Category Archives: Equities

UT or share portfolio

There are many with strong opinions about the merits of a share portfolio versus a unit trust portfolio. Here’s another one (strong opinion) in favour of a unit trust portfolio.

One of the aims of investing surely has to be to accumulate wealth which will enable you to live “comfortably” at a later stage in life (usually referred to as retirement). In this regard, it is my opinion that a unit trust portfolio trumps a share portfolio, every time!

A retiree’s primary aim is usually security of income and this is where a share portfolio falls short; it is very difficult to draw a regular income from a share portfolio. Investors usually have to depend on dividends which are irregular, sometimes unreliable and the long-term dividend yield is less than 3% (±2.8%). An investor with a share portfolio of R10m would therefore expect to receive less than R300k pa from the dividend yield. Alternately they would need to sell shares (CGT) and this is also tricky as many investors are emotionally tied to their investments.

The same amount in a unit trust portfolio could reasonably generate a sustainable (and close to tax-free) income of ±R500k pa (5%). This would be done by selling units on a monthly basis to provide the income – essentially rand-cost-averaging on the way out. Sure, this is a capital gains tax event but in most cases, this would be very tax efficient (if not completely tax-free).  Most unit trust investors also have no idea of the underlying shares that they hold and the emotional attachment to “granny’s shares” is simply not there.

The ultimate savings & investment vehicle!

Today I got a call from a journalist asking a few questions about what a beginner investor should do if they want to start investing…I think that they were looking for “tips and tricks” about which funds or shares to choose…here was my reply.

The first bit of advice I would give them is to consult a Certified Financial Planner®. It will cost them but could well prove to be the best investment they make. At the very least, they need help identifying their savings and investment goals. Are they short, medium or long term? They are “beginner” investors after all.

My 2nd piece of advice is to stay away from insurance companies- don’t ever invest via one of them. They are expensive, inflexible, opaque with respect to fees and returns and there are penalties when you change your premium/mind – and you will need to change your premium because life happens!

Once they know why they are saving/investing then there is no reason that they cant do the rest on their own…and my advice is to use unit trusts.

Why unit trusts? I think that they are the ultimate savings and investment vehicles because they are:

  • Accessible – you can invest from as little as R50 per month (and unlike many of the insurance products with low initial investment amounts, you wont pay 5-15% of premium each time you invest)!
  • Diversified – for R50 you can get exposure to all of the shares on the JSE and for R200 pm you can own the top 2000 shares in the world.
  • Cheap – in most instances there are no upfront admin fees and there are more than a few passive (tracker) funds with annual fees that are as low as 0.2% pa.
  • Flexible – you can stop, restart, increase or decrease the premium without ever incurring penalties!
  • Transparent – you can see the underlying investments and you can see all of the charges
  • Tax efficient – any time a manager buys/sells shares you will not be subject to any capital gains tax. This only comes when you sell one day.
  • Come in a variety of flavours – specialist equity to money market and you can get a tax-free account as well.
  • There is a whole layer of legislative protection – you own units in a trust fund and this is highly regulated!

I was then asked for my 2nd and 3rd choice investments…my answer was “unit trusts and unit trusts”.

Yes, I am a huge fan of unit trusts and will remain so until someone comes up with a better idea.

 

Memories

On a recent car trip, my daughter insisted on playing some of her music – 2 of the songs on the “hit list” were “Bear necessities” from the Jungle Book and “Hakuna Matata” from The Lion King. When the music finished there was a follow up question from her to me – “what’s your favourite Disney movie, dad?”

I thought about it and decided that “Disney” could now include Pixar and went with “The Incredibles” followed by “Monsters Inc”. And then I asked her. “Jungle book, followed by Lion King” was her reply. Her younger brother concurred.
As I pondered this I realised I had just witnessed a case of what behavioural economists call “anchoring” in practice. In short, anchoring can be described as the human behaviour trait that gives more importance to recent history than to things that happened long ago. This tends to skew our view of things…we all do it and we all need to be aware of it, especially when it comes to our money. For a more precise definition read the bit below by the people that first described the concept, Nobel prize winners Amos Tversky and Daniel Kahneman.

 

“Anchoring is a particular form of priming effect whereby initial exposure to a number serves as a reference point and influences subsequent judgments about value. The process usually occurs without our awareness (Tversky & Kahneman, 1974), and sometimes it occurs when people’s price perceptions are influenced by reference points. For example, the price of the first house shown to us by an estate agent may serve as an anchor and influence perceptions of houses subsequently presented to us (as relatively cheap or expensive). These effects have also been shown in consumer behavior whereby not only explicit slogans to buy more (e.g. “Buy 18 Snickers bars for your freezer”), but also purchase quantity limits (e.g. “limit of 12 per person”) or ‘expansion anchors’ (e.g. “101 uses!”) can increase purchase quantities (Wansink, Kent, & Hoch, 1998).” https://www.behavioraleconomics.com/mini-encyclopedia-of-be/anchoring-heuristic/

 

One page financial plan

I have just finished reading this excellent book by Carl Richards…

The One-page Financial Plan – some notes from the book:

“The best financial plan has nothing to do with what the markets are doing, nothing to do with what your real estate agent is telling you, nothing to do with the hot stock your brother-in-law told you about. It has everything to do with what’s most important to you.” p7

• know why you are planning
• time spent + money spent = what you really value.
• it’s about making best guesses (and not obsessing about getting things exactly right) – a lot can happen between now and the future!
• It’s about giving yourself more time!
• Things you have to invest: money, time, energy and skills – all NB to consider
• Most people don’t have a clear understanding of their current financial situation. Budgeting = awareness
• budgeting & flossing: both insanely important, super simple, & for many of us, nonstarters
• save as much as you can
• spend less than you earn
• don’t lose money
• life insurance plays 1 role: it covers economic loss. It is an expense, not an investment…it’s about the risks you are ok with and the risks you’d like someone else to take care of. Economic need, not emotional loss.
• Paying off debt = investment with guaranteed return
• Speculation and intuition are not investment strategies
• Invest and then behave for a really long time

Nedgroup Core Accelerated Fund

Regulation 28 has long been a frustration of many retirement fund investors with the Financial Services Board having applied a “one size fits all” approach. That means that within Regulation 28 confines, a 20-year-old investor in a retirement fund is treated the same way as a 64-year-old investor with respect to the maximum exposure that they can have to growth assets. This is insane!

In short, regulation 28 limits the exposure that an investor can have to certain of the asset classes. Equity exposure is limited to a maximum of 75% of the fund and property to 25%*. Reg 28 also limits offshore exposure to 25% of the investment.

And while it has been possible (in theory mostly) to construct an “aggressive” retirement portfolio with 75% in equities and 25% in property, the reality is that this has required frequent rebalancing in order not to fall foul of the regulation.

The resulting “default” has been for investors to make use of “balanced” or “managed” funds. Unfortunately for younger (and more adventurous) investors, who may have a 30+ year view on their retirement money or who are just wanting more growth, most balanced fund managers manage their portfolios with a 5-7 year time horizon because this is how they are measured (it makes no sense).

The result of this is that it unusual to find a balanced fund with more than 65% in equities and 5-7% in property. Over a 30 year term, this conservative approach could seriously undermine the returns that investors can achieve – further compounding the issue of most South Africans not being able to retire with sufficient funds.

Things were not looking all that attractive in the Reg 28 space…until recently, that is, when Nedgroup launched their Core Accelerated Fund.

The Core Accelerated Fund is the latest addition to their Core (passive) range of funds that is managed by Jannie Leach and his team. It is reg 28 compliant and has a static asset allocation of 75% in equities and 15% property at all times with the balance in bonds/cash. That’s 90% in growth assets at all times! The fund will also have 25% offshore exposure (as long as the legislation permits this). And the best thing about the fund is that being a passive fund, it has a very low annual fund fee of 0.35% (this is as low as 0.25% if you access it via one of the LISP platforms).

So now it is possible to have a high growth oriented retirement fund with an all-in annual fee of less than 1%**.

This fund gets a big thumbs up!

 

 

*This includes 25% offshore exposure.

** this includes the fund, admin and advice fees.

To pay a penalty or not?

A client of mine presented a potential dilemma to me. He has a living annuity through Liberty Life but also has the bulk of his living annuity funds on a LISP platform. He was wanting to move the Liberty one to the LISP and consolidate his investments on one platform*.
Under normal circumstances there should be no penalty when transferring living annuities. However, in the fine print, Liberty had noted that there would be an exit penalty if the annuity was transferred anywhere else within the first 5 years of the investment. As such he was advised that he was going to pay a penalty of 1.2% (±R6500) to move his annuity and he balked at the prospect.
We told him to find out from Liberty what the total annual fee on his annuity is and it turns out that they are charging him a total of 2.15% pa (admin and fund fee, no advice fee included – the advisor took that maximum upfront fee).
By comparison his living annuity on the LISP has a total annual fee of 1.1% (fund and admin fee, no advice fee). Do the maths – the 1.2% penalty will be covered in the next 12 months and thereafter he will be better off because of the lower annual fee (less than half of the current annual fee and there would still be a penalty to move for the next 24 months).
The real question I have for him is why anyone would ever invest in a product where there is any kind of exit penalty? There is no need to ever pay penalties when it comes to investing – there are far better (and cheaper) products out there than those offered by the life insurance companies. Stay away from them unless it is insurance you need!

*Note: he pays us directly for advice and there are no on-going advice fees on his investments so the advice we give to him is not affected by the desire to grow assets on which we earn fees.

Is everyone thinking it but no one prepared to say it?

What if SA is where Zimbabwe was ±20-25 years ago? With the benefit of hindsight, what would the average Zimbabwean do differently? Would they have stopped investing into their pension funds and bought more foreign currency? Would they have emigrated? Would they have bonded their houses to the hilt and taken the funds offshore?

I have always promised my clients that I would not invest their funds where I am not investing myself…if it is good enough for me it is good enough for them. In the same way, I have been a massive proponent of retirement annuities (and pension funds) in SA – they have made so much tax sense (as well as estate duty sense). But what if this is all about to change? If SA goes the way of Zim then I am afraid that your pension fund in SA will be worthless. If the state re-introduces prescribed assets for pension funds, then possibly it will be better to have funds offshore. If Zuma has been paid his commission for the nuclear deal, as some are suggesting, then we are facing a bleak future and a very weak currency – then it will be better to have funds offshore.

They say you should never ask a barber if he thinks you need a haircut and unfortunately this seems to apply to fund managers and pension funds too? If you ask them if it still makes sense to invest into your pension fund in SA they are likely to answer yes – their income depends on it. But what are they doing with their own money? I’ve asked a few of them but no one is prepared to stick their necks out – I suspect that they are all moving as much money offshore as quickly as they can but no one seems to be brave enough to say this in public.

So perhaps it’s time that we had a frank discussion about the future of pension funds in SA – we might not be Zimbabwe yet but perhaps we are the proverbial frog in the pot of water and perhaps we are reaching the point where we will no longer be able to jump out? So how about it, anyone brave enough to express an opinion on this one?

Dont panic – plan!

There are essentially 2 emotions that drive human behaviour when it comes to money: fear and greed. Both of them can result in investors behaving irrationally and this can result is significant financial losses if we are not careful.
For many South Africans there is currently a lot of fear around the future – it certainly looks like SA Inc is doomed (well for the next 5-10 years at least) and at times like this it is easy to panic and want to sell the house and take all the proceeds offshore. However, while having funds offshore may make you feel better about things, it might not be the correct thing to do financially.

Investing requires time – but investing offshore requires even more time. This is because you not only subject yourself to the volatility of the markets but also the volatility of the currency. It is possible that you get a double negative on your money – weak offshore markets and a stronger rand at the same time.

If you don’t think this is possible, ask anyone who took funds offshore during the first 3 months of 2016 – we hit almost R17/US$ (we are currently under R14/$) and we touched R24/GBP (R17.1/GBP currently). Those are significant short term losses as a result of currency movements*.

The point is this – take money offshore by all means but make sure that:
• You have a plan in place for investing and that this forms part of your long-term plan.
• You don’t need the funds for at least the next 10+ years and possibly longer.
• You don’t need to draw income from the funds at any stage.
• You don’t leave it sitting in a bank account offshore.
• Don’t put it into an insurance backed product – use unit trusts and ETF’s as far as is possible.
• It is also probably not a good idea to borrow money to take it offshore – there is a very real chance that interest rates could go up by a few % points over the next few years which might make the repayments on the loan impossible. If this corresponds to a period of currency strength and market weakness, you could end up in a real cash-flow crisis

*for anyone who can remember back to 2001/2 – the rand almost hit R14/$ and then fell right back to around R5/$ over the next few years.

It’s too late to panic

As we wake to the news of a significant cabinet reshuffle by Mr Zuma and that the rand has lost another 4% on the news, there will be a tendency to panic. Now is not the time for knee-jerk reactions. The market will do that for you. Like a pendulum, it will overshoot as people attempt to digest and predict the future consequences of the moves.
You are a long-term investor and should not be swayed by short term noise – even if it is a very loud noise. Today will most likely be horrible from a market and currency point of view but over the next few weeks and months we will make sense of it and there will be some positives that come out of this – don’t do anything in a panic. It is too late to take that money offshore (today) and it is too late to sell your portfolio to try to get out of the market.

One of my favourite lines that we often get to use is from the movie “Mickey Blue Eyes” which stars Hugh Grant as the boyfriend whose prospective father-in-law is a gangster boss. Grant’s character is very proper and speaks with a real hot potato in his mouth. The father wants to introduce him to his gangster friends but cant have him speak with that accent and so he tries to teach him to speak like a mobster…about the only thing he gets right is the line “forget about it” which sounds more like “fur ged abowd did”.

I am not advocating a reckless negligence of your finances but I recommending that if you are an investor (that implies that you are in it for the long haul) and you have an investment plan/strategy in place then you need to learn to do the “Micky Blue Eyes” with your funds and “fur ged abowd did” (for now).

Five lessons learnt in 2016

It has been a while since I last posted – 2016 has been a year to remember…I think that this post by Anet Ahern from PSG pretty much sums it up. Happy holidays and here’s to a better 2017!

1.   The best investment decisions aren’t always the most comfortable

During the first two weeks of 2016, the S&P 500, Dow Jones and Nasdaq Composite indices were down between 8% and 10% – the worst start to a year ever. All three indices would eventually add to their losses after a modest rebound, hitting their lows for the year in mid-February.  The US market then staged the biggest quarterly reversal since 1933 from these lows.  Here in SA, our All Share index had a similar start, and rose by 16% in just four months to reach its high for the year in June.  But that’s only part of the story…

It was during those panic-stricken weeks that shares such as Imperial, Glencore, Anglos and FirstRand were on sale at levels which subsequently provided returns of between 30% and 300%.  What was needed to make the right decision to invest in these shares at that point?

  • A calm, unemotional, measured approach.
  • Deep knowledge of the companies in question.
  • A solid assessment of their long term value.
  • Cash to invest, whether in a separate income portfolio or as part of the asset allocation of a multi asset or flexible fund.

During 2016, PSG Asset Management’s funds were invested in the shares mentioned above as well as other undervalued shares. Our ability to do so was backed by research, and funded by cash holdings which were intended to help us take advantage of opportunities to add more of these shares to portfolios at a time when others were fearful to act.

2.   Shares in good companies don’t need a good economy to show excellent returns
It would be fair to say that economic conditions have not been ideal for the likes of Imperial.Yet, an investment in this company at the low in January 2016 has produced a return of around 70% to the end of November 2016. This is because the market is often short-term oriented and frequently extrapolates current events and conditions into the future, creating extreme under- or overvaluation.In other words, investors often fail to take a long-term view, and they overreact to short-term pressures. This creates opportunities, as is evident with Imperial, a share held across our funds.

3.   Fixed Income can work hard towards your long term goals too
It was a long-term view on inflation that helped us to recognise the attractive real yields on offer from time to time during 2016, enabling us to lock-in returns of up to 4.5% above inflation in parts of our funds. We view cash and fixed income instruments as hardworking portions of a portfolio, providing income, diversification, stability, real returns and fire-power for opportunities during uncertainty. At PSG Asset Management every single part of the portfolio is an active decision and has to bring something that will take our investors closer to their long term goals.

4.    Our institutions are holding up so far
By the skin of our teeth, I hear some say.  But the fact is that the institutions which served to help us retain credibility in the eyes of the world mostly worked for us in SA this year when it really counted.  We had a peaceful and fair election and our finance minister managed to hang on to his independence. The Reserve Bank delivered on their inflation targeting mandate. While there are many instances of poor delivery and corruption, we learned this year that our key institutions stood the test of 2016, which was no mean feat.

5.    All countries have their issues, and major events will happen
Italy’s referendum led to the resignation of their prime minister. Brits voted in favour of leaving the EU, and Trump amused, horrified and surprised the world. We saw a failed military coup in Turkey. Oil hit a 12-year low this year, and gold had its best quarter in 30 years. Japanese bonds traded at a negative interest rate for the first time ever while Apple sales fell for the first time in almost 13 years. While investors around the world try to get their mind around these as they happen, at PSG Asset Management we try to focus on seeing the bigger picture and taking a longer-term perspective, while doing most of the work from the bottom-up. We believe this approach will continue to work as it has in the past.

As always, hindsight can serve to make us forget how hard it was at the time to stay calm and make the right decision.This is only possible if you have a solid framework to start with, be it around the way you research and assess shares, or the way your long-term investment strategy is crafted.