Monthly Archives: June 2016

Stay in shares after retirement

There are a number of important issues that someone in this position would need to consider.

Firstly, South Africa and most of the world is in a low-yield environment at the moment. Some countries are actually providing a negative yield on cash investments for the first time in history.

This has forced investors into higher risk asset classes like equities and property for the relatively higher yield they provide. At the same time, however, this has pushed up the valuations of these asset classes and many are now considered expensive. In turn, the relative yield on these asset classes have come under pressure as the prices have increased.

Secondly, even the current situation notwithstanding, equities are considered high risk compared to other asset classes. It is therefore important to establish what percentage exposure to equities is appropriate based on an investor’s risk profile and income requirements.

There are periods when equities do not perform and one must be able to stay invested for the long term and not be a forced seller for income purposes. This will ensure that one derives the full upside and value.

Thirdly, the dividend yield on South African equities is currently approximately 3%. That means that a R7 million equity portfolio would yield around R210 000 per annum. That is a shortfall of R490 000 every year on the R700 000 income required.

There are certain equities that provide a higher yield, but making changes will potentially incur capital gains tax and brokerage charges, which will lower the overall value of the investment. One must also consider the 15% tax on dividends when calculating the income that one will be receiving.

Fourthly, other asset classes like preference shares and bonds provide a higher income yield, however, their potential for capital growth is generally more limited than equities over longer periods. Bonds (fixed income) are also taxed at the investors’ marginal rate (potentially 41%) as opposed to the 15% tax on dividends for preference shares and equities.

Lastly, clients that have built a large capital base need to be realistic about the income these assets can provide. In this case R7 million might sound like a lot, but it is not enough to provide a sustainable income of R700 000 a year. To do that comfortably, one would need almost twice as much.

Investors in this or similar positions should therefore consider whether they might need to extend their working lives or lower their retirement expenditure.

It is also important that clients who are approaching retirement do not sell down all their equities, which provide long-term inflation-beating returns. People are living longer in their retirement years and must ensure their capital and income keep up with inflation. Meeting with a professional and gaining investment advice is a sound start in gaining direction and hopefully peace of mind.

Money into your bond

unduhan-46Advisors are frequently asked this question. This often has more to do with personal risk preference than with economic rationality. To answer this question, however, certain assumptions must be made, and I specifically won’t look at tax to keep the answer succinct.

The rational answer

Let us assume that the interest rate on the bond is at the prime lending rate. That is currently 10.50%

The second assumption we need to make is about what the risk level of the unit trust in question is. A money market unit trust has a very different risk and associated return goal than an equity unit trust.

A low-risk money market or income fund aims to beat inflation and offer a real return of 1% per annum. Thus, if the R100 000 is in an income unit trust only yielding 7% to 8%, it would be rational to secure the higher guaranteed return of 10.5% and transfer the funds into the bond.

However, if the money is in a balanced fund which generally targets a 5% real return, it would be more rational to remain invested as the real return is in excess of the bond interest rate.

It is also important not to fall into the trap of looking at the short-term underperformance of equity linked funds in a time like now and compare this to a resilient prime rate. This may result in the wrong decision to sell out at the wrong time. Every situation is unique and the best course of action is to get advice from a financial advisor who will look at the big picture and your individual circumstances.

The subjective answer

The other way I would advise a client on this is a more subjective approach – the sleep test. Quite simply, what makes you sleep better at night? Would that be a bond balance of R100 000 lower than it is now with no funds invested, or the same outstanding bond balance but R100 000 invested?

The answer will be different for each individual and there are a lot of factors that influence one’s financial decision making such as your view of debt as either toxic or as an enabler. For some people having R100 000 invested offshore, for example, gives them comfort. Therefore, because the economic rationality argument is often such a close contest, considering the subjective approach may help make the final decision easier.

advice worth the cost

To answer this question, we need to take a step back. Before you can decide what you want to do with your money, you need to know what you want to do with your retirement.

One person’s retirement dreams are very different from another’s. For some it is to slow down, but for others it is to do the things that your working life never allowed you to do.

At your age a financial plan should support your remaining life plan and lifestyle. Your  financial plan is one component of a flexible life plan that will need to see you through from your mid 60s into your late 90s.

Bear in mind that if you manage your investments yourself, you need to set aside the time to monitor your portfolio and be disciplined to adjust to different market conditions. You also have to keep your emotions in check when markets are volatile. These demands and complexities of successful investment management can prove challenging, even for the most informed individual investor.

People everywhere are also living longer. You therefore have to consider the long-term implications of managing risk, your money, tax and liquidity.

In addition, we live in very uncertain times. The IMF has cut South Africa’s 2016 growth forecast to 0.1%, foreign investment in the country has dipped to its lowest in ten years, a credit downgrade is still on the horizon, and there are still uncertainties around Brexit and Chinese growth, to name only a few. Getting the right financial advice to manage these risks is more important than ever.

A professional advisor will help you set up different investment strategies to achieve certain financial goals and provide assistance and guidance with retirement and estate planning. Competent financial advisors are knowledgeable about financial markets, investing landscapes and tax implications.

At your age there’s much more to consider than saving roughly 0.5% in fees. It is vital to ensure that you’ve planned appropriately so that your flow of  retirement income suits your life expectancy, while at the same time taking into consideration factors such as inflation increases and the need to tick off some of the items on your bucket list. Financial planners assist in managing your financial risk to a level of comfort and help making decisions that are in line with your long-term financial objectives.

Bear in mind that the savings you are looking to invest are your hard-earned cash. This represents your reward after many years of working. They can be used  to sustain your desired retirement lifestyle on a month-to-month basis, fulfil your dreams of travelling or taking on new hobbies and be sufficient to take care of those unexpected emergencies. You therefore owe it to yourself to look after this money as best you can.

There are several options available for investing our cash. A financial planner will help you to decide on the most tax-efficient option available, not only from an investing point of view but also when withdrawing. They will also consider different vehicles for different goals, and will also plan for liquidity during your life and on death.

Time for clear heads

For South African investors, the headline news at the moment is almost universally bad. Politically and economically, the country is facing very challenging times.

These difficulties aren’t limited to South Africa either. Global economic growth is still tepid and geopolitical tension is high.

“It’s very much at the top of everyone’s mind that there are very high levels of uncertainty both on the political and macro economic fronts,” says the manager of the PSG Equity Fund, Shaun le Roux. “As far as politics is concerned we have what’s going on inside the ANC, a very divisive US election, and Brexit and its consequences. On the macro economic side, there are big questions around the South African economy, which is going through a very tough patch and may be looking at a recession.”

Of these, the local political landscape is perhaps the most concerning. However Le Roux says that while the stakes are high and the outcomes unpredictable, investors shouldn’t make hasty decisions based on noise alone.

“What one needs to bear in mind is that when a story is dominating all the newspaper headlines the market knows about it and the market tends to be quite efficient at pricing in bad news,” he argues. “In this regard our analysis shows that something like a sovereign debt downgrade is pretty much priced in by the market already.”

Although there could still be a crisis caused by a successful attack on the integrity of treasury and the Reserve Bank, this is not PSG’s base case. Nevertheless it’s important to be diversified to be protected against even the worst possible scenario.

“The main pint that we try to make to clients is that when the world is this uncertain and the range of outcomes is this wide, we think you gain very little by trying to forecast exactly what is going to happen,” Le Roux says. “Brexit is the best example of how futile this can be. What we are rather focusing on is trying to make decisions that give our clients the best chance of achieving their objectives.”

This requires taking a long-term view and seeing opportunities beyond the market noise.

“When there are this much uncertainty and fear, we typically find that the market will give you some good opportunities,” says Le Roux. “But you need to be able to take a long-term view backed up by a long-term process. We are prepared to be patient, but we also can’t dismiss the risks out of hand. We just have to make sure that our clients are adequately protected.”

This means ensuring that they aren’t exposed to assets that could incur permanent capital losses. At the moment, Le Roux believes that there is a very real risk of this in certain assets.

“The anomaly is that even though there is all of this uncertainty and fear, at the same time there is a backstop to global financial markets in the form of ridiculously low developed market bond yields,” Le Roux says. “A consequence of this is that asset classes that are deemed to be related to bonds, specifically the highest quality equities are trading at very elevated valuation levels. We would argue that ownership of inflated assets poses the biggest risk to future performance for investors.”

At the same time, there are other parts of the market where the uncertainty has given rise to attractive asset prices.

“This includes domestically-focused business in South Africa such as banks, where the tough economic conditions and the recent spike in bond yields have had a dramatic impact on share prices,” Le Roux says. “In the last six to nine months we have been buyers of financial stocks and have also been adding South African bonds to our multi-asset portfolios.

“It’s important to note that we hadn’t been invested in South African bonds for a number of years before this,” he adds. “ It’s only in recent times that we think we can buy them at a margin of safety and at levels that lock in attractive real yields on a long-term view.”

Ultimately, he argues that the only safe way to negotiate times like these that are so uncertain is to focus on the fundamentals as much as possible.

“We think its time for clear heads,” Le Roux says. “It’s very noisy at the moment and when it’s this noisy, people do have a tendency to allow the headlines to throw them off course as far as their long-term investment objectives are concerned. But you need to think in an unemotional way about what you are trying to achieve from a return perspective and make sure you’re not taking on too much risk to achieve that.”