriate these proceeds on a monthly or annual basis, and to invoke any applicable double-taxation on the other side. Expatriating funds in this way is costly and an administrative hassle, as you have to apply for each transfer separately.

The bottom line for emigrating pension fund members who don’t want to leave their money behind: resign before you reach your fund’s normal retirement age, so to that you retain the option to cash out.

Generally, you do not have the option to withdraw from a retirement annuity fund. You may not access your funds before the age of 55, unless the value of your benefit falls below a limit specified by the Minister (currently R7, 000), you qualify for reasons of ill-health or you decide to emigrate. You may only ‘retire’ from the fund from the age of 55 years. If you retire, you must purchase an annuity with at least two-thirds of your proceeds (unless the annuity value is less than R247,500), with the same consequences as buying an annuity out of your pension or pension preservation fund proceeds.

To take your RA savings abroad, you need to emigrate formally and you need to do so before you reach your fund’s specified retirement age. Formal emigration requires you to sign off with SARS, which triggers capital gains tax on all your capital assets (other than on your fixed property located in South Africa). Once all your tax affairs are in order, you will receive a tax clearance certificate that will entitle you to withdraw from your RA. The proceeds will be taxed according to the withdrawal lump sum tax table. If you are invested in a life company RA, you may also incur ‘termination penalties’ for withdrawing early (depending on the contracted investment term and fund rules).

TRUST TO TRUST: DOES A TRUST ELIMINATE ESTATE DUTY?

Although death and taxes are certain, people are always looking for ways to minimise taxes upon death.

In certain instances, people are not even aware of the tax consequences upon death. They may have to pay in excess of 30 percent in costs and taxes – capital gains tax, estate duty and executors fees.

If no provision was made for these costs and taxes, the executor may have to liquidate assets needed by the remaining family, to make these payments from the estate.

Many people are unaware that all the costs and taxes (as if you bequeathed it to any other legatee) will firstly have to be settled from the estate, before the trust is registered, as determined in the deceased’s will. This may leave dependents, such as minor children, with much less assets to survive from.

When you set up a trust during your lifetime, it will determine the tax consequences, both during your lifetime and upon your death. Many people believe that they should only set up a trust after they have created sufficient wealth. This is too late, for two reasons.

Firstly, when you transfer paid up assets held in your personal name to the trust, the trust will not have any liquidity to pay for those assets, and they will either have to be donated to the trust, or acquired on loan account. When you donate assets to the trust, donations tax at 20 percent on the first R30million, and on amounts in excess of R30m at 25 percent will be payable upon transfer to the trust from liquidity, which very few people have.

When you sell your assets to the trust on loan account, you will now be required to either charge interest on such loan accounts at at least the official rate (repo rate plus 1 percent, currently 7.75 percent), or pay ongoing donations tax if your loan was interest-free or interest is charged below the official rate (Section 7C of the Income Tax Act).

The donations tax will be calculated on the interest income forfeited by you. This tax on interest forefeited can be equated to the annual payment of estate duty during your lifetime.

Secondly, the balance of the loan to the trust will be included in your estate upon your death. If you charge interest on the loan, to avoid the donations tax liability, discussed above, all the interest charged will inflate your estate.

Section 7C has been successfully implemented by Sars to prevent the estate duty avoidance that could result when a person transfers growth assets to a trust.

The best time, therefore, to create a trust for estate planning purposes, is before major wealth is created during a person’s life.

In this instance, the assets will be acquired and grow in the trust, such as shareholding in a company which is acquired at nominal value when it is created, and where all the growth happen in the trust, with no resulting taxes as discussed above.

If you intended to create a trust, but you have dealt with the trust assets during your life as if they were your own, then Sars can attack the trust and have it labelled as an alter ego trust; in other words, an extension of yourself.

Despite the fact that the trust does in fact exist, SA Revenue Service will disregard the trust and treat the assets as if they belong to you, and include the assets in your estate. There must be a clear separation of control from enjoyment of trust assets. All trustees – and not just one of them – should control the trust assets for the enjoyment of the beneficiaries.

The Estate Duty Act (Section 3(3)(d)) is relevant where the trust instrument contains a provision that empowers the deceased, immediately prior to his/her death, to: appropriate or dispose of property; or revoke or vary the provisions of any donation, settlement, trust, or other disposition made by him/her for his/her own, or his/her estate’s benefit.

In such cases, the trust property will be included in the estate of the deceased as deemed property, so it is important that you are mindful of inserting problematic provisions when you draft your trust deed.

If you have a trust, please review and amend your trust deed and remove any provisions which may impact your estate negatively, especially if you have not made provision for additional estate duty and capital gains tax payable upon your death, as a result. When and how you set up a trust, and how you execute it, may impact estate duty payable.

The importance of doing nothing

In this day and age of instant gratification, constant information flow, and the general speed of doing things, people constantly need to be kept entertained and constantly need to be “seen to be doing something.” If you look at the first graph below you will see the Monster Beverage share price from inception in 1985 to date. If you invested $10 000 in December 1985 into the share, in June 2018 it would be worth around $4 300 000 and this is quite a bit lower than its peak of $5 260 000.

Continue reading

Trustees: Your Risk of Personal Liability in Property Sales

Firstly, a warning to anyone selling or buying property to/from a trust – have your lawyer check upfront that you are adequately protected by the terms of the sale agreement.

The problem is that contracting with trusts has its own specific set of rules and, as a High Court case illustrates, standard sale agreements don’t always provide adequately for them.

A seller sues an unauthorised trustee for R2m – personally

  1. A company sold a “real right of extension” (a right to build additional buildings in a sectional title development) to a trust,
  2. The agreement of sale was signed by only one of two trustees,
  3. The sale agreement was invalid because the trustee who signed had no authority to sign alone,
  4. The seller sued the trustee in an attempt to hold him personally liable for payment of the purchase price of R1,45m (almost R2m with interest),
  5. The seller relied on a clause in the sale agreement – standard in such agreements – in which the trustee “warrants and binds himself in his personal capacity” that he had authority to sign and that the trust would perform in terms of the sale,
  6. A further provision bound any unauthorised signatory as surety and as the purchaser in his/her personal capacity.  The seller’s problem here was that this provision specifically only applied to anyone signing for a company or close corporation yet to be formed.  There was nothing specifically binding an unauthorised trustee to similar personal liability,
  7. The seller tried to persuade the Court that the trustee was nevertheless liable as a surety, or that there was an implied term in the agreement holding him personally liable, but the Court was unimpressed on both counts and dismissed the seller’s claim.

The risk for trustees

As the Court pointed out, the seller could have sued the trustee personally not for the purchase price as such, but rather for damages arising from the trustee’s “breach of warranty”.
There’s a warning there for all trustees – you risk a damages claim in your personal capacity if you don’t make sure that you are fully authorised to sign, that you hold the necessary letter of appointment from the Master of the High Court, that your trust has the power to do whatever you are binding it to do, and that all the terms of the trust deed have been complied with.

And a lesson for property sellers and buyers

On the other hand the seller, to succeed in such a damages claim, would have had to prove the extent of its loss, causation of that loss, mitigation of its damages and so on. Its position would have been much clearer, safer and easier had it, before signing the sale agreement

  1. Checked for all the necessary signing authorities, compliance with the  trust deed etc (prevention being as always better than cure), and
  2. Inserted a clause giving it clear and strong personal remedies against any unauthorised trust signatory.

The same advice applies of course to anyone buying a property from a trust.
Mistakes here will be expensive – take legal advice before you sign anything!

Contact one of our Fiduciary expert attorneys for assistance info@lhtc.co.za

Seed Market Overview – 31 December 2017

Local Market

After two calendar years of weaker returns (5% in 2015 and 2.6% in 2016), market prices produced a respectable 21% in 2017. Despite this move up in prices, the 5 year compounded return for the JSE All Share index is only up to 11.9%. Nevertheless, this is an approximate 6.5%real rate of return on this asset class.

The JSE All Share index ended the year just shy of the 60 000 level, which it managed to reach early in 2018. Few investors would have predicted a 20% plus return on the local listed shares, given the issues that the SA investor faced over 2017,including:

  • The year started off on a firm footing, but soon became unstable when political risk was heightened with a cabinet reshuffle by President Zuma in March, with Finance Minister Pravin Gordhan ousted
  • This was followed in April by two of the major rating agencies downgrading SA local and foreign debt to sub investment grade
  • Quarter 1 saw SA slip into a technical recession, which rebounded in quarter 2.
  • Midyear, the ANC policy conference made calls to nationalise the SA Reserve Bank
  • In November, rating agencies made a further downgrade to SA debt
  • In December, Steinhoff (Top 40 share) crashed over 90% after admitting accounting irregularities and delaying publishing its annual financial statements.

Naturally, there were many positives for investors, which outweighed the negative sentiment, resulting in the following :

  • The rand appreciating versus the weaker US dollar by close to 10%
  • The All Share index gaining 21% and the Top 40 23% – 35% in USD dollars
  • The industrial metals sector gaining 90% on the back of firmer base metal prices
  • The bond market up 10.2%
  • Listed property up 17.2%
  • Money market up 7.5%

Local market prices were boosted by Naspers, which accounted for approximately half of the market gains. Late into 2017, banks rallied on the firmer rand, ending the year up 31%.

It is evident from Chart 1 (below) that returns from both listed property and shares only came through in the second half of the year. As is the nature of risk asset prices, returns are lumpier (unlike lower risk returns from money market).

Global Market

Following the global financial crisis in 2008/2009, monetary authorities, led by the US Federal Reserve (the US Fed) undertook an experiment by lowering short term interest rates to essentially zero in the hope of driving investors out of fixed income investments and back again into risk assets.

Since then, in each calendar year since 2008, US equities have posted a positive year and global equities were only negative in 2011 and 2015, with 2017 proving to be a bumper year, both for developed markets and emerging market risk assets as evidenced by the 23.9%gain from the MSCI All Country index.

In 2017, the bulk of the return from global markets came from growth in earnings; this means that valuations in general are not necessarily more stretched than a year back, despite gains of over 20% for many global shares.

The question that investors are now asking is “have we now reached the end of the easy monetary experiment, or is there still more to come from risk assets?”

While at this stage, there is no sign of a recession, these do typically occur after there has been significant monetary tightening from central banks in their enthusiasm to rein in rising inflation.

Therefore, one of the key areas to focus on in 2018 will be US inflation and further tightening of interest rates by the US Federal Reserve. The market is pricing in 3 or 4 further rate hikes, but if inflation picks up more than expected, this will be cause for concern.

For the time being our view is to maintain close to maximum exposure to global equities. But this will be tempered with an ongoing higher weight to global quality companies, with reasonable valuations and a steady reduction in allocation as prices rise (i.e. taking some profits off the table).

 

Seed Local Review

Equity December 2017 was a volatile month, with politics playing a huge part in investor sentiment. The election of Cyril Ramaphosa as head of the ANC was considered positive for SA and the rand gained ground against the USD, trading near 10% firmer for the month. This put strain on the JSE returns, which are heavily weighted to rand hedge shares. The Steinhoff decline was also a contributing factor. These factors combined resulted in the JSE Top 40 index falling by 1.3%. While earnings have come through, the price gains mean that valuations remain elevated above long term averages. Pockets of value appear in local focused shares, and stock picking, as opposed to buying an index, is going to be more important in 2018.

Property

Property Listed property shares were strong, gaining over 4% in December following the outcome of the ANC elective conference. This resulted in property shares gaining 14.5% since mid-2017 and 17.2% for the year. Over 2017, shares with a greater focus on local assets underperformed those with a more global focus. In December, gains were dominated by heavyweight shares (Growthpoint, Hyprop and Redefine). The listed property market has a one year forward income yield of around 6.5%, appearing expensive in relation to the local bond yield (trading at 8.5%). Approximately 50% of the index is now exposed to global properties, where the equivalent bond yields are much lower. A property portfolio with a one year forward yield of over 10% can still be constructed, which is attractive when compared to the prevailing bond yield.

Bonds

The December gain of 5.7% for local bonds SA bond yields was an indication of the risk premium investors, both local and foreign, were pricing in for the political situation in SA. With the ANC elective conference bringing in Ramaphosa, a large portion of this premium was removed, and yields on bonds fell from 9.4% to 8.7%, resulting in a strong gain. For the year bonds produced a 10.2% gain but proved to be a reasonable investment, outperforming money market returns (with higher volatility). Valuations are not as attractive following this price gain and given a possible further downgrade by Moody’slater in 2018.

Cash

The level of inflation has continued to remain under the upper band of 6%. The November inflation rate came down from 4.8% to 4.6%. Higher fuel prices will put pressure on inflation into the end of the year, but the much firmer rand price into December is positive for the inflation outlook. Reasonable expectations are that inflation should end the year around 5.3% as compared to 6.4% for 2016. This means that cash generating investments continue to provide a relatively high real return compared to long term history, at least before tax. For this reason cash and near cash investments remain attractive.

 

Seed Global Review

Currency

The rand surprised many investors in 2017, given the materialisation of risks. December saw a sharp turnaround, resulting in an appreciation of the rand against the USD (around 10%) and the Euro. The rand gained 10% against the USD for 2017, which was slightly weaker relative to some of the majors, gained 1.5% against the GBP, and was approximately 2.5% weaker against the Euro. Hence, one month made a big difference. The strong gain meant that on a purchasing power parity basis, the rand appears to be reasonably valued against a trade weighted currency basket. Further gains may come from a greater normalisation of the politics and ongoing firm commodity prices.

Equity

Global equity markets have had a huge 2017 with virtually all markets making gains. This has been supported by a synchronised global growth story. At a broad level the MSCI All Country index gained 1.6% in December and 24% for the full year in USD terms. Because price gains have mostly been supported by firmer earnings growth over the year, valuations have not necessarily become more stretched. At the same time investor sentiment is more positive and therefore the strong momentum is likely to continue. The risk lies with the easy monetary policy starting to turn into a tightening one and therefore a headwind. For now, though, we remain fully invested, but cognisant of the these risks.

Fixed Income

The US 10 year treasury bond yield traded relatively sideways in December closing at 2.4%. Into January, it has weakened to 2.5%. In the UK the 10 year bond trades at 1.3%. As generally expected, the US Federal Reserve increased rates again at their December meeting. The market is expecting at least 3 rate hikes in 2018 as the monetary authorities try and stay ahead of the inflation curve. Many market commentators believe that we are slowly going to unwind the 30 year bull market in bonds and that the 1.3% seen in mid 2016 was the high point, while others remain convinced that there is still value as the yield creeps up. In our view valuations in global government bond markets remain too expensive.

Alternative

Other asset classes that can sometimes be considered include private equity, direct real estate, commodities, and hedge funds and can provide investors with uncorrelated returns. In an environment where starting yields are at historical lows these traits are highly valued. These assets can perform a useful role in multi asset portfolios as they help provide more consistent returns. Generally rising yields however will be a constraint on valuations.

 

Source : Seed Investments (31/12/2017)

 

Queasy markets and returns

So 2018 has dawned, holidays are over and there are more negatives than positives in our bank account. We have our new year’s resolutions and goals set. So time to review the last statement of the year and oh dear what happened?…

2017 was a good year for investment and retirement funds. Yes, this might be a puzzling statement when you look at the political turmoil that was being experienced all over the world. But, overall up until the end of November most statements had good returns, especially after the dismal events we have been through and the impacts of our different finance ministers. However, at the beginning of December the news broke of the Steinhoff saga and our markets experienced a significant loss over a few short days. The Steinhoff share tumbled over 91% in a matter of days. The impact of this event effected everyone who was in the market, those who actually owned the share as well as those who did not. Many of us stayed glued to the news tickers trying to understand how a company that seemed so invincible and had to be in every Investment house’s portfolio or else they lost out on returns, had suddenly been rocked by such a scandal.

Next came the ANC elective conference and the markets went into an ever more extreme rollercoaster of up’s and down’s with everyone trying desperately to predict who would be the next president of the ANC. What would this do to our country and would we still have a market once the votes were counted? Suddenly, it was Ramaphosa, which calmed everyone and made the most anxious person look forward to a great summer holiday. The Rand strengthened and all seemed bright and shiny. So again you ask, then why are the statements we have received not reflecting this positivity?

The answer is that before the December events most funds had offshore allocations to try and hedge against our political uncertainty. These allocations were driving the returns with the world economy starting to grow and providing a protection for the savings we had. However, with the sudden rapid strengthening of the Rand after the conference it has reversed all the gains these investments made in helping our funds ride through our bumpy year. Added to this is that a large portion of our listed companies have offshore subsidiaries and income streams which were positive but with the rand strengthening so significantly, the income received was far less. Add in the Steinhoff saga at the beginning of the month the December returns look horrid and very negative.

These events in such a quick succession highlight why the core of all investment approaches is to ensure all funds are diversified between different types of assets such as equities, bonds, property as well as onshore and offshore investments. Understandably the above was more like a perfect storm and no matter how you invested you were not going to avoid any impact, but staying diversified did help soften the drop.

Lastly, always remember the core principle of investing is sticking to the time period you have allocated to your investment. 1 month’s volatile return is not going to have an impact on an investment created for a 5 or 10-year period, however it will affect those who have a 1 to 2-year time horizon. Make sure you and your advisor chose the right risk profile and asset mix to meet your needs, goals and time allocations.

The markets will turn and another news cycle will impact them in another way. There is no crystal ball which can predict what will happen next or how much you will or won’t make. Investment units go up and they go down, but regular and continual investing helps to reduce the risk, spreading your investment and diversifying the underlying assets will ensure the returns you are aiming for are achievable. Sticking to the time period and ignoring the noise and numbers that are being spoken about on a daily, weekly and monthly basis will help you meet the goals you have. Unfortunately, there are no guarantees in investing and what goes down, must come up. Speak to your advisor and stay the course. Enjoy 2018 and happy investing.

Article written by:

Joleene Webster