basic investment concepts

7/24/2019 Basic Investment Concepts

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WELCOME TO TRAINING ON

BASIC INVESTMENT CONCEPTS

Presented by

Jim Ash CFP®

Mn!in! "ire#t$r

Fin!r$%& 'S()i*nd+ 'Pty+ Ltd



The Global View



ORIGIN OF RETIREMENT F,N"S

The economic working time of any person is limited; i.e. a worker’s earning capacity

ceases when he is physically or mentally no longer able to work.

When that stage is reached, it is essential for the employee to obtain another source

of income so that she/he can continue to support her/himself and family. If no

provision is made in the form of money that is saved, such a person will be destitute.

Then the idea originated that money should be saved regularly during an employee’s

working lifetime to make provision for an income during that period when the

employee is not able to earn an income, which led to the establishment of

etirement !unds



W-AT IS A RETIREMENT F,N" .

" etirement !und is defined in the etirement !und "ct to mean #any plan, fund, or

program or business established for purpose of providing annuities or lump sum

benefits for its members on their retirement or dependents of such members on the

death of such members$.

The definition of etirement !und in terms of the "ct includes a pension fund,

provident fund, and retirement annuity.



MANAGEMENT BOAR"

The etirement !und "ct re%uires that every fund shall have a controlling body

called the management board, whose main ob&ect is to control the business of the

retirement fund. 'ection ()*+.



TR,STEES

The term Trustee is defined in the etirement !und "ct to mean a member of the board

This is due to the nature of the functions they perform and the fiduciary duties imposed

on them by law.

"lthough individual trustees, may be appointed by the sponsoring employer or elected by

the members as the case may be, it is their individual and collective duty to ensure that

the interest of members is protected at all times. 'ection *- of the etirement !und "ct



RETIREMENT F,N" ASSETS

'ection *( of the etirement !und "ct defines the manner in which retirement fund assets

may be kept as follows

egistered in its own name and the fund shall retain custody of all of its assets

"ssets may be kept in the name of the retirement fund by one or more of the following

institutions registered in the country approved by the egistrar in terms of the

regulations

" 'tock broker"n Investment 0anager

An Ins%rer $r

" 1anking institution



TR,STEE RESPONSIBILITIES REGAR"ING INVESTMENTS

"lthough the etirement !und "ct allows the Trustees to delegate the management of the

assets to certain institutions, the 1oard cannot relieve themselves from the following

responsibilities

2nsure the investment manager operates within the !unds investment policy and has ade%uate controls to

ensure the security of the assets

2nsure the assets and contributions of the fund are invested in terms of the rules of the !und

0onitoring of Investment 3erformance and the appropriateness of investments

2nsure the assets of the !und are invested in a matter to achieve an ade%uate return

2nsure that the responsibilities of the investment managers are clearly defined

2nsure that clearly defined investment guidelines and performance guidelines are in place



OT-ER PLA/ERS

The !" does not e4pect the board to carry out all the responsibilities of managing

the !und

2mployer

"dministrator

Ins%rn#e C$m&nies

Investment 0anagers

5onsultants 6aluator "uditor

egulator

Ta4 authorities



TR,STEE RESPONSIBILITIES REGAR"ING INVESTMENTS #$nt0

It is important to understand that the Administrator is merely a conduit for the receipt of

funds and delays have been known to occur in getting the contributions of the fund to

the various fund managers.

This was discovered with a large administrator in South Africa (the process is called

Bulking) (how to make profits without the clients knowing)

It is also the Trustees responsibility to ensure that the companies do not take

advantage in order to increase their profits.

It is also important to understand where the contributions of the fund are dispersed.

ormally !""# of the employees funds are fully invested but this is not so with the

employers contribution. $osts of risk cover and administration are normally deducted

from the employers contributions and it is important to note these costs to ensure that

there is a level of investment from the employer also.

The Asset %anager is responsible for growing the funds in terms of the mandate e&pected of

them.



-OW T-E F,N" WOR1S

F,N"ING MET-O"

There are currently two methods to provide for retirement, namely defined

contribution )75+ and defined benefit )71+




INVESTMENT RET,RN

0oney can be invested in many different ways, for e4ample, savings account, unit

trusts, property and endowment policies. 8o matter where you choose to invest your

money, the main aim is for your money to grow. 9our in2estment ret%rn is how much

your money has grown or reduced, and this affects the overall value of your investment

over time. 'ome investment vehicles may give you a higher return in the long term than

others.

For Example:

You invest E100 (your capital amount), and after a year that money has grown to E110 Yourinvestment return is E10 or 10!

The money a retirement fund member and employer contribute towards the retirement

savings is invested in much the same way, with the aim being to grow your money so

that you have enough at retirement.




INFLATION

Inflation is what makes your money worth less over time, in other words, you can buy

less now with that money than you could in the past. The b%yin! &$(er of your money

has therefore decreased. !or e4ample, &ust think how much 2* could buy you twenty

years ago.

If you want your money to grow, you have to make sure that the investment return you

receive on your money is higher than the rate of inflation.

For Example:

For "0 years, #ha$o saves %100 a month in a savings account with an average investment return of

&! 'ut, the average inflation rate during this period was 10! #ha$os money has therefore lost

value at a rate of "! a year

f #ha$o had saved his %100 in an investment vehicle with an average interest rate of 1*! over the

same period, his money would have grown faster than the inflation rate +e would have achieved a

real return of *! per year on his investment

0any people believe that their money will grow ade%uately in an investment vehicle such as an

ordinary bank account. :nfortunately, the emalangeni value of this money may be the same )it will



THE HALF LIFE OF MONEY

•




24change < " formal marketplace in which shares, options and futures on shares, bonds,

commodities, and inde4es are traded.

5apital 0arkets < "ny markets used to raise capital, e.g. listed e%uities )!T'2/='2+ through

share issuances, fi4edinterest )bond+ and unlisted securities markets.

2merging 0arkets < The financial markets of developing or emerging economies.

T/PES OF FINANCIAL MAR1ETS




VOLATILIT/ 3 FL,CT,ATIONS IN T-E MAR1ET

Investments are e4posed to market risk and their value tends to fluctuate, depending

on certain economic and market conditions. "n investment associated with a high level

of market risk is regarded as less secure and more volatile, while an investment with alow level of market risk is considered to be more secure and less volatile.

6olatility refers to the daily fluctuation in the value of an investment, and different

investments have different levels of volatility. !or e4ample, a fi4ed deposit account is

least volatile because you know e4actly how much you have deposited, how much

interest you will earn and how much you will receive at the end of the fi4ed period. Incontrast, shares are e4tremely volatile because share prices can rise and fall

dramatically in one day.




VOLATILIT/

"lthough the value of an investment may fluctuate from day to day, this does not

necessarily mean that it is high risk and will not achieve good returns in the long term.

!or e4ample, shares are %uite a volatile investment, but in the long term they will

probably achieve a better return than other fi4ed interest investments, e.g. fi4ed

deposit.




RIS1 VERS,S REWAR"

8o matter where you invest your money, it will always be e4posed to some level of risk,

which refers to the possibility of a poor return.

!ortunately, risk is something that can be taken into account in investment planning

because, although risk cannot be removed completely, the amount of risk an investor is

prepared to be e4posed to can be decided upon.

'o, what are the risks that may be faced>

6olatility ?f Investment

2rosive 2ffects of Inflation in the @ong Term.

24change ate !luctuations

5hanging 2conomic !undamentals




RIS1 VERS,S REWAR"

9ou will generally find that the greater the risk investors are prepared to take, the

greater the possible re(rds or investment return over the long term.

The level of e4posure to risk is a decision that the Trustees need to make. 'ome want

absolute security, while others are prepared to take a bigger risk if it means they can

achieve more growth. Aenerally, a scheme with a younger membership can afford to

take a greater risk than a scheme whose members are close to retirement, as a

younger scheme has more time to recover from shortterm

7efined contribution fund, this means the members carry the risk of the investments.

'ince risk cannot be avoided entirely, it is important that the e4posure to risk is

managed so that the investments can provide the membership with the re%uired

income at retirement.



• WARNING THAT A MASIVE STOCK MARKET CRASH ISIMMENENT

• October 3, 2012

• By Michael Snyder

• In he !nancial world" he #onh o$ Ocober i% %ynony#o&% wih %oc' #ar'e cra%he%( So will a #a%%i)e %oc' #ar'e cra%h ha**en hi% year+ ,o& ne)er 'now( The r&h i% ha o&r !nancial %y%e# i% e)en #ore )&lnerable han i wa%bac' in -../" and !nancial e0*er% %&ch a% 1o&2 Shor" 3eer Schi4" Rober Wiede#er and Harry 1en are all warnin2 ha he ne0 cra%h i% ra*idly a**roach

in2( We are li)in2 in he 2reae% deb b&bble in he hi%ory o$ he world and Wall Sree ha% been ran%$or#ed ino a 2ian ca%ino ha i% ba%ed on a #a%%i)e web o$ deb" ri%' and le)era2e( When ha web brea'% we are 2oin2 o %eea %oc' #ar'e cra%h ha i% 2oin2 o #a'e -../ loo' li'e a S&nday *icnic( ,e%" he 5ederal Re%er)e ha% ried o *re)en any *roble#% $ro# er&*in2 in he!nancial #ar'e% by iniiain2anoher ro&nd o$ 6&aniai)e ea%in2" b& 7. billion dollar% a #onh will no be nearly eno&2h o %o* he #a%%i)ecolla*%e ha i% co#in2( Thi% will be e0*lained in deail oward he end o$ he aricle( Ho*e$&lly we will 2e hro&2h Ocober 8and he re% o$ hi% year9 wiho& %eein2 a %oc' #ar'e colla*%e" b& wiho& a do&b one i% co#in2 a %o#e oin( Tho%e on he wron end o$ he co#in cra%h are oin o be ab%ol&el

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T-E INVESTMENT -ORI4ON

The decision on how to invest any type of saving will depend on how soon the money

will be re%uired. This is known as the investment horiBon.

Sh$rt in2estment h$ri)$n5 The shorter the investment horiBon, the more secure or conservative

the approach. If all assets of a scheme whose members are close to retirement put all its assets

into a volatile investment such as shares, where the return may fluctuate from year to year, there

may not be time for the investment to recover before the benefits become due if the shares drop

in value in the short term. 'uch etirement !und schemes should consider investing their savings

in more stable portfolios.

L$n! in2estment h$ri)$n5 The longer the investment horiBon, the more risk a retirement fundcan tolerate. 1y investing too cautiously over the long term, the investments may not perform as

well as they could have in a higher risk investment. !or e4ample, a savings account may be a

secure option )low volatility+ but the effect of inflation may decrease the value of the investment

over the years. If you are C- years from retirement, you can afford to take the ups with the downs

of the market.

Aenerally, etirement !unds take a longer investment horiBon due to the long termnature of the liabilities




RIS1 PROFILE

Identifying the risk profile helps in deciding the appropriate portfolio in which to invest the

assets of a retirement !und.

C$nser2ti2e5 0ore certainty and consistency of returns, even if that means a lower

return is achieved in the long run

M$derte5 :nderstanding that longterm investments must be invested in shares and the

investor is willing to take a slightly higher level of risk to achieve the desired return

A!!ressi2e5 'eek out specific investment opportunities that might provide e4ceptional

returns but at a much higher level of risk




ASSET CLASS

1roadly speaking, an asset class is a category of financial assets that share certaincharacteristics, and that are tradable;

Traditionally, the main asset classes are e%uities )shares+, bonds, cash )money market+

and property;

"sset classes are often also split into local and international or offshore." combination of asset classes makes up an investment portfolio, each with its own

level of risk.




•ASSET CLASS

Csh

• 5ash investments, e.g. a fi4ed deposit account with a bank, are a lowrisk investment whereyou earn a fi4ed interest rate. They do not offer a very high return on your investment.•

Fi6ed7interest in2estments

• These are usually longerterm loans )or bonds+ issued by the government or• companies such as '3T5 to raise capital. They agree to repay the initial capital to investorsat the end of an agreed period as well as make regular interest payments. This is a fairly secure

investment earning slightly higher returns than cash.

Pr$&erty

• Investors who put money into property such as office blocks, shopping centres and industrialparks, receive rental income and can also e4pect the value of the properties to grow over time.This is a mediumrisk investment, depending on factors such as location, supply and demand,commercial or residential property, etc.




ASSET CLASS

Shres

When you buy a share in a company, you become a partowner of that company. When the

company makes a profit, this is shared with shareholders in the form of a dividend. If the value

of the shares increases, shares can be sold at a higher price. 'hares tend to be a highrisk

investment as prices may fluctuate considerably.




'ff shore Assets

$ashi&ed interest

*uities

+roperties

ASSET ALLOCATION




RELATIVE PERFORMANCE OF ASSET CLASS




"IVERSIFICATION

Ideally, investments should be spread between highrisk, mediumrisk and lowrisk

investment vehicles so that you can reduce the overall risk of your portfolio. This is

known as diversification )i.e. not putting all your eggs into one basket+. Therefore, if

one portfolio performs badly, it will affect only a small portion of your total portfolio

and will not make such a big impact on your total savings.

To protect fund members from investing their savings inappropriately, the etirement

!und "ct has strict limitations that specify how much may be invested in any one asset

class. !or e4ample, a fund may not invest more than DEF of its money in shares, and

not more than *EF in one particular share.

" good !und investment portfolio contains a spread of assets and is already in line with

these investment limitations.




RETIREMENT F,N" INVESTMENTS

Mr8et7Lin8ed5

The performance of these portfolios is directly linked to the performance of the underlyinginvestments, e.g. the shares in which you are invested. !or e4ample, if the assets )shares+

increase in value, so does the value of the investment. 5onversely, if the assets )shares+ do not

perform well, this is also reflected in the value of your investment.

Sm$$thed B$n%s5

This type of portfolio cushions the impact of the market and offers a greater degree of

security. The investment returns earned by this kind of portfolio are smoothed, in other words, in

good years part of the total investment return is kept in reserve and the reserves are used to

supplement returns in bad years. There is usually some form of guarantee, such as the original

capital invested in the portfolio plus a bonus which is declared each year. The reduced volatility

offered by a smoothed bonus portfolio may result in a slightly lower performance in the long

term.

•




•MAR1ET LIN1E" VERS,S SMOOT- BON,S

0arket linked portfolios tend to outperform over time

•




ASSET ALLOCATION




PERFORMANCE



25"3 ?! 0"=? 3?I8T'



ASSET CLASSES

!or classification purposes, all "ssets are divided into different categories known as "sset

5lasses

7ifferent "sset 5lasses have different investment characteristics such as risk/return tradeoff,

li%uidity, charges

0ain "sset 5lasses are 2%uities )'hares+, 1onds, 3roperty and 5ash. !oreign investments often

treated as separate asset class although underlying the foreign investment will be the four

main "sset 5lasses above



E;,ITIES

"lso known as 'hares

Aive the holder of the e%uity part ownership of the company

5an be listed )on a stock e4change+ or unlisted

7ividends, which are a distribution of the company’s profits to its shareholders, are typically

paid once or twice annually. :sually e4pressed as the amount paid per issued share

" capital profit or loss can be made on sale of the 'hares relative to the purchase price



BON"S

" form of debt that provides regular coupon payments )interest+ and a return of capital on the0aturity 7ate

0aturity 7ate 7ate on which a bond repays the 3rincipal borrowed amount to the lender, i.e.typically bonds have a defined term

Typically issued by government, parastatal or companies



PROPERT/

In investment conte4t, usually refers to ownership of physical or tangible land and/or buildings< bricks and mortar

3ossible to have direct ownership of physical property or indirect ownership via listed propertycompany or property unit trust

ental income is main form of income

Typically has high running costs and may have some li%uidity constraints



CAS-

"lso known as 0oney 0arket Instruments

'hortterm debt instruments such as commercial paper, banker’s acceptances and Treasurybills that mature in less than one year

eturns are similar to those from cash in the bank



FOREIGN

Investments in "ssets outside of the 5ommon 0onetary "rea )50"+



T/PES OF FINANCIAL MAR1ETS

E6#hn!e < " formal marketplace in which shares, options and futures on shares, bonds,

commodities, and inde4es are traded.

C&it* Mr8ets < "ny markets used to raise capital, e.g. listed e%uities )!T'2/='2+ through

share issuances and fi4edinterest )bonds+.

Emer!in! Mr8ets < The financial markets of developing or emerging economies.



FINANCIAL MAR1ET CON"ITIONS

Mr8et Cy#*e < The cycles the financial markets go through due to the impact of cyclical

macroeconomic factors and resultant human behavior.

B%** Mr8et < 2%uity market prices e4pected to increase during a bull market. 1ullish refers to

an optimistic outlook by investors.

Ber Mr8et < "ny market in which prices e4hibit a declining trend for a prolonged period,

usually falling by C-F or more. 1earish refers to a pessimistic outlook by investors. " market

with few buyers and many sellers.



ECONOMIC TERMINOLOG/

Gr$ss "$mesti# Pr$d%#t 'G"P+ < The sum of all goods and services produced by a country,

e4pressed as an annual total. A73 growth indicates whether or not an economy is growing.

Typically %uoted as eal A73 i.e. after allowing for the effect of inflation.

Fis#* P$*i#y < The use of government spending to influence macroeconomic conditions.

B%d!et "e9i#it < When a country spends more money than it takes in. ?pposite is referred to as a

budget surplus. "n accumulation of budget deficits leads to government debt, usually financed by

governments borrowing money.



ECONOMIC TERMINOLOG/

M$netry P$*i#y < The means by which government tries to influence macroeconomic

conditions by increasing or decreasing money supply, primarily through interestrate policy.

"e2*%ti$n < " decrease in the value of one currency relative to another.

In9*ti$n < The rate at which the general level of prices of goods and services is rising, usuallye4pressed as a percentage. ?pposite is referred to as deflation or disinflation.

M#r$e#$n$mi# #$nditi$ns < "nalysis of economic statistics such as A73 growth, inflation,

budget deficit, etc.



SI;E O5 E:ROBON1 BAI<O:T



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