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Monthly Archives: December 2016

Three key investment mistakes to avoid

The current environment is an extremely testing one for fund managers. There is so much uncertainty on so many levels, that selecting appropriate investments takes both a lot of analysis and a lot of courage.

However, Paul Bosman, the co-manager of the PSG Balanced Fund, says that even in times like this it is possible to build robust portfolios that allow both the fund managers and investors to sleep well at night.

“Regardless of whether times are rosy or stormy, the three key mistakes to avoid remain the same,” Bosman says. “Don’t pay significantly more for something than it’s worth; don’t buy something just because it looks cheap; and don’t build highly correlated portfolios.”

To do this, however, you have to be able to look past the short term noise and appreciate the longer term fundamentals of what you are buying.

Understand the risks

Bosman points out that it is possible to manage risk by trying to work out what is already in the price of an asset. And when quality assets sell off, that doesn’t make them more risky, but less so.

“Even the worst of news can be priced into a stock,” says Bosman. “And if it’s already in the price, then it’s not such a risky investment.”

For example, South African banking stocks collapsed at the time of Nenegate last year and have largely remained depressed. Nedbank is basically trading flat over the last three years.

“There is a lot of bad news in the share price,” says Bosman, “but this is a quality business with good intrinsic growth, paying a 5% dividend yield.

“There can be further political challenges in the short run, but over the long term an investment is about competitive forces in the market,” he says. “Banking is not an easy industry to come into, and with all the noise in South Africa there aren’t a lot of people who want to try. So if you can buy this kind of business with inherent quality that the market is not pricing correctly, that is actually a low risk strategy.”

Be circumspect

However, Bosman does caution that just because there is strong negative sentiment in the market, doesn’t mean that everything that has sold off is now worth buying.

“Just because something is down, doesn’t mean that it’s cheap,” he says. “You still need to look for inherent quality that’s worth paying for.”

When adding assets into a portfolio, you also have to be aware of how they are likely to move in relation to each other. Especially when building bottom up portfolios, there is the risk of ending up with assets that are highly correlated as it is likely that the stocks that are currently attractively-priced, may have all sold off for similar reasons.

“You have to try to balance this,” Bosman explains. “At PSG we follow a bottom-up process, but are very aware of having too much unintended correlation because you don’t want the whole portfolio to perform strongly only in one kind of environment and poorly in another.”

In the same vein, it is very important not to construct a portfolio around a single outcome.

“You can draw parallels between building a portfolio and going to the supermarket,” Bosman says. “If you only go to the supermarket to buy things that you will need in a world war three scenario you are going to be pretty well stocked up on canned food. Whereas if go and you do your regular shopping, but also buy food for the kind of circumstances that might stop you from going to the supermarket in the future, such as a world war, you will have that canned food in the pantry, but you haven’t built your lifestyle around it. So when you need it it’s there, but you aren’t only eating baked beans.”

For instance, he points out that nobody can know with 100% certainty that South Africa’s credit rating will be downgraded. So it would be irrational to build 100% of a portfolio around this outcome.

“But if you think there is a 30% that we will be downgraded and you can build 30% of your portfolio accordingly, that’s rational,” he says.

PSG therefore does hold a lot of cash at the moment as security against a worst-case scenario, but it is also willing to use that cash when opportunities present themselves.

“That cash can become very powerful when quality assets are selling off,” Bosman says. “We only allocate money when we find an opportunity that is compelling. At the moment across our portfolios we are very happy to sit in cash, and so we don’t mind when the market sells off because that creates opportunities we can enjoy.”

Give the gift that keeps on giving

This time of year sees both children and adults preparing their wish-lists for the upcoming festive season. But as many South Africans continue to grapple with rising debt, now is a good time to shift the focus from giving material items to providing future financial well-being.

Giving a child an investment as a gift will not only promote a culture of saving from a young age, but will also show them how you can make money grow.

There’s a powerful story of one customer’s commitment to leave a legacy for his family, and the value of sound financial advice. In November 1968, a customer made an initial deposit of  R400 into the Old Mutual Investors’ Fund and 48 years later, his investment is today worth over R600 000.

More precious than the value of his money, however, was the culture of saving and the legacy that he passed on to his children and grandchildren. On special occasions such as Christmas and birthdays, he invested a set amount of money on his children’s or grandchildren’s behalf. With this investment, his daughter was able to provide for her daughter’s schooling.

If South Africa is to develop a generation of financially savvy adults, it is crucial to not just talk about it, but actually practise good money habits. It is important to teach your children about money, and the festive season – with the spirit of giving – is a good time of the year for parents to set a good example. Teach your children about the importance of giving within your means, as well as showing them the value of relaxing with family and rewinding after a long, hard year, while respecting the value of hard-earned money.

Families should consider starting a financial tradition of their own. Set a reasonable budget for gift giving this festive season, and instead of spending all your money on gifts that are likely to fade, go missing or be forgotten, speak to your financial adviser about starting an investment in the name of your children.

When children become old enough to understand more about money management, parents should involve them in the process. Teach them the principle of compound interest and explain why putting money away today means they will have more money tomorrow. Help them set a budget for the money they’ll receive over the festive season, encouraging them to spend a smaller percentage today, and investing the rest for the future.

Here are various ways you can give a gift that keeps on giving long after the hype of the festive period has subsided:

  1. Start saving for your children’s education: A hotly debated topic this year, the cost of education is something that needs to be saved towards and planned for. Opening an account and allocating money to it each month can help you fund your children’s future education.
  1. Life-starter fund: Every parent dreams of having the power to provide their children with the necessities in life, but in reality, this isn’t always possible. Setting up an investment and adding to it each year, even just a small contribution of R500, will enable you to provide your children with a lump sum that they can use as a deposit for their first car or deposit on a house.
  1. Set up a tax-free savings account for your children: A tax-free savings account can enable you to save towards your children’s long-term dreams and financial goals, but is also flexible enough to be accessed at any time should it be required. Also, by investing in a tax-free savings account, you won’t get taxed on the growth earned from the investment.

It is never too late to start saving, but the sooner the better, so don’t delay and start today by speaking to a financial adviser. Saving and investing make wishes come true.

3 ways to give your children a financial head-start

Many parents find it very difficult to talk to their children about money. Either the topic is seen as too sensitive or they just feel that they don’t know enough to give good advice.

However, the worst lesson that any parent could ever give a child about money is not talking about it. Children learn the most from the example that they are set, and that is why it is so important to show that money is not something to be scared of or anxious about it. It is something that should be made to work for you.

This is why it is best to expose children to the idea of saving sooner rather than later. From a young age they should see that they can have control over their money.

Here are three easy ways to get them thinking the right way about saving:

Give presents that mean something

Of course children love toys and having something to play with, but not every present they receive has to give them instant gratification. Putting money in a unit trust or stock broking account might not sound like the most exciting gift in the world, but it can be very rewarding.

For a start, it gives them some sense of having their own savings and some money of their own to look after. Over time, it’s also the best way to teach them about different savings products, asset classes, and things like interest and dividends, as they can see for themselves how they work.

A low-cost online stock broking account could even allow them to make their own decisions about what stocks to invest in. At an early age their decisions are not likely to be influenced by rigorous analysis, but they can still invest in companies that they know something about.

For instance, if they like eating at Spur, why not show them that they can actually buy a part of that company? Or if you always do your shopping at Pick n Pay, let them buy the stock. Over time, the likelihood is that their interest will grow in how these businesses work, how they generate earnings, and what being a shareholder means. This will eventually lead them to making more informed decisions about their investments.

Involve them in their own savings

If you are saving for your child’s education, are they aware of it? Do they know that you are putting away money every month, where it is going, and what it is for?

Explaining to your children that you are saving for their future allows for you to have a discussion around why it’s important to do this and how it works. Not only will this give them some sense that they can’t just take things for granted, but it also gets them thinking about the importance of financial planning.

Think of their future before they do

The earlier your children start saving for retirement, the less they will need to save. One of the biggest impacts you can make on their future financial well-being is therefore to start for them.

Plan to present your child with a lump sum on their 18th or 21st birthdays, either in their own tax-free account or placed in a retirement funding vehicle. You may not think you are contributing much, but just R10 000 will grow to nearly R1 million over 45 years at a compound growth rate of 10% per year. That is a worthwhile boost to their future retirement, and will also get them thinking about their financial future as soon as they enter the working world.

If you do this in a retirement annuity (RA), they will not be able to access the money until they are at least 55, which will ensure that it is kept for what it is meant for. However, if you believe that they will be disciplined it makes more sense to use a tax-free savings account. This is because over such a long period the benefits of a tax-free savings account will likely be greater, and you can also invest fully in growth assets like equities, while an RA will have to meet the restrictions of Regulation 28.

As with all savings, the earlier you start planning for this, the better. If you put away just R100 every month from the day your child is born, you would have saved R21 600 by the time they reach 18. If this portfolio grows at 10% per year, you could present them with over R60 000.

It is possible to do this through a tax-free savings account from the start, as you can open an account in your child’s name. It doesn’t, however, make as much sense to open an RA for them while they are still children, as nobody will gain any benefit from the tax deductible contributions. If you want to give them money in an RA, invest in a unit trust until the point where you want to give them the lump sum, and then transfer it into an RA once they are income-earning adults and will benefit from the tax deduction.

Tips to reduce the costs in an estate

The death of a spouse, friend or relative is often an emotional time even before estate matters are addressed.

And truth be told, death can be an expensive and cumbersome affair, particularly if estate planning was neglected, the claims against the estate start accumulating and there isn’t sufficient cash to settle outstanding debts.

People generally underestimate the costs related to death, says Ronel Williams, chairperson of the Fiduciary Institute of Southern African (Fisa). Most individuals have a fairly good grasp of significant expenses like a mortgage bond that would have to be settled, but the smaller fees can also add up.

To avoid a situation where valuable assets have to be sold to settle outstanding debts, it is important to do proper planning and take out life and/or bond insurance to ensure sufficient cash is available, she notes.

Costs

The costs involved in an estate can broadly be classified as administration costs and claims against the estate. The administration costs are incurred after death as a result of the death. Claims against the estate are those the deceased was liable for at the time of death, the notable exception being tax, Williams explains.

Administration costs as well as most claims against the estate will generally need to be paid in cash, although there are exceptions, for example the bond on the property. If the bank that holds the bond is satisfied and the heir to the property agrees to it, the bank may replace the heir as the new debtor.

Williams says quite often estates are solvent, but there is insufficient cash to settle administration costs and claims against the estate. In the event of a cash shortfall the executor will approach the heirs to the balance of the estate to see if they would be willing to pay the required cash into the estate to avoid the sale of assets.

If the heirs are not willing to do this, the executor may have no choice but to sell estate assets to raise the necessary cash.

“This is far from ideal as the executor may be forced to sell a valuable asset to generate a small amount of cash.”

If there is a bond on the property and not sufficient cash in the estate, it is not a good idea to leave the property to someone specific as the costs of the estate would have to be settled from the residue. Where a particular item is bequeathed to a beneficiary, the person would normally receive it free from any liabilities. This could result in a situation where the beneficiaries of the residue of the estate may be asked to pay cash into the estate even though they wouldn’t receive any benefit from the property, Williams says.

The most significant administration costs are generally the executor’s and conveyancing fees.

If the will does not explicitly specify the executor’s remuneration, it will be calculated according to a prescribed tariff, currently 3.5% of the gross value of the assets subject to a minimum remuneration of R350. The executor is also entitled to a fee on all income earned after the date of death, currently 6%. If the executor is a VAT vendor, another 14% must be added.

Assuming an estate value of R2 million comprising of a fixed property of R1 million, shares, furniture, vehicles and cash, the executor’s fee at a tariff of 3.5% would amount to R70 000 (plus VAT if the executor is a VAT vendor). Conveyancing fees will be an estimated R18 000 plus VAT. Depending on the situation, funeral costs may be another R20 000, while other fees (Master’s Office fees, advertising costs, mortgage bond cancellation and tax fees) can easily add another R10 000. By law advertisements have to be placed in a local newspaper and the Government Gazette, with estimated costs of between R400 and R700 and R40 respectively. Master’s fees are payable to the South African Revenue Service (Sars) in all estates where an executor is appointed with a gross value of R15 000 or more. The maximum fee is R600.

Where applicable mortgage bond cancellation costs, appraisement costs, costs of realisation of assets, transfer costs of fixed property or shares, bank charges, maintenance of assets and tax fees will also have to be paid. The executor is also allowed to claim an amount for postage and sundry costs, while funeral expenses, short-term insurance, maintenance of assets and the cost of a duplicate motor vehicle registration certificate may also have to be taken into account.

Luckily, there are ways to reduce the costs involved

Williams says the first step is to try and negotiate the executor’s fee with the appointed executor when the will is drafted. The fee could then be stipulated in the will or the executor could give a written undertaking confirming the agreed fee. But even if the deceased did not negotiate it at the time of drafting, the family or heirs can still approach the nominated executor and negotiate a competitive fee when they report the estate to the executor.

“Depending on who the executor is and what the composition of your estate is, you can probably negotiate up to a 50% discount.”

The composition of assets will generally be a good indicator of the amount of work that needs to be done and the executor will quote a fee against this background. The sale of a fixed property and business or offshore interests may complicate the process of winding up the estate.

If the surviving spouse is the sole heir, and/or there are no business interests and sufficient cash is available to cover the costs, the executor will generally offer a larger discount. Ultimately, the executor is responsible for signing off the liquidation and distribution account, confirming that all the costs are correct and that it will be settled.

Unfortunately, most of the smaller administration costs will have to be paid, with limited scope for negotiation, Williams says.

Costs of security can be avoided completely by exempting the nominated executor from lodging the bond of security in the will, Williams says.