Monthly Archives: July 2017

Good investment in the short term tips

In this advice column Kirsty Scully from Core Wealth answers a question from a reader who wants to know what to do with a lump sum investment.

Q: I’ve decided to sell my house, and I expect to realise just under R1 million. I would like to use this money to pay off our debts like our credit cards and possibly our cars. That will leave me with approximately R500 000.

My plan is not to buy another house just yet as we are not sure if we may move to a different province or even different country in the next couple of years. With all that is going on in the markets and considering that all of my other money is either in exchange-traded funds (ETFs), unit trusts, retirement annuities and another property that I own, would it be wise to invest my money in physical gold? Or would it be better to invest in a money market account where I can get 6.4{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e}?

I want something safe, as it is not often in life you get a lump sum like this. We are also sacrificing having a nice big house in order to live in a smaller dwelling for the sake of being prudent and using this opportunity wisely.

As with many similar questions that I have been asked over the years, it is vital that you meet with a financial planner. A full understanding of your financial situation is required. It is not wise to give recommendations based on only a portion of your investment information.

However, that said, let’s assume that I have understood your risk profile accurately, and that a ‘couple of years’ refers to two years. I would consider the following to be wise counsel:

It is unlikely that allocating the full amount to gold would be appropriate as the price of gold can be volatile over short-term periods. I would also assume that the lump sum of R500 000 is unlikely to be a small portion (i.e. less than 5{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e}) of your overall portfolio, and this makes it even less appropriate to allocate the full amount to gold.

In addition, you specifically ask about physical gold, which in most cases is Krugerrands. When investing in Krugerrands there are fees of about R3 000 per ounce (you can buy for R21 000 versus selling for R18 000 as per the Cape Gold Coin Exchange), which need to be taken into account. Over a short-term horizon, these costs could be really punitive.

The gold price would therefore have to increase substantially over your two year period to beat the 6.4{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} per annum offered by your money market option. Remember you will also have to take into account the storage and insurance costs of holding physical gold. Therefore, taking all things into consideration, I would consider gold to be a relatively high risk investment for you.

The money market is probably one of your safest options. However, I am interested that you quote an interest rate of 6.4{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e}, as I know other options that offer up to 8.0{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} per annum. Make sure that you do your homework well, in conjunction with your financial planner. You may even look at the possibility of a 24 month fixed deposit, where the interest offered is currently about 8.8{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e}.

Depending on your marginal tax rate and your age, a more efficient investment may well be through a dividend income-type of portfolio. Ask your financial planner about this because you should be able to achieve an improved growth rate after tax compared to a money market. All in all, this will still be the relatively low risk that you require in a two year, short-term investment.

Role of a consultant in umbrella funds

Sanlam Employee Benefit’s head of special projects David Gluckman penned the following in response to a recent article published as part of a Sygnia marketing campaign.

Consistency is the only currency that matters” is a well-known slogan of one of South Africa’s leading asset managers.

At the other end of the spectrum, a new player entered the commercial umbrella fund market less than 4 months ago proudly announcing “one all-in fee as a percentage of assets under management” and illustrating projected cost savings to clients adopting this model versus the competing leading commercial umbrella funds. Besides some fees such as costly hedge funds being over and above the so-called “one all-in fee”, importantly all these projections assumed there would be no need to separately pay for the services of a consultant. Today the message is slightly different and we should now understand that these projections were never accurate in that the true intention was always to leave “financial room for the employment of independent consultants.”

But the new player does raise some valid questions as regards the most appropriate governance model for commercial umbrella funds. These questions are important given the massive growth in this market (see graph below).

Two recent experiences highlighted to me that a very important question to explore is what will in the future be the role of the consultant in commercial umbrella funds.

One highly respected independent consultant to a large book of Sanlam Umbrella Fund clients (and who also has many clients participating in other major commercial umbrella funds) raised the issue with me at our 2016 Sanlam Employee Benefits Benchmark Symposium, and said he is worried about the sustainability of his business given the increasing power of the major commercial umbrella fund sponsors.

Various senior Financial Services Board officials also raised the matter in an April 2016 workshop with Sanlam Umbrella Fund representatives, essentially asking whether consultants introduce an extra and unnecessary layer of costs. They wanted to explore whether Sanlam could instead provide these advisory services thus savings costs for the ultimate clients of umbrella funds being the members.

The Sanlam Umbrella Fund governance model was structured consistently with thinking as set out in my paper entitled “Retirement Fund Reform for Dummies” presented to the Actuarial Society of South Africa as far back as 2009. In that paper I argued:

The role of intermediaries (aka consultants) requires particularly close scrutiny. I would argue their role is a particularly vital one if we want to create a culture of effective competition.

Rusconi argues “In the institutional space, however, savings levels are less likely to change and marketing is more about attracting another provider’s customer than about motivating additional savings”.

Such arguments emanate from the premise that intermediaries do not add value to consumers – an assertion that I would challenge. My view is that there are both good and bad intermediaries, and we need to find a model where market forces will push in the direction of forcing intermediaries to continually “up their game”.

There are many good intermediaries who not only fight for the rights of their clients, but also serve as an effective means to ensure that product providers are continually aware of the need to provide quality service in an increasingly competitive environment.

May even result in delays when winding up the estate

People often draft a will with the best intentions, and even though the document may be technically sound, emotional decisions can have far-reaching consequences for the beneficiaries. They may even result in potential delays when winding up the estate.

To discuss the feelings or sentiments that could derail your estate planning, I’m joined by the CEO of the Fiduciary Institute of Southern Africa, Louis van Vuren. Louis, I’d like to discuss each of these emotions in some detail, but let’s unpack the issues first. What has been your experience? What are the five emotional issues that may create problems when winding up an estate?

LOUIS VAN VUREN: Ingé, firstly the desire to control – even after your death. Then also the desire to keep the peace – specifically in difficult family circumstances. Then there is also sympathy with struggling children, trying to look after your struggling children after your death, sometimes at the expense of other considerations. Feelings of guilt, or what I sometimes call debts of honour, when people feel they want to set the record straight or set things right in the will that they haven’t got round to during their lifetime. And then lastly feelings of superiority, whether it’s moral superiority or racial superiority or whatever. That also sometimes comes between a good, practical legally enforceable will and the wishes of the testator.

INGÉ LAMPRECHT: Louis, like you mentioned just now, impractical provisions in a will are often due to a desire to control or rule from the grave, so to speak. Why is this problematic and how do you avoid it?

LOUIS VAN VUREN: Ingé, the reality is that it doesn’t matter how carefully you think about things prior to your death, after your death circumstances can change drastically. And then if your will and the provisions of your will and how you would like things to happen after your death – sometimes for many years to come in certain cases – do not take into consideration the fact that circumstances can change drastically, this can lead to impractical situations, impractical solutions, etc.

One example would be: it has been, especially in the farming community, for many years customary to leave the farm and the farming operations to, let’s say, a son with the usufruct in favour of the surviving spouse, usually the wife. And the usufruct – in itself there is nothing wrong with it and it’s a perfectly legal structure – but the practical side of this is that often the farmers also try to limit the usufruct by stipulating that it will exist until the death or remarriage of the surviving spouse. And when people started living together and not necessarily getting married, there were all kinds of hilarious ways of trying to avoid a situation where the surviving spouse would still enjoy the usufruct after living with somebody.

An example that I came across many years ago was where the will stipulated that if the surviving spouse, the wife, stayed with any man under the roof of that farmhouse for more than five nights, the usufruct would be cancelled and everything would then go to the son. Now obviously the surviving spouse then found a very creative way around that. She married a year-long friend of theirs and they stayed in the house on the farm from Monday to Saturday morning, then went to town for the weekend and came back on the next Monday morning.

The market is considering when recruiting financial executives

Today we’re chatting to Grant Robson and Richard Angus from The Finance Team. The Finance Team is a professional consultancy specialising in the provision of experienced financial executives on a part time, interim or project basis. Last year The Finance Team ran a survey entitled mind the gap, gaps in resourcing your finance department. We’re here with Grant and Richard to talk through the survey and see what we can learn from some of the key insights.

GRANT ROBSON: As you mentioned in your introduction, The Finance Team is a professional consultancy, we’re not really a recruitment company as such. We employ our own professionals who we then utilize in the market to provide an interim part-time financial executive solution. So we were very interested to go to the market and find out the elements that we believe are very important in terms of how companies go about making these selections.

There were only five basic questions, to ensure that we were on the right track in terms of our reading of what we think the market finds very important when it comes to placing top notch, experienced financial executives. So that was the rationale behind why we conducted the survey.

JESSICA HUBBARD: Where was this survey run and who were your respondents?

GRANT ROBSON: The survey was run in conjunction with Moneyweb. Moneyweb sent out a link to the survey in the Moneyweb Morning Coffee (recently rebranded as MoneywebNOW)newsletter and then we also conducted the survey at the Finance Indaba in October 2016, which I think drew about 5 000 financial professionals to the event and whoever wanted to come through and do the survey was more than welcome to come through. Readers and listeners of Moneyweb were also invited to come and complete the survey.

JESSICA HUBBARD: So let’s dive into some of the key findings that came out of it, anything particularly surprising or unexpected?

GRANT ROBSON: I think before we even go into the results it’s really important to just note that the majority of the respondents were from SME companies, so smaller companies with turnover of less than R500 million and less than 200 employees, so I think that’s a really important element. You can expect to get different results from larger companies and I think at a later stage we will do another survey targeted at those larger corporates. But for now, it’s mainly smaller companies that answered, there were different categories, which I’ll ask Richard to go through. And because it was open to a large range of individuals, we then limited the results of the survey to those who we believe are the ones who make the call in terms of who gets employed in the company. Richard, if you can just go through that quickly.

RICHARD ANGUS: In terms of those roles, we looked at the chief executive role, the chief financial officer, then also the group financial manager role because they’re often charged with filling holes in a bigger organisation and then also financial managers themselves, because they often have to plug gaps in their team or across associated people and other teams. Then we also had a very small percentage, as Grant indicated earlier, of human resource managers, we only had about 4{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} of them, just due to the nature of the survey and where it took place.

Interestingly, of the people who responded, 44{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} were in the chief executive officer role, so we are talking to people who are actually the key decision-makers. So we’re talking about the people who are actually making the calls for their own businesses and for that mid-corporate size – staff below 200 and turnover below R500 million.

Tips for help with investing a small amount of retirement capital

I would highly recommend that this reader engages the services of a recognised professional financial planner. The information provided here leaves many more questions than answers, so advice is difficult.

The individual has a residence which she rents at R3 000 per month. She has R400 000 from which she needs to generate the rental income.

Sadly R3 000 per month represents R36 000 per year, which requires an income yield of 9{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e}. This may be possible by purchasing SA Retail Bonds, which are currently offering 9.25{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} on a two year fix, but this would leave her very exposed to inflation. That means that if her rental escalates she will be required to spend capital. Given that she is currently only 68, the need to invest with a longer term outlook to beat or match inflation is critical.

Investing in another property may be an alternative, but the illiquid nature of this asset plus the tenant risk she highlights may offset the benefit of an escalating rental. In addition maintenance and repairs also have to be factored in.

Another alternative is a listed property or real estate investment trust (REIT) unit trust or exchange-traded fund (ETF). These funds would invest in listed property stocks on the JSE that generate income yield and also have the potential for capital growth.

The downside here, however, is that while the tenant mix is more diverse, commercially-orientated and subject to increases in rental income, the daily volatility of a property fund due to share price movements may leave the investor very uncomfortable from a risk perspective.

As for a fixed deposit, while there may have been some negative press around a number of our banking institutions, I am doubtful that the big banks are in any form of a crisis. They are well funded and run and it is unlikely we will see one of them fail in the near future.

However, even though she may be able to get a fixed deposit that offers the required 9{abaf7da085c97d97c5749780ad44a0e55d5a01fb0b713ae478e338e15f926a8e} interest, she will have the same inflation problem that a retail bond presented. Her income will not increase even though her rental probably will.

I see two other options that may or may not be viable:

The first is to generate further income. The possibility of generating additional income from employment may allow for less income to be drawn from the investment and then the possibility of investing in a more growth-oriented portfolio.

The second is to consider engaging with her family around generational wealth planning. While this is often avoided at all costs by retirees, the reality is that it often only delays the inevitable. It may be possible to merge her situation with what succeeding generation’s lack. Parents lack cash flow and children lack capital. By planning together, there may be scope for both parties to benefit in the longer term. Sitting down a with a financial planner who can help you to come up with a potential solution around this proposal is essential.

Beyond these options, there are unfortuantely no ‘silver bullet’ options for retirees who have not prepared adequately. Their stories should however serve as an incentive to younger generations to start saving more, earlier!