1. VOLUME 04 | 2015 | 01
VOLUME 04 | 2015
IS SOUTH AFRICA
RUNNING OUT OF
GROWTH OPTIONS?
05
How do we Create Wealth
in the Current Cycle?
How to Build Your
Property Investment
Moving on up…
The Risk Spectrum
Performance Fees and
Treasury’s Draft Retirement Reform
11
17
21
07
2. VOLUME 04 | 2015 | 02
STANLIBisanauthorisedfinancialservicesprovider.
At STANLIB we never stop analysing the markets for
new opportunities to grow our clients’ investments.
It’s why we are proud to manage R560 billion in assets
under management and administration.
Speak to us to find out what our unwavering
focus can do for your clients and invest with
STANLIB today.
www.stanlib.com
Itcantakeupto10000
hourstobecomeanexpert.
We have spent a collective
1200 years focused on the
worldofinvestment.
3. VOLUME 04 | 2015 | 03
05IS SOUTH AFRICA
RUNNING OUT
OF GROWTH
OPTIONS?
In Q2 2015, South
African GDP declined
by a shock -1.3%q/q
annualised, compared
with growth of +1.3%q/q
in Q1 2015.
07HOW DO WE
CREATE WEALTH
IN THE CURRENT
CYCLE?
Returnsaretemporary
fromhere.Howdowe
createwealthfromthis
pointforwardinthe
currentcycle?Before
answeringthisquestion,
it’simportantto
understandthecurrent
marketconditions.
11HOW TO
BUILD YOUR
PROPERTY
INVESTMENT
Tomost,buyingahome
is“investinginproperty”.
However,whileitincurs
runningcosts,youcannot
deriveanincomefrom
thehomeyoulivein.
• SCAN TO SEE US ONLINE
14MTN — AFRICA'S
LARGEST MOBILE
OPERATOR
MTNlistedonthe
JohannesburgStock
Exchangein1994.It
currentlycommands
over35% ofthemarket
inSouthAfrica,withover
25millionsubscribers
domestically.
18MOVINGONUP...
THERISK
SPECTRUM
We know you need to
beat inflation to reach
your retirement goals
and this requires you
to move out of cash or
money market funds
and take on some
investment risk.
22TAX-FREE SAVING
INVESTMENT:
YOUR LONG-TERM
PARTNER
Saving for retirement
is a long-term goal and
choosing the correct
investment vehicle is a
little bit like finding your
long-term partner.
GO DIGITAL
WITH
STANLIB’S
eSTATEMENTS
Stepbystep,STANLIBis
changingthewaywedo
thingstoplayourpartin
preservingourworldfor
futuregenerations.Our
effortstobecomea
paperlessenvironment
involveofferingyouthe
opportunitytoaccessyour
investmentinformationat
theclickofabutton24/7,
365daysayear.
Ifyouwouldbehappyto
receiveyourstatement
andSTANDPOINTdigitally,
pleasevisitSTANLIB Online
toregister.
Oursecureonlineservice,
STANLIBOnline,provides
accesstoyoureStatements
andisavailabletoallexisting
investors.Toregister, goto
www.stanlib.comandlogonto
STANLIBOnline.Then select
Individual andfollowtheeasy
stepstoregister.STANLIB
Onlineoffersyoumanyother
services,e.g.youcanviewyour
welcomepacks,investment
detailsandtaxcertificates.
4. VOLUME 04 | 2015 | 04
BONGANI’S
FOREWORD
ATTHETIMEOF
WRITINGTHIS
FOREWORD,THE
INTERNATIONAL
MONETARYFUND(IMF)
HADJUSTRELEASED
THEIRWORLD
ECONOMIC OUTLOOK
ATTHEANNUAL IMF
MEETINGSINLIMA,
PERU.
They provided a number
of important updates; in
particular, they revised
down their growth forecast
for Sub-Saharan Africa,
especially Nigeria and South
Africa, Africa’s two largest
economies. The IMF’s
growth forecast for Nigeria
has been cut to 4.0% for
2015 and 4.3% for 2016.
TheIMFalsoheavilyrevised
downtheirestimateof
SouthAfrica’sgrowthfrom
2.0%to1.4%for2015and
from2.1%to1.3%for2016.
Theseforecastsnowappear
muchmorerealistic,butare
stillslightlyaboveourown
estimateof1.4%for2015and
1.1%for2016.Thedownward
revisiontoSouthAfrica’s
growthoutlookpartlyreflects
theIMF’sconcernsaboutthe
performanceofemerging
markets.
This means that external
conditions are becoming
more difficult for most
emerging economies,
including South Africa.
The IMF explained that
the world economy is at
the intersection of at least
three powerful forces. The
first major force is China’s
economic transformation
—away from export and
investment-led growth
and manufacturing, in
favour of a greater focus on
consumption and services.
The second force, related
to China’s slowdown, is the
fall in commodity prices.
The third force is the
impending increase in US
interest rates, which can
have global repercussions
and add to current
uncertainties.
The next couple of
months are going to be
very interesting. I am sure
that Kevin Lings, our Chief
Economist, will keep you
updated via the Weekly
Focus as well as twitter:
@lingskevin.
Regards,
Bongani Mageba
Managing Director:
STANLIB Retail
NOTES
FROM
THE
EDITOR
Ittakesalargeteamtopull
STANDPOINTtogetherevery
quarterandIwouldliketo
thankallthecontributors
andmysub-editor,Olga
Cukrowska,fortheirinputs.
Wewelcomeyourinput.
Ifyouhaveanyfeedbackor
questions,pleasee-mailmeat
Erica.stuart@stanlib.com.
Regards,
ERICASTUART
Editor
5. VOLUME 04 | 2015 | 05
OPTION ONE:
INCREASE
GOVERNMENT
SPENDING TO
BOOST GROWTH
Increasing government
spending to boost growth
has been the South African
government’s preferred
method of stimulating
the economy since the
global financial crisis. The
government has spent a
considerable amount of
money on growing the size
of the public sector, paying
higher wages and increasing
employment. Consumption
has been fuelled, but critical
infrastructure bottlenecks
have not been alleviated.
The current slowdown in
economic activity is starting
to undermine tax revenue.
The spending-more option is
no longer easily available to
the government as its debt
levels are already high at
around 44% of GDP, up from
a low of 26% of GDP in 2009.
The rating agencies have
downgraded the country’s
international credit rating,
limiting the government’s
ability to increase debt
significantly.
The government has made
it clear that it will endeavour
to control its salary bill and
consumption spending to
manage the fiscal deficit,
reducing it to below 3% of
GDP over upcoming years. It
also means that there is less
scope to boost public sector
infrastructural development
substantially—unless there is
a sizeable shift of spending
away from consumption into
infrastructure.
OPTION TWO:
PRIVATE BUSINESS
SECTOR EXPANSION,
INCLUDING NEW
BUSINESS VENTURES
Privatebusinesssector
expansion,includingnew
businessventures,aresimply
nothappeninginSouthAfrica.
Instead,privatesectorfixed
investmentisessentially
stagnating—growingbyamere
0.1%q/qinQ22015.Business
isnotevenspendingenough
tomaintainthemachineryand
equipmentitalreadyhas,let
aloneexpandorinvestinnew
technology.
Underthesecircumstances,
productioncapacitywill
stagnateandultimately
deteriorateasequipment
ages.Italsoimpliesthatprivate
employmentwillremain
subdued.
Itseemsclearthatthe
privatebusinesssectorlacks
confidence.Forexample,
theSouthAfricanChamber
ofCommerceandIndustry’s
businessconfidenceindex
reacheda16-yearlowinAugust
2015.Frequentpoweroutages,
subduedcommodityprices,
ongoinglabourunrestandan
uncertainpolicyenvironment
havecontributedtotheweak
confidencelevel.
IS SOUTH AFRICA
RUNNING OUT OF
GROWTH OPTIONS?
BY KEVIN LINGS
STANLIB CHIEF
ECONOMIST
The current
slowdown in
economic
activity is starting
to undermine
tax revenue.
The spending-
more option is
no longer easily
available to the
government as
its debt levels
are already high
at around 44%
of GDP, up from
a low of 26% of
GDP in 2009.
1
2
INQ22015,SOUTHAFRICANGDPDECLINEDBYASHOCK-1.3%Q/QANNUALISED,
COMPAREDWITHGROWTHOF+1.3%Q/QINQ12015.
The decline in Q2 2015 GDP was broad-based, including a fall in agriculture (-17.4%q/q due to
drought), mining (-6.8%q/q), manufacturing (-6.3%q/q), electricity (-2.9%q/q) and retail trade
and accommodation (-0.4%q/q). These sectors have been significantly hurt by regular bouts of
electricity outages and falling confidence.
Overall, during 2014 the South African economy grew by a mere 1.5%, down from 2.2% in both
2013 and 2012. For 2015 as a whole, we have revised the growth projection down to a weak 1.4%,
sliding further to 1.1% in 2016.
South Africa is going to struggle to lift its growth rate meaningfully back up to 2.0% or higher over the
next 18 months, given the electricity, labour and low-confidence constraints.
THERE ARE BROADLY FIVE OPTIONS FOR
GROWING SOUTH AFRICA’S ECONOMY:
6. VOLUME 04 | 2015 | 06
South African corporate
deposits are sitting at a
record high of R690 billion,
while corporate balance
sheets are, largely, in good
shape with relatively low debt
and impressive earnings
growth. Yet, the private sector
remains unwilling to use this
cash or leverage their balance
sheets for local expansion.
This is despite the relatively
low cost of capital due to low
interest rates.
To some extent, local
companies are looking for
investment opportunities
in the rest of Africa and
offshore, but they are still not
committing a large portion of
their balance sheet to these
ventures.
This situation is not unique to
South Africa. Private sector
fixed investment remains
subdued in many parts of the
world.
OPTION THREE:
INCREASE EXPORTS
The argument that a
weakening rand will boost
the South African economy
through a surge in our exports
has not proved to be correct.
Although the rand has lost
50% of its value since the
beginning of 2011, the growth
in exports, when measured
in US dollars, has been
somewhat lacklustre over the
past three years.
Thisdisappointingexport
performancepartlyreflectsa
slowdowninworldtrade.Prior
totheglobalfinancialmarket
crisis,worldtradewasgrowing
comfortablyataround8%.
Inthepastyear,worldtradehas
slowedtoagrowthrateofless
than1%.Inaddition,theimpact
ofdomesticinfrastructural
bottlenecksandacontraction
inSouthAfrica’smanufacturing
capacityhavealsohurtour
exports.
OPTION FOUR:
BOOST HOUSEHOLD
CONSUMPTION
Whilethisisasub-optimal
growthstrategy,SouthAfrica
hasbecomeaconsumption-
driveneconomy.Privateand
publicsectorconsumption
madeup79.6%ofGDPinthe
firstquarterof2015.Although
consumer confidence has
fallen, South Africans have
continued to shop and the
retail sector is growing at
between 2% and 2.5% a year.
Thisoptioncouldbeunder
threatifformalsector
employmentkeepsdeclining.
Overthepastyear,SouthAfrica
lost43000formalsectorjobs.If
massivejoblossesinthemining
andotherindustriescontinue,
andtoomanySouthAfricans
areoutofwork,household
consumptionwillstartdeclining
andtheeconomywillgointoa
recession.
OPTION FIVE: A
PUBLIC-PRIVATE
PARTNERSHIP
Thegovernmentcouldlookat
waystopartnerwithbusiness
inthedevelopmentofvital
projects,particularlyeconomic
infrastructure.Public-private
partnershipshaveworked
wellinmanyothercountries.
Infact,wehaveourown
exampleinSouthAfricaofa
highlyeffectivepublic-private
partnershipintheDepartment
ofEnergy’sRenewable
EnergyIndependentPower
ProcurementProgramme,and
developmentandmanagement
ofsomeroadnetworks.
Concernsaboutthepublic
sector losingcontrol of
keyutilitiesareoverstated.
Thegovernmentcanretain
ownershipandstrategic
controlofinfrastructural
developments,butinvolvethe
privatesectorinthedesign,
fundingandmanagement
oftheprojects.Inthefew
instancesSouthAfricahas
embarkedonthisapproach
theoutcomeshavebeen
beneficialforallparties
concerned, especiallythe
end-user.
Thisdevelopmentmodelcan
beappliedacrossabroad
rangeofsectors,including
socialinfrastructure.Agood
exampleisthedevelopment
ofthehealthsystemby
Netcare,inLesotho.
This does not need a plethora
of special incentives or tax
concessions to succeed.
Instead, as long as the
projects are costed correctly,
with sufficient understanding
of maintenance costs and
realistic projections of
utilisation rates, the projects
can become self-funding,
with modest support from
the state. It would ease the
burden on the state’s budget.
There is also no reason why
these projects cannot attract
foreign funding.
It is unrealistic to expect that
the public sector can fund
the required infrastructural
development of the country
within a reasonable time.
The public sector’s balance
sheet is simply not strong
enough. However, by
government articulating a
clear set of guidelines and
objectives, many projects
could be financed by the
private sector, still allowing
the government to retain
ownership and oversight.
Doing so would lift the
country’s growth rate, boost
business and consumer
confidence, increase tax
revenue receipts and
encourage employment.
THISSITUATIONISNOTUNIQUETOSOUTH
AFRICA.PRIVATESECTORFIXEDINVESTMENT
REMAINSSUBDUEDINMANYPARTSOFTHE
WORLD.
3
4
5
7. VOLUME 04 | 2015 | 07
HOW DO WE CREATE
WEALTH IN THE
CURRENT CYCLE?
RETURNSARE
TEMPORARYFROMHERE
Howdowecreatewealth
fromthispointforwardin
thecurrentcycle?Before
answeringthisquestion,it’s
importanttounderstandthe
currentmarketconditions.
Webelievethisisbest
explained bythe testimony
ofAdolphMiller,former
FederalReservemember,
beforethe USSenate in 1931.
Hewastestifyingaboutthe
Fed’s1927interestratecuts
andaccelerationofopen
marketpurchases,which
fuelledthespeculationand
lowqualitycreditexpansion
thatculminated inthe1929
stockmarketpeakandthen
collapse:
“Itwasthegreatestand
boldestoperationever
undertakenbytheFederal
ReserveSystem,and,in my
judgment, resulted inone
ofthemostcostlyerrors
committed byitoranybanking
systeminthelast75 years…
Businesscould notuseand
wasnotaskingforincreased
moneyatthattime.”
Insimpleterms,Millerwas
sayingifconsumersor
businessarenotdemanding
moneyyetcentralbanksflood
themwithexcessivemoney,
thisleadstoamisallocation
ofcapital. Bothinvestors
andbusinessesallocate
theirwealthtoanyasset
givingthemabetterreturn
thanzero.Thismisallocation
resultsinexcessiverisk-taking
andthecreationofassetprice
bubbles.
Alltoooften,investment
discussionsmoveawayfrom
thesimpleprincipleatthe
heartofa goodinvestment
decision: howdo youcreate
realwealthoveracycle?
Aclient'sageorwhenthey
needtheirwealthisonly
relevanttothedegree
ofexcessiveriskyouare
preparedtotaketogenerate
thatrealwealth. Whethera
clientis20or82thesimple
goalisrealwealthcreation.
AREWEINABUBBLE…?
Setting aside the technical
debates about what defines
an asset bubble, we look at
the risk of a loss of wealth for
clients over the next part of
the cycle. We don’t attempt
to forecast the market; we
simply look at what the risks
are to clients’ wealth if they
are invested in the current
set of market conditions.
Historically, we have seen
that deep losses of clients’
wealth occur when the
market is expensive, as
illustrated in the graph below.
It shows that investing in
the market at the current
valuation level historically
has resulted in a loss of
more than half of the clients’
wealth within the next three
years. So, for example, you
can see that at single digit
price to earnings ratios (PEs)
the biggest loss a client
suffered historically was less
than 20%, while investing
in the market at PEs above
15, losses historically have
reached above 50%.
BY ROBIN EAGAR
HEAD OF STANLIB
MULTI-ASSET
FRANCHISE
S&P500 PE VS DEEPEST SUBSEQUENT 3-YEAR LOSS
6"(C"30"A"(
!
! <!Q,&!2#(.)+/ 0&%!WX!VF,/++&(!WXY 9!Q#>/2:0 ![ !#(!0/.1+4!)2!#+%!
! )*/#2!#?&(!]W9!)++!0)4!*,&!0).&!*,/27 R!
3(& !
*# ^?)+3&%!.)(;&*!#2!1&);!.)(7/20 !*# # !_
-#(!'+/&2*0< !
:! <!D&*3(2 0 !
9! !
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
0,0 2,5 5,0 7,5 10,0 12,5 15,0 17,5 20,0 22,5 25,0 27,5
S&P500 PE
Source: STANLIB Research/I-Net BFA
Current PE
8. VOLUME 04 | 2015 | 08
To be absolutely clear
regarding our view, we
believe we are now in an
equity bubble and a highly
advanced one. The equity
market is above 1972, 1987
and 2007 market levels and
has only been higher in the
final periods leading up to
the 2000 Tech Bubble.
This can be measured on a
variety of metrics, each with
their pros and cons. The
normalised PE (Shiller PE),
Tobin’s Q or simply an old
Warren Buffet favourite of
market capitalisation over
GDP, all say the same thing:
we have only been at these
levels less than 10% of the
time (as seen in the graph
below).
In addition to buying
the market at extremely
elevated levels, an investor
today would be buying a
over-valued market on peak
margins too—an extremely
toxic mix when thinking
about real wealth creation
for clients.
We prefer to invest based
on sound principles that
align to our clients’ real
wealth creation as opposed
to hope. Returns from
here are, in our opinion,
temporary.
CURRENT PSYCHOLOGY
OF THE MARKET
A zero interest rate policy
drives strong emotional
behaviour. Investors are
willing to take a risk, no
matter how extreme, to
avoid the discomfort of
holding cash. This normal
emotional behaviour has
historically resulted in
poor investment decisions
and makes it difficult to
generate real wealth for
clients over the second part
of the cycle.
We are constantly engaging
with investors who are
trying to justify the market
levels based on the fact that
markets have been higher
before and that low interest
rates justify higher valuation
levels. All low rates do is
bring forward the returns
you would experience over
the cycle. Low rates do
not mean perpetual higher
returns, they mean we have
already experienced them
as they have been brought
forward and from here we
can expect, at best, lower
returns for the next part
of the cycle. The current
valuations assume interest
rates would be very low for
at least a decade.
Low rates in practice mean
excessive risk taking and a
misallocation of capital. This
is evident in the number of
margin accounts in China
and the US markets today
and the excessive issuance
of high-yield debt by
corporate America.
In our view, equity market
returns from here on are
temporary. Based on
current market conditions
we have no evidence on
which to accept market risk
at this point and, therefore,
will not take market risk.
IT’S NOT JUST EQUITIES;
YOU HAVE TO THINK
ABOUT BONDS AS WELL
We are of the view that, more
than ever before, investors
need to be aware of the level
of all asset classes at this
point in the cycle. One of
the benefits of investing in a
multi-asset portfolio is that
when one asset class, equity
in this case, suffers a loss an
alternative asset class, for
example bonds, provides
protection to your overall
investment. This is one of
the benefits of asset class
diversification.
As with all asset classes,
the starting valuation is
important. This is evident
in the graph on the next
page, which shows how a
theoretical 60/40 (equities/
bonds) balanced portfolio
would have protected clients’
wealth in 2008 when the
equity market declined 42%.
MARKET CAPITALISATION OVER GDP
0%
20%
40%
60%
80%
100%
120%
140%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
S&P Market Cap / Nominal US GDP
Source: Bloomberg
Tech Bubble Current levels have only been
reached over brief periods of
history:
Mkt Cap / GDP 6%
Financial crisis
9. VOLUME 04 | 2015 | 09
At the time, bonds
protected clients’ wealth
by delivering a 17% return
for investors over the same
period. Bonds thereby
mitigated clients’ loss of
wealth by more than half
of what it could have been.
Interestingly, this was even
more evident in the 2002/3
market correction.
However, to generate the
capital returns in bonds
evident in the previous cycles,
two important components
are necessary: the starting
yield needs to be high and
inflation needs to be high.
This means that by the end of
the cycle inflation and yields
have declined, generating
large capital returns for bond
holders. These ingredients
are not in place at the
moment as both starting
yields and inflation are low.
SA MARKET RETURNS DURING MARKET CRASHES
-60% -50% -40% -30% -20% -10% 0% 10% 20%
1969-1971
1974-1976
1980-1982
1987-1988
1990-1991
1992-1992
1998-1998
2002-2003
2008-2009
60/40 Portfolio Return Equity Returns Bond Returns
Source: I-Net BFA
Wethinkitisevenmore
important,giventhehigh
equitymarketlevelsandthe
limitedimpactofthebond
protection,toreduceour
equityallocationtoprotect
capitalforourclientsbasedon
experiencesofpreviouscycles.
Thewaywethinkaboutclients’
realwealthcreationcanbe
illustratedbysimpleexample
indicatedbelow.If aclient
investedR10milliontodayinan
equityfund(redline)andthe
marketgavereturnsof10%per
annumforthenexttwoyears
andthensufferedadrawdown
inyearthree,evenwiththe
traditionalstrongreboundin
themarketpostthecorrection,
theclientwouldbeworseoff
overthefull
five-yearperiod.
Thissimplisticallyillustrates
ourviewthattogenerate
realwealthoverthenextleg
ofthecycle,clients'require
assetallocationpositionsthat
protecttheirwealthduringa
marketfall.
Itisnotimportantifclients
donotparticipateinthefull
equityreturns,asreturns
aretemporaryfromhere
on,untilacorrectiontakes
place.Intheeventthatyou
believethatourviewiswrong,
wewouldputforwardthat
returnsfromhereonare
asymmetricalinnature,with
limitedupsideandsignificant
riskofamateriallossofclients’
wealth.
GENERATING REAL WEALTH OVER CLIENTS CYCLES
9 329 170
11 356 365
10 000 000
5 000 000
6 000 000
7 000 000
8 000 000
9 000 000
10 000 000
11 000 000
12 000 000
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Equity Only (Real Returns) Balanced Fund (Real Returns) Inflation at 6% (Real Return)
Source: STANLIB Research
10. VOLUME 04 | 2015 | 10
RISK PROFILE OF OUR BALANCED FUNDS
61%
9% 9%
5%
13%
33%
18%
0% 0%
13%
9%
26%
0%
10%
20%
30%
40%
50%
60%
70%
SA Equity International
Equities
Commodities SA Property SA Bonds International
Bonds & Cash
SA Income
Source: STANLIB Performance
Fund & Cash
Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Current
Protected Equity
Structure
WHYSTANLIB?
We have lowered the risk
profile of our Balanced
Funds by reducing our
equity exposure in
favour of high-yielding
income earning products,
effectively moving down the
risk curve on an absolute
and relative basis.
When we look back at history
we don’t expect clients will
regret the path we have
chosen by the time we
complete the cycle. There are
enough managers willing to
provide you with market risk
from here—we are not one
of them. We are positioned
to create long-term wealth
for our clients—not to try
to squeeze out the next
bit of marginal returns to
move up a ranking table.
STANLIB balanced funds
are positioned differently to
peers and our focus remains
on doing what is right for our
clients.
STANLIBBALANCEDFUNDSARE
POSITIONEDDIFFERENTLYTOPEERS
ANDOURFOCUSREMAINSONDOING
WHATISRIGHTFOROURCLIENTS.
11. VOLUME 04 | 2015 | 11
TOMOST,BUYINGA
HOMEIS“INVESTINGIN
PROPERTY”.HOWEVER,
WHILEITINCURS
RUNNINGCOSTS,YOU
CANNOTDERIVEAN
INCOMEFROMTHE
HOMEYOULIVEIN.
Soeventhoughitisanasset,it
isnotaliquid one—youcannot
tapintoitwhenyouneedcash.
Youwould havetosellyour
houseto realise itsvalue,but
thenwhere would youlive?
Investorshave twomain
routesto followwheninvesting
inproperty:investingin public
propertycompanieslisted
ontheJohannesburgStock
Exchange(JSE),orinvestingin
unlistedordirectproperties.
Within the listed property
options,there isactiveor
passive investing,orablend
ofboth.
AtSTANLIB,there arefour
differentwaystoaccess
purepropertyinvesting.
Threelistedoptions
includingsingleactiveasset
management,singlepassive
assetmanagementand
multi-manageractiveasset
management.Thereisalso
theunlisted optionofinvesting
indirectproperties. Inthis
article,we outlinethekey
featuresandbenefitsof each.
WHYPROPERTY?
Apropertyinvestment
appealstomanypeople
becauseitseemsmore
tangiblethan,say,ashare.
Itisnotmerelyapiece of
paper thatentitlesyouto
somedividends,itisbrickand
mortar.Manyinvestorsfind
thatreassuring.
However, other than
sentiment, there are
technically valid reasons
to invest in property. As an
asset class, property behaves
differently to both bonds
and equities. This lack of
correlation means that when
the one asset class falls in
value, the other may rise,
cancelling out at least some
of the former’s fall.
This is the overriding principle
behind diversification.
Investing in multiple asset
classes at any one time
smooths out the returns
in your portfolio, without
necessarily reducing the
long-term return.
Secondly,property
investments,listedorunlisted,
havebond-likecharacteristics
becausetheypayyouaregular
andstable income—andunlike
a bond,youcanrelyongrowth
ofyourincome.Thegrowing
incomestreamofferedby
propertymakesitanattractive
assetclass.
Where the underlying
properties themselves are
revalued annually in the
unlisted space, a portfolio
of properties is revalued by
the market daily, minute-to-
minute, in the listed space.
While some investors focus
on yield and others focus on
capital, it is the hybrid nature
of property as an asset class
in its own right that makes it
attractive.
ACTIVEINVESTING
–CAPITAL GROWTH
ANDINCOMEGROWTH
A single active manager, like
STANLIB’s Keillen Ndlovu,
Head of Listed Property
Franchise, looks at the South
African Property Index (SAPI)
with the view to outperform it.
While a passive manager has
to mirror the index, an active
manager has to outperform
the index.
Keillen’s philosophy is to
generate a source of income
and show capital growth
over time. He does this by
investing in shares of listed
property companies. These
shares are tradable on the
JSE and, therefore, provide
great liquidity. The underlying
companies are purely
property companies—so they
own and manage a variety
of properties, like offices,
shopping malls and even
residential.
TheListedProperty
Franchise'sinvestorpromise
isthattheycanachieveoneto
twopercentoutperformance
onaverageperannum—
usuallyachievingcloserto2%
annualisedoutperformance,
leavingtheinvestorwithalittle
moreafterfees.Thisisthe
firstadvantageofinvesting
inpropertyviaanactively
managedfund.
“There’saperceptionthat
activefundmanagersunder-
performtheindex,butwe’ve
consistentlyoutperformed
itthroughallperiodssince
inceptionin2002.There’s
aplaceforpropertyina
portfoliowiththebenefitof
amorepredictableincome
streamandlessvolatilitythan
otherassetclasses,”says
Keillen.
Thesecondadvantageis
thatanactivemanageris
hands-onandconductsdeep
researchintothecompanies
beforeinvesting.Thisincludes
highengagementthrough
HOW TO BUILD
YOUR PROPERTY
INVESTMENT
BY KEILLEN
NDLOVU, HEAD OF
LISTED PROPERTY
FRANCHISE
BY MALCOLM
HOLMES,
HEAD OF PORTFOLIO
MANAGEMENT:
STANLIB
MULTI-MANAGER
BY LEN
JORDAAN,
HEAD OF EXCHANGE
TRADED FUNDS
BY ALEX
PHAKATHI,
FUND MANAGER:
LIBERTY PROPERTY
PORTFOLIO
13. VOLUME 04 | 2015 | 13
Tobenefitfrom the promised
return,investorsneed tobe
invested forthe long-term(a
minimum offiveyears). What
makestheincomepredictable
isthatatleast85% ofthe
rental incomeinthe portfolio
iscontractual,within-built
contractualrentalescalations
of7.5%to 9% eachyear,
makingthisaninflationhedge.
“Inoverthepasttenyears
retailproperty,big shopping
centresinparticular,have
donebetterthantheother
typesofproperty.Inour
particularportfolio wehave
someof themosticonic
propertyassetsinthe
country.Ourportfoliois
about67% investedinretail
andthoseretailproperties
include twosuper-regional
shoppingcentres(over
100m2):Eastgateand
SandtonCity.Super-regional
shoppingcentresare
more resilientinleanyears
comparedtoone-wing
shopping centres,because
theyhavea verygoodtenant
mix.Weconstantlyensure
thatourportfolio isahead of
themarketintermsoftenant
mix.Wewerethefirsttobring
ZaraandPrada to Africa,
forexample.InMay2015we
launchedDiamondWalkat
SandtonCitythathouses
11international brands
includingLouis Vuitton,
JimmyChooand Todds”,
says,AlexPhakathi,Fund
Manager: Liberty Property
Portfolio.
Retailinvestorsgainentryto
thedirectpropertyportfolio
via acquiringa policyor
productthroughLiberty.
Sizeable corporate investors
caninvestinthisfund.
WHYPROPERTY HAS
DONESOWELLOVER
THEPAST20YEARS
Thetrendinproperty
investmenthaschangedquite
dramatically in South Africa
overthepasttwentyyears.
“Interestingly, in South
Africa, property investing
has actually taken off
dramatically. It used to be
dominated by retail investors.
In the early days, if an
institutional investor wanted
to get into property, he might
have bought one or two
shares. However, we’ve seen
a huge pick-up in the property
weightings of pension fund
investments over the past ten
years. I’d say that if a pension
fund had 2% invested in
property ten years ago, that
would have been considered
an overweight.
"Today,Iestimatethat
theaveragepensionfund
probablyhas5%investedin
property.It’sthisincreased
allocation towardsproperty
andincreaseddemandfrom
institutionalinvestorsthat
hasboostedtheproperty
investmentmarketand
pushedpricesup.Thisiswhy
propertyhasactuallydone
verywellovertherecent
decades,”saysMalcolm
Holmes.
Anotherinfluentialfactoron
thelocalpropertymarkethas
beenincreasedinvestment
fromthirdpartyinvestorslike
foreigners.Malcolmsays,
“TheylikeSouthAfrican
propertybecauseitprovides
aniceneatreturnstream,
brokendownbetweencapital
andincome.
The income is quite stable
and has grown steadily at
around 7.5% per annum over
the last five years. Over the
next year, an investment in
property will produce an
income yield of around 7%,
which is attractive relative to
the dividend yield on equity
of about 3%.
Whatyouarenowfinding
isthatmanySouthAfrican
companiesarebeingnoticed
becausetheyhavemadetheir
wayintoindicesglobally. This
hascreatedforced-buying
whichhaspushedupprices
andthemarketcapitalisation
ofpropertyinSA.Byway
ofexample,thecombined
weightoflistedpropertyin
theFTSE/JSEAllShareIndex
hasgrownfromaround1% ten
yearsagotoaround6% today,”
saysMalcolm.
INCONCLUSION
Whetherit’ssingleactiveasset
management,singlepassive
assetmanagement, multi-
managerordirectproperty
investmentthatappealsmost
toyouasaninvestor, you need
toweighuptheprosandcons
ofeachandbecomfortable
withwhichevermandateyou
select.
Alternatively,youcanleave
thisdecisionuptotheexperts
bychoosingoneofourmany
multi-assetfundsthatcontain
propertyexposure.
IN THE PAST TEN YEARS RETAIL
PROPERTY, BIG SHOPPING CENTRES
IN PARTICULAR, HAVE DONE BETTER
THAN THE OTHER TYPES OF PROPERTY.
IN OUR PARTICULAR PORTFOLIO WE
HAVE SOME OF THE MOST ICONIC
PROPERTY ASSETS IN THE COUNTRY
14. VOLUME 04 | 2015 | 14
MTNLISTEDONTHE
JOHANNESBURGSTOCK
EXCHANGEIN1994.
ITCURRENTLY
COMMANDSOVER35%OF
THEMARKETINSOUTH
AFRICA,WITHOVER25
MILLIONSUBSCRIBERS
DOMESTICALLY.
However,theMTNsuccess
storyexpandsfarbeyondSA
borders.Ithasestablisheda
firmfootprintin22countries
acrossAfricaandtheMiddle
East,withover230million
subscribers.Moreover,itisthe
numberoneoperatorin15of
its22markets.
WHAT’S BEHIND THE
RECENT SHARE PRICE
DECREASE?
The MTN share price has
been steadily decreasing in
the last few months. Despite
this, STANLIB has put this
stock on our buy list. While
this might seem counter-
intuitive at first blush, we have
very good reasons for having
done so.
When looking at any share
price movements, it is
important to investigate the
reasons for them. Is the price
depreciating because the
business is in trouble, or is it a
matter of sentiment or short-
term shocks? As investing
is a long-term game, it is
important not to get caught
up in short-term factors.
In the case of MTN, we believe
the current subdued price
is due to short-to-medium
term shocks and investor
sentiment, rather than any
fundamental shortcomings
in MTN’s long-term growth
strategy. Here are a few
reasons for this view:
THE HEADWINDS
FROM NIGERIA
MTN’s top two markets by
revenue, Nigeria and South
Africa, account for more than
60% of its current profits.
Nigeria and South Africa
are both resources-driven
economies. Resource prices
have been under pressure
lately—for a myriad of
reasons. When commodity
prices decrease, the Gross
Domestic Products (GDPs)
of these two countries suffer,
as a large part of the national
income is derived from the
sale of resources.
Nigeria’s main export is oil.
As we all know, oil prices have
fallen rapidly over the past 12
months. Low oil prices mean
low values for the country’s
main export, translating into
lower government income,
lower GDP growth, and
ultimately, an end-consumer
under increased pressure.
MTN derives over 40% of
its revenues from Nigeria. A
subdued macro-economic
climate in that country
translates to a slow-down in
revenue for MTN.
Inpart,thisisthereason for
therecentslideinMTN’sshare
MTN — AFRICA'S
LARGEST MOBILE
OPERATOR
SHAREPRICEOFMTNANDVODACOMVSALLSHAREINDEX
60
70
80
90
100
110
120
2014
O N D F M A M J J A
2015
12 month price performance rebased to 100
Source:I-Net
Vodacom
AllShare
MTN
MTNSUBSCRIBERSPERCOUNTRY
Cameroon 10 363 000
Nigeria 62 813 000
Benin 3 913 000
Guinea-Bissau 705 000
Guinea-Conarky 3 485 000
Liberia 1 300 000
Cote D’ivoire 8 488 000
Ghana 14 886 000
Congo Brazzaville 2 128 000
South Africa 28 504 000
Source: MTN
Cyprus 354 000
Swaziland 889 000
Botswana 1 784 000
Zambia 4 901 000
Rwanda 3 588 000
Uganda 11 146 000
South Sudan 982 000
North Sudan 8 757 000
Yemen 5 239 000
Afghanistan 6 487 000
Iran 44 146 000
Syria 5 765 000
15. VOLUME 04 | 2015 | 15
BY FRED
TEELING-SMITH,
INDUSTRIALS
ANALYST
BY OLGA
CUKROWSKA,
TECHNICAL
MARKETING
MANAGER, STANLIB
price.Marketspeculators
lookattheoilpricereducing
andinferthatMTN’sNigerian
operationsare goingtosuffer.
They,therefore,selloffMTN
basedonthisshort-term
viewand drivetheshareprice
lower.
This trend is easy to discern
from the graph above that
plots the oil price versus the
MTN share price in dollars.
Even though the MTN share
price fundamentals have no
direct dependency on the oil
price, the market forces have
made these two counters
move in tandem. Due to its
large exposure to Nigeria,
they are using the oil price as
a proxy for MTN’s success.
The shortcoming of a proxy
is that it is, by its nature,
an approximation. So the
market using the oil price as
a proxy for MTN’s revenue,
due to its approximate
nature, has in our opinion, led
to an undervaluation of an
otherwise solid stock.
There is another supply and
demand mechanism at play
here. A lower US-dollar value
of oil exports means a lower
demand for the Nigerian
currency, the Naira. As
with all supply and demand
equations, a lower demand
leads to a lower price. In the
case of currencies like this, it
translates into a weakening
in the Naira against other
currencies.
A weakening currency is
normally good for a country’s
economy because it makes
their exports cheaper for
other countries to buy. In
Nigeria, its central bank has
allowed the official exchange
rate to weaken to around 200
Naira to one USD. However,
there is a parallel unofficial
market for the USD in Nigeria,
where it is trading between
230 and 250 Naira. This
parallel market is more nimble
than the official exchange
rate and is, therefore, a good
indicator of the direction the
currency may take. Thus,
there is the risk of further
official devaluation in due
course.
As mentioned, the
devaluation will be good for
the economy but not good
for MTN’s rand earnings.
MTN repatriate all Nigeria’s
earnings back to SA, so a
REVENUEANDEBITDABYREGION(12MONTHSTO30JUNE2015)
Revenue contribution EBITDA contribution
Source:MTN
SouthAfrica
Uganda
RestofSEA
Nigeria
Ghana
Cameroon
IvoryCoast
RestofWECA
Iran
Syria RestofMENA
Sudan
Afghanistan
AllShare
24%
3%
4%
33%
5%
4%
4%
6%
8%
2%
4%2%
2% 19%
3%
3%
45%
4%
3%
3%
5%
8%
1%
3%1%
1%
MTNSHAREPRICE(USD)VSOILPRICE
12
14
16
18
20
22
40
50
60
70
80
90
100
2014
O N D F M A M J J A
2015
Source:I-Net
Oilprice
MTN
USD USD
MTNshareprice($)
Oilpriceperbarrel($)
MTN derives
over 40% of
its revenues
from Nigeria.
A subdued
macro-economic
climate in
that country
translates to a
slow-down in
revenue for MTN.
16. VOLUME 04 | 2015 | 16
weakening Naira currency
means lower rand earnings.
Fortunately, a weakening rand
has provided an element of
protection for MTN’s earnings
base.
On the up-side, Nigeria
has a new government that
has vowed to eradicate
corruption. It also has
good long-term prospects,
despite the short-term oil
price shocks to its growth.
We, therefore, expect this
economy will recover with
time, and with it, MTN’s
fortunes.
WELL POSITIONED TO
TAKE ADVANTAGE OF
OPPORTUNITIES IN
AFRICA
Even though Nigeria is its
largest market, MTN is a well-
diversified business across
various geographies, as
evidenced by the graphic on
the previous page.
Apart from SA, where real
penetration is close to 100%,
real mobile penetration is
still below 50% across the
rest of Africa—representing
good growth potential. We
therefore expect MTN to be
able to grow its subscriber
base to over 350 million
over the next ten years, with
penetration rates climbing.
Increasing penetration
with growing economies
will mean more people in
Africa with more money to
spend on communications—
and with no fixed-line
infrastructure to speak of,
mobile is the only choice.
Also, data usage across Africa
is in its infancy. Without fixed-
line alternatives, the majority
of data consumption will have
to take place via the mobile
networks. If the development
of data usage in Africa follows
global trends, then this will
prove to be a substantial
growth area on the continent.
And then there is Mobile
Money. Africa is home to a
large unbanked market. Even
though urbanisation is taking
place at an unprecedented
pace, there are still large
populations without easy
access to banks or ATM’s.
Mobile Money is, therefore,
a convenient solution to
this challenge, and is being
actively launched across
MTN’s operations.
Being the largest operator
in 15 of its 22 markets, MTN
is uniquely positioned to
capture these new revenue
streams ahead of its
competitors.
STREAMLINING OF
OPERATIONS
MTN is also partnering with
various companies across
the continent to streamline
their infrastructure. They
are selling their towers in
segments to dedicated tower
operators. MTN benefits
from a cash injection from
these transactions and by
having fewer maintenance
costs. The tower operators
benefit from expanding their
networks and recouping
their costs by being able
to piggyback other service
providers onto the existing
towers. It is a rare example of
a win-win situation.
STRONG CASH
GENERATION
AND ATTRACTIVE
DIVIDEND YIELD
Although MTN operates
in a capital-intensive
industry, (building a
network from scratch and
subsequent maintenance
and network upgrades
is expensive—although
partly offset by the above
mentioned streamlining),
cash flow generation
remains high. This means
that in future, the share
price will be supported by
a dividend yield of over 7%
and expected growth in
dividends of 5% to 15% per
annum.
Free cash flow after capital
expenditure as a percentage
of operating income is
over 100%. Despite the
short-term pressure on
Headline Earnings Per Share
(HEPS), MTN can use its
ungeared balance sheet to
support dividend growth,
(if repatriation of cash from
some of its key operations is
impacted in the short-term).
Finally, let’s not forget
about Iran. MTN has been
unable to extract any cash
from Iran for several years
due to sanctions. With the
expectation of sanctions
being lifted, Iran will become
an important contributor
to MTN’s cash available for
dividends.
Leading mobile operators in
any country have an ability to
generate higher profit margins
due to the economies of
scale—and, as mentioned,
MTN dominates in 15 of its
22 regions.Therefore, overall
group margins should be
supported by increasing
margins in the smaller
markets.
CONCLUSION
Following the trend or
buying things en vogue
will work wonders for your
fashion wardrobe but it is a
poor investment strategy.
Stocks that are popular are
often expensive. Yet, when
investing, you want to buy low
and sell high.
Thefactthattheshare
pricehascomedown from
itsrecenthighofR260,
(September2014),to its
currentlevelsofaroundR165,
meansthisqualitystock isnow
availableatalowerprice—and
we,therefore,viewthisasan
idealopportunitytobuyit. Itis,
aswesay,avalue-play.
IFTHEDEVELOPMENTOFDATAUSAGE
INAFRICAFOLLOWSGLOBALTRENDS,
THENTHISWILLPROVETOBEA
SUBSTANTIALGROWTHAREAONTHE
CONTINENT.
17. VOLUME 04 | 2015 | 17
WEKNOWYOUNEED
TO BEATINFLATION
TO REACHYOUR
RETIREMENTGOALS
ANDTHISREQUIRESYOU
TOMOVEOUTOFCASH
ORMONEYMARKET
FUNDSANDTAKEON
SOMEINVESTMENTRISK.
HOW MUCH RISK
SHOULD YOU
TAKE ON?
That is a question best
answered by you and your
financial adviser. However,
we devised an example
to illustrate how moving
slightly up the risk-return
spectrum can have an
impact on your final nest
egg:
We looked at how R100 000
would have performed at the
average rate of cash return
over the past 20 years,
which was approximately
10% nominal, (ignoring tax
and fees), versus how the
same lump sum investment
would have performed if it
were invested in a portfolio
that provided just one
extra percent of return per
annum, i.e. 11%.
Over 20 years, the 1% of
extra return per annum leads
to a final value that is 20%
higher. That is the power of
compound interest—a small
increase in return leads to a
large difference in investment
value over time.
BY OLGA
CUKROWSKA,
TECHNICAL
MARKETING
MANAGER, STANLIB
MOVING ON UP...
THE RISK
SPECTRUM
AT AVERAGE
CASH RETURN:
of 10% pa
AT AVERAGE
RETURN:
of 11% pa
VS
R100000 R100 000
20YEARS 20 YEARS
=±R673000 = ±R806 000
LUMPSUM LUMPSUM
R133000EXTRA GROWTH
OVER20YEARSDUETOONLY1%EXTRARETURN
18. VOLUME 04 | 2015 | 18
Ifyoudon’tneedtheextra20%
attheendofyourinvestment
period,thinkaboutthis
differently—inahigheryielding
portfolio,youcouldhavegotto
thesameendresultwitha20%
lowerinitialinvestment. Either
way,inthelongrun,aslightly
riskierinvestmentworksinyour
favour.
INVEST ACCORDING
TO YOUR TIME
HORIZON, NOT
ACCORDING TO YOUR
RISK AVERSION
Nobody likes making a loss.
In this way, we are all risk
averse by nature. Therefore,
allowing your risk aversion
to determine your asset
exposure is not always the
best tactic.
Instead,yourassetmixorrisk
profileshould beafunction
ofhow longyouhaveuntil
retirement. Thetwoextremes
ofthisspectrum are:
• A 20-yearold hasover
40yearsuntilretirement
and,therefore,can take
onsubstantialrisk to
benefitfrom thehigher
returnsthiswillyieldinthe
longrun,but
• A personwho isaboutto
turn65 and retireshould
beinalowerrisk portfolio,
onewhichshieldsthem
from large assetvalue
variations,tominimise
the downside risk whenit
comesto cashinginthe
investmentatthe point
ofretirement.Justhow
lowthe risk profileshould
bewilldepend onthe
choice ofannuitytypeat
retirement
Betweenthesetwoextremes
isa continuum of risk-return
profiles.Again,whereyou
fitonthiscontinuumis
somethingyou should
discusswithyouradviser,
aseveryone’spersonal
circumstancesaredifferent.
CHOOSING THE
UNDERLYING FUNDS
So,youhavemadea decision
astotheretirementproduct
youneed,andyouhave
workedoutthebudgetforhow
muchyoucanputawayeach
month.Now,theunderlying
fundsneedtobechosen—
withthehelpofyouradviser,
youneedtocreatea portfolio
offundsthatisalignedtoyour
investmentgoalandtobeat
inflation.
Severalfactorswillcomeinto
considerationhere: yourtime
horizontoretirement;how
yourotherexistingretirement
savingshave been invested;
yourstateofhealth;howmany
dependantsyouhave, etc. If
youarealreadyinretirement,
thenyourage,healthandthe
amountofmonthlydrawdown
shouldbetakenintoaccount
when choosingunderlying
funds.
Thechoiceofunderlyingunit
trustsandothersolutionswill,
therefore,beaverypersonal
oneandyoushouldseek
professionaladvicefromyour
accreditedfinancialadviser
beforemakingyourchoices.
However,themostimportant
considerationshouldbeyour
time horizontoretirement,
whichwillinformhowmuch
riskyoucantakeoninyour
choiceofunittrusts.
YOURASSETMIXORRISK
PROFILESHOULDBE
AFUNCTIONOFHOW
LONGYOUHAVEUNTIL
RETIREMENT.
19. VOLUME 04 | 2015 | 19
TAX-FREE SAVING
INVESTMENT:
YOUR LONG-TERM
PARTNER
IFYOU’RE18OROLDER,
WITHAVALIDSOUTH
AFRICANIDENTITY
NUMBERANDCAN
CONTRIBUTEAMINIMUM
OFR500PERMONTH,
YOUQUALIFYTOINVEST
INATAX-FREESAVINGS
VEHICLE.
Why would you be interested
in this investment? Firstly,
it allows you to invest tax-
free over the long–term.
Secondly, it can be valuable
post-retirement.
The National Treasury
introduced Tax-Free Savings
Accounts from 1 March
2015, allowing individual
investors to invest up to
R30 000 a year tax-free
while the maximum capital
investment is R500 000
over your lifetime, there
are no limits on the size to
which this account can grow.
All growth in this account—
interest, dividends and
capital growth—is 100% tax-
free. You don't pay capital
gains tax, no matter how
often you switch between
funds.
While Treasury would like to
see lower income earners
use these accounts to
boost their savings, tax-free
savings accounts are also
well suited to higher income
earners. This includes
anyone who can afford to
put away R30 000 a year,
over many years, to build up
to the R500 000 maximum
lifetime contribution limit.
TRADITIONAL
RETIREMENT SAVING
Investorshavealways
beenabletoaccumulate
retirementassetsthrough
aretirementfund,topped
upbyaretirementannuity.
Contributionstoboththese
savingsvehiclesaretax-
deductibletothelimitof15%
ofyournon-pensionable
income.Anycontributions
abovethisamountarenot
tax-deductible.Aslongasthe
moneystaysinthepension
fundorretirementannuity,
yourincomeandgrowth
remainstax-free.
Onceretired,youneedto
manageyourannuitypayouts
relativetoinflation,ensuring
theystillmeetyourneeds
throughretirement.
BY ANTHONY
KATAKUZINOS,
CHIEF OPERATING
OFFICER,
STANLIB RETAIL
BY LEVASHNI
NAICKER,
TECHNICAL
MARKETING
MANAGER
PLANNINGFORYOURPOST-RETIREMENTGOALS
Can be more effective by combining a retirement annuity with a tax-free savings account:
PENSIONWITHDRAWALFROMALINKED-LIFEANNUITYONLY
PENSIONWITHDRAWALFROMALINKED-LIFEANNUITYANDATAX-FREESAVINGSACCOUNT
InvestorAwithdrawsapensionfromalivingannuityofR20000p.m.
andisthentaxedannuallyonR240000
AnnualtaxonR240000 = R47848
Tocalculatethenetmonthlyincomefromthelinked-lifeannuity:
Annualtaxbeforerebate: R47848
Less:Primaryrebate: R13257
Less:Secondaryrebate: R7407
Annualtaxafterrebate: R27184
(R27184/12months =R2265.33monthlytaxamount)
Netpaymentfromlinkedlifeannuitypermonthis(R20000-R2265)=R17735
InvestorBwithdrawsalivingannuityofR15000permonth
andR5000p.m.fromatax-freesavingsaccount
HeorsheisthentaxedannuallyonR180000
AnnualtaxonR180000 = R32400
Tocalculatethenetmonthlyincomefromthelinked-lifeannuity:
Annualtaxbeforerebate: R32400
Less:Primaryrebate: R13257
Less:Secondaryrebate: R7407
Annualtaxafterrebate: R11736
(R11736/12months=R978monthlytaxamount)
Netpaymentfromlinked-lifeannuitypermonthis(15000-R978)=R14022
Netpaymentfromlinked-lifeannuityandtax-freeinvestmentis(R14022+R5000)=R19022
InvestorA
InvestorB
Assumptions:
Thiscalculationisbasedona
pensionofR20000p.m.or
R15000p.m.fromalivingannuityat
theapplicabletaxrate,fora
pensionerovertheageof65,
butundertheageof75,at2016tax
tablesrates.Thiscalculationdoes
nottakeintoaccountanyallowable
deductions.Thewithdrawalfrom
thetax-freesavingsaccountis
basedontheassumptionthatthe
pensionerhasaccumulatedenough
fundsinthetax-freesavings
accounttosupportamonthly
withdrawalofR5000.Allfigures
roundeduptonearestrand.
THEREFORE,THE
TOTALTAX
SAVINGSPERMONTH,
IFANINVESTOR
SUPPLEMENTSTHEIR
RETIREMENTANNUITY
WITHATAX-FREE
SAVINGSVEHICLE
IS(R19022-R17735)
R1287PERMONTH
ORR15340PER
ANNUM.
SAVING FOR RETIREMENT IS A LONG-TERM GOAL AND
CHOOSING THE CORRECT INVESTMENT VEHICLE IS A LITTLE
BIT LIKE FINDING YOUR LONG-TERM PARTNER.
20. VOLUME 04 | 2015 | 20
When you retire, your
retirement annuity is
converted as follows:
• Up to one third of your
lump sum is taxed at a
specific scale
• The remaining portion
must be used to
purchase an annuity
On the other hand, from
your tax-free savings
account, you can draw a
monthly cash flow plan,
giving you tax-free income in
retirement.
CONCLUSION
The cards are on the table
as to why you should
consider entering into a
long-term relationship with
a tax-free savings account.
You may have the account
for 20 years or more pre-
retirement (building up
your pool of assets), and
another 20 or so years post-
retirement (where you can
withdraw a tax-free income).
When you enter into any
long-term relationship, it is
important to choose your
partner carefully. It’s equally
important to choose your
tax-free savings account
with care.
It is important to note: Your
contributions in a tax-free
savings account are limited
to R30 000 p.a. SARS will tax
any amounts exceeding the
R30 000 p.a. limit at rate of
40%.
WHEN YOU ENTER INTO ANY LONG-TERM RELATIONSHIP,
IT IS IMPORTANT TO CHOOSE YOUR PARTNER CAREFULLY.
IT’S EQUALLY IMPORTANT TO CHOOSE YOUR TAX-FREE
SAVINGS ACCOUNT WITH CARE.
• Investments in a
retirement annuity
cannot be accessed
prior to age 55, whereas
tax-free savings account
funds can be accessed
at any time. However,
withdrawing from your
tax-free savings account
impacts negatively on your
lifetime investment limit of
R500 000
• Pre-tax money is used
to invest in a retirement
annuity, while after-tax
money is deposited into a
tax-free savings account
• Withbotharetirement
annuityandtax-free
savingsaccount,your
growthistax-free.
Thepre-retirementbenefit
witha retirementannuity
isthata percentageof
your contributionsare
tax-deductible. Inpost-
retirement, thebenefitwith
a savingsaccountisthatall
withdrawalsandincome
aretax-free
• A retirement product
is protected from being
attached as security
for debt. Although a tax-
free savings account can’t
be used as security for
debt, creditors can still
attach it
• A great advantage of a
retirement annuity is
that it falls outside your
estate upon death, while a
tax-free savings account
falls within your estate
DIFFERENCES BETWEEN
A RETIREMENT ANNUITY AND
A TAX-FREE SAVINGS ACCOUNT:
21. VOLUME 04 | 2015 | 21
BY FARAI
MURONDO,
STRATEGY
DEVELOPMENT
MANAGER
PERFORMANCE FEES
AND TREASURY’S DRAFT
RETIREMENT REFORMS
BY GILLIAN JONES,
HEAD OF THOUGHT
LEADERSHIP AND
PERFORMANCE
COMMUNICATION,
STANLIB
THESOUTHAFRICAN
TREASURY’SDRAFT
PROPOSALSTO
OVERHAULTHE
RETIREMENTINDUSTRY
AIMTOIMPROVEMARKET
CONDUCTANDLOWER
COSTSFORINVESTORS,
ENCOURAGINGSOUTH
AFRICANSACROSSALL
INCOMELEVELSTO
FOCUSONINVESTING
MOREFORRETIREMENT.
Following its paper,
Charges in South African
Retirement Funds,
published in July 2013,
the Treasury’s draft
regulations were first
outlined in the 2014 Budget
update on retirement
reforms document. The
draft regulations state
that all retirement funds
must provide members
with a low-cost default
investment choice suitable
for their needs. No
performance fees may be
charged on any assets held
in these default portfolios.
Evidencesuggeststhe
majorityofretirementfund
memberswillroutinelyselect
thedefaultinvestmentoption.
Thesedefaultoptionsare
expectedtocapturethe
majorityofretirementassets
infuture.
OBJECTIVESOFTHE
RETIREMENTINDUSTRY
REFORMLEGISLATION
Government’s view is that
all employed South Africans
should contribute to a
retirement fund. Products
offered to these retirement
funds must protect member
interests through product
simplification and fee
transparency.
Therefore, regulations are
based on the premise that
parts of the South African
retirement system are
characterised by complex
and unclear products with
high charges. Higher costs,
all else being equal, can
erode retirement savings
for many fund members
that can acutely impact
lower-income members in
particular.
Byreducingthecostof
savingforretirement,the
governmenthopestoimprove
thelevelofsavingsamong
SouthAfricans.Anymoney
spentonmanaginga fundis
moneynotspentonsavings
andcan impactoverall
investmentovertime.
STANLIB supports
the Treasury’s intent
of encouraging better
retirement outcomes by
instituting frameworks to
manage retirement fund
service providers like asset
managers and by clarifying
obligations of trustees.
Intermsofthedraft
regulations,default
investmentportfoliosmust
be simple—performancefees,
loyaltybonusesorsimilar
charge structuresare not
permitted.
Accordingtothedraft
amendmentstothe
regulations issuedinterms
ofSection36ofthePension
FundsAct1956(Act24of
1956):
• Allfeesandcharges,
andtheirimpacton
memberbenefitsmust
bedisclosedaccurately
andregularly
• Performancefeesare
notpermittedindefault
investmentportfolios.
Noserviceprovidermay
receivefeesorcharges
forassetsheldinrespect
ofthedefaultinvestment
portfoliothatdepend
onthereturnearnedon
thoseassets
Our unit trust portfolios
align with Treasury’s good
practice because they
charge no performance
fees. Our Multi-Manager
funds are the exception,
where underlying managers
may charge performance
fees—however, the fund
itself and STANLIB Multi-
Manager do not.
Treasury’sretirement
reformdocumentisstill
indraftformat.Theasset
managementindustry
hasbeenaskedtoprovide
commentontheproposalsto
theFinancial ServicesBoard.
Thefinallegislationislikely
tobeimplementedbythe
beginningof2017.
Thenewdraftregulationsare
acontinuationofthetrend
ofincreasingregulationand
involvementoftheregulatorin
thesavingsandinvestments
industry.
22. VOLUME 04 | 2015 | 22
WHYAREPERFORMANCE
FEESPROBLEMATIC?
Performancefeeshavelong
beenconsideredcontroversial
inthe assetmanagement
industryformanyreasons.
• Performancefees are
calculated usingthe
returnsgeneratedbythe
fund.Investorsneedto
considerwhetherthe
portfoliomanagertook
excessiveinvestmentrisk
to generate the returns.
STANLIBbelievesthata
risk-adjustedreturnmust
underpinperformance
fees
• Performancefeesmust
bestructured using
appropriatebenchmarks
thatreflectthe objectives
oftheportfolio and
theassetclassesbeing
managed.Forexample,
usingabenchmarklike
theConsumerPrice
Index(CPI)asabasis
for performance fees
foranequityfund is
inappropriate—reaching
thistargetiseasy,
meaningfundmanagers
willbecompensatedfor
simplyfulfillingtheir basic
investmentmandate
• Performancefeesmay
beunsuitableforretail
investors,whomight
notbeappropriately
informed regarding
potentiallycomplexfee
structures. Additionally,
retailinvestorsareoften
notinthebestpositionto
judge feesorto negotiate
thecorrectfeesfortheir
circumstances
• Due tothenature ofretail
investmentsandclient
turnover,itisdifficult
toascertaintheexact
returnsenjoyedbyeach
investororchargefeeson
thatbasis.Newinvestors
mayenduppaying
forpastperformance
enjoyedbeforethey
joinedthefund
• Theperformancefee
calculationandits
underlyingmethodology
canbeincredibly
complexforinvestors.
STANLIB’s suggestion is
that investors focus on the
following three elements:
Fairness to all parties;
ensuring portfolio manager
incentives are aligned to
investor outcomes; and
whether the performance fee
is calculated with available
public information.
Itisimportanttonotethat
SouthAfrica currentlyhas
noindustrystandardfor
structuringperformancefees.
Eachassetmanagerhasfull
discretion in designingtheir
performancefeemodel.
PERFORMANCEFEES
ANDALTERNATIVE
INVESTMENTVEHICLES
STANLIBsupportsandagrees
withTreasury’sintended
reforms,welcomingthe
move to ensure performance
feesaremoreappropriately
structured.However,
prescriptiveregulationsand
anoutrightban,ratherthana
structuredframeworkforthe
useofsuchfees,mayhave
unintendedconsequencesfor
theinvestmentindustryand
investor portfolios.
Amorenuanced,principle-
basedregulationof
performancefeeswould
empowertrusteesto
negotiatehowfeesare
structured.Itisanimportant
leverforaligningfundmanager
andmemberinterests.
Another unintended
consequence is that
banning performance
fees on any assets held in
these default portfolios
effectively excludes the
entire spectrum of alternative
investments from default
funds, including direct
property, infrastructure,
renewable energy and
private equity vehicles. The
use of pension fund assets
in these investments plays
an important supportive
role to achieving South
Africa’s infrastructure and
development goals.
Theperformancefee
structureisanintegralpartof
themanagementoflonger-
terminvestmentvehicles,
necessitatedbytheilliquidity
natureoftheunderlyingassets.
Performancefees,alsoknown
ascarriedinterest,areused
toaligntheinterestsoffund
managerswiththatofthe
fundoverthelifetimeofthese
investments,andmotivate
fundmanagerstoactinthe
bestinterestofinvestors.
Investorspaybasefeesto
coverthemanager’sminimum
runningcosts.Managersthen
participatealongsideinvestors
whenreturnsarerealised
afterasignificantlock-in
period.Investorsalsooften
derivecomfortfromthefact
thatmanagersco-investorin
thefundandhaveavested
interestinitssuccess.
Structuringalternative
investmentvehiclesinthis
waymayaligntheinterestsof
managersandinvestorsandis
acceptedglobalbestpractice.
Whilethedraftregulations
couldbeconsidered
unnecessarilyprescriptive,
thisoversightcouldhavethe
unintendedconsequenceof
theexclusionofalternatives.
Ultimately,webelievethis
wouldbetothedetriment
ofmembers.Alternatives
areanimportantsourceof
uncorrelatedreturnsand
offerlong-terminvestment
horizonswhileproviding
investorstheopportunityto
benefitfromtheilliquidity
premium—ahigherreturndue
totheilliquidnatureofthese
investments.
Also,pensionfund
investmentsaremadeby
professionalinvestorslike
assetconsultantswhoare
informedandempowered
tonegotiatethebestfeesfor
thefund.Aprescriptiveban
ofperformancefees across
theboard,inthiscase, seems
excessive.
InSTANLIB’sview,
Treasuryshouldapproach
theperformancefee
issuesimilarlytohow
itsapproachedpassive
investments.Thedraft
regulationsmandatepension
fundtrusteestoconsider
passiveinvestments—but
doesnotspecifically prescribe
themtoincludethem.Such
principle-basedregulation
shouldbeextendedto
performancefees,ratherthan
bannedoutright.
23. VOLUME 04 | 2015 | 23
THE
AFRICAN
BANK
TANGO
BY OLGA
CUKROWSKA,
TECHNICAL
MARKETING
MANAGER, STANLIB
THEAFRICANBANK
CURATORSHIPPROCESS
HASPLAYEDOUTA
LITTLELIKE—TAKING
TWOSTEPSFORWARD,
ANDTHENONESTEP
BACK.
Attheonsetofthecuratorship
on10August2014,the curator
hadhoped to havetheGood
Bank,ahealthynewcompany,
listedonthe stock exchange
inthefirsthalfof2015.The
timetable,asatthetimeof
going to print,nowplacesthe
listingat1February2016,with
apossibilityofanotherdelay,
(which wewilltouchonlaterin
thisarticle).
Thedelayscanneitherbe
ascribedtothecuratornor
theprocessheisfollowing.
Rather,theyhavebeendueto
unforeseenobstacles,ranging
fromlegislationchallengesto
courtorders.
THEAMENDMENT
CHA-CHA
One of the major delays was
an amendment to the Banks
Act of 1990. The amendment
was needed to make the
African Bank transition into
the new Good Bank legally
possible. We remind our
readers that the African
Bank bail-out was a first such
occurrence in South African
history. Our laws were not
geared for it and, therefore,
had to be amended.
The first draft was published
on 23 November 2014 but
met with criticism. Many
industry stakeholders
felt that it had too many
loopholes, which could be
unintentionally open to abuse
in the future. Extensive public
consultation took place until
all participants were satisfied.
TheBanksAmendmentBill
of2015waseventuallysigned
bythePresidentintolaw
on25June2015.Thiswasa
six-monthstepbackinthe
curatorshipprocesswhich
couldneitherhavebeen
foreseennorhelped.Clearly,a
newbanklistinginfirsthalfof
2015wasoutofthequestion.
THEFINANCIALS
FOXTROT
Anotherculpritresponsiblefor
afewsmallerback-stepsinthe
curatorshipdancehasbeen
thefinalisationofthevarious
auditedfinancialstatements.
Youwillrecallfromourprevious
articlesthatAfricanBank
InvestmentsLimited,orABIL,
hadthreemajorsubsidiary
companies:AfricanBank
Limited;theailingfurniture
retailerEllerines;andStandard
GeneralInsuranceCompany
Limited,orStangenforshort.
Allthreesubsidiariesneed
tohavetheirfinancial
statementsfinalisedand
auditedbeforeconsolidated
ABILfinancialscanbe
finalised.Therehavebeen
severaldelaysinthisprocess.
THESTANGENSAMBA
After the step-backs caused
by the legislative delays, the
curator communicated his
intent to have the Information
Memorandum (IM) published
in July 2015, with the new
bank listing scheduled for
October 2015.
TheIMisadocumentthat
detailstheGoodBank
RestructuringProposal.
Fortheholdingcompany
ABILtoberesolved,allthree
subsidiariesneedtobe
handled.Asweknow,African
Bankassetsandliabilitieswill
betransferredtothenew
GoodBankinduecourse.
TheCuratorhadhopedtosell
theothertwosubsidiariesto
thirdparties.Nobuyerscould
befoundforEllerines,whichis
nowinbusinessrescue.
On 15 July 2015, the curator
communicated that the
release of the IM would be
delayed, mostly due to
on-going negotiations
around the sale of Stangen.
This was the first instance
when the Stangen subsidiary
caused a setback.
THENAFEW STEPS
FORWARD
TheAfricanBankLimited
financialstatementswere
finalisedby11June2015,
andtheStangenfinancial
statementswerereleasedon
16July2015.
On27August2015,thecurator
communicatedtwoimportant
piecesofgoodnews:
Firstly,theSouthAfrican
ReserveBankhasauthorised
thecreationoftheGood
All three
subsidiaries
need to have
their financial
statements
finalised and
audited before
consolidated
ABIL financials
can be finalised.
There have been
several delays in
this process.
25. VOLUME 04 | 2015 | 25
WHAT YOU
MAY HAVE
MISSED
1. Onourwebsiteasane-book
2. Themagazineisalsoavailable
asatabletapplicationonthe
AppleandAndroidAppstores
search"standpoint"
search"standpoint"
3. Themagazineisnowalso
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search"standpoint"
search"standpoint"
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refertotheproductorfundspecificformformoredetails
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(thisincludesSTANLIB’sportionandyourfinancialadviser’s
portion).
STANLIBchargesnoupfrontchargeonnewinvestments(lump
sumordebitorder)forUnitTrustsandLinkedInvestments
regardlessoftheinvestmentamount.Thisappliestoonce-off
debits,directdepositsandrecurringdebitorders.
Theabovedoesnotaffectyourfinancialadviser’supfront
chargeasagreedwithhim/her.
STANDPOINT IS
AVAILABLE VIA VARIOUS
DIGITAL PLATFORMS:
OR SCAN BELOW •
26. VOLUME 04 | 2015 | 26
INTOUCH
Thereareseveralwaysto
contactusatSTANLIB.
OurheadofficeisinMelrose
Arch,Johannesburg,where
wehaveawalk-ininvestment
centre,oryoucancallusor
useouronlineservices:
JOHANNESBURG
(HEADOFFICE)
Physical address:
17 Melrose Boulevard,
Melrose Arch, 2196
Postal address:
PO Box 202,
Melrose Arch, 2076
Switchboard:
+27 (0)11 448 6000
Call Centre:
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Financial Adviser:
0860 104 418 (SA only)
For enquiries:
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For instructions:
instructions@stanlib.com
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S 26.1347°, E 28.0686°
HOWTOACCESS
YOURINVESTMENT
VIATHEWEB,MOBILE
PHONEORVIAA
STANDARDBANKATM
Wehavevariouswaysin
whichyoucanaccessyour
investment,viewbalancesor
transact.
KEEPINGYOU
CONNECTED24/7
RegisternowforSTANLIB
Online,asself-serviceportal
thatgivesyoueasyaccessto
yourinvestments24/7,a
simplifiedregistration
processjustaclickaway.
Gotowww.stanlib.com
STANLIBMOBILE:
M.STANLIB.COM
Ifyouhaveaweb-enabled
cellphone,youcanaccess
yourinvestmentviaSTANLIB
Mobile.
• View your investment
balances
• View your asset and fund
allocation
• Download or e-mail your
statement
ToaccessSTANLIBOnline
andSTANLIBMobile,you
needtobearegistered
STANLIBOnlineuser.
HOWTOREGISTERFOR
STANLIBONLINEAND
STANLIBMOBILE
1. Gotowww.stanlib.com
2. ClickontheSTANLIB
Onlineloginatthetopofthe
homepage
3. ClickonRegisterNow
4. Completetherequested
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6. After48hoursa
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STANDARDBANKATM
IfyouareaStandardBank
client,youcanlinkyour
STANLIBunittrusttoyour
StandardBankATMcard.
EverytimeyouusetheATM,
youcanviewyourstatement,
buyadditionalunitsinyour
unittrustandswitchbetween
unittrustfundsinyour
account.
HOWTOLINKYOURATM
CARDTOYOURSTANLIB
INVESTMENT
1. CompletetheUnitTrust
ATMLinkingForm
(availableonourwebsite
www.stanlib.com).
Print,signand
e-mailtheformto
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orfaxitto0867277501.
2. Pleasecontactourcall
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CONTACT US
If you would like to
email the editor, you
can contact her on:
erica.stuart@stanlib.com
IF YOU WISH TO MAKE
ANY CHANGES TO YOUR
INVESTMENT OR HAVE
ANY QUERIES, PLEASE
CONTACT YOUR FINANCIAL
ADVISER OR ALTERNATIVELY
OUR DEDICATED CLIENT
SERVICE TEAM ON
0860 123 003
On STANLIB Online
you can:
• View your history of
transactions
•View your investment
balance and
statements
•Access your tax
certificate
•View investment
graphs and fund fact
sheets
•Switch unit trusts (for
Unit Trust clients)
27. VOLUME 04 | 2015 | 27
STANLIBisanauthorisedfinancialservicesprovider.
invest@stanlib.com
STANLIB is proud to have been named as the
BestAssetManagerbasedinFrontierMarkets
by Global Finance.
Opportunity
lieswhereyou
havethefocus
tofindit.
The award is recognition of the fact that we never stop looking for new
opportunities to grow our clients’ investments. We operate on the ground
in 10 African countries – immersing ourselves in both traditional and
alternative investment classes, every day. To find out how we can open
new frontiers for your investments, contact us today.
UK / Europe
Michael Barnes
+27 11 448 5384
Africa
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+27 11 448 5164
South Africa
Brendan Howie
+27 11 448 6585
Global Finance Ad 4Sep Opt2.indd 1 2015/09/07 3:26 PM
28. STANLIB ASSET MANAGEMENT REG. NO. 1969/002753/06 | AN AUTHORISED
FINANCIAL SERVICES PROVIDER IN TERMS OF THE FINANCIAL ADVISORY AND
INTERMEDIARY SERVICES ACT 37 OF 2002 (LICENCE NO. 26/10/719)
