nfb proficio issue 64
DESCRIPTION
Newsletter about financial planning and adviceTRANSCRIPT
IN THIS ISSUE
From the CEO’s desk
Cash, inflation and
growth assets
Estate duty
NFB FINANCIAL UPDATE
Issue64 October2012
FROM THE CEO’s DESKhy does Mr. Malema keep popping terrible asset to have held. And although recently
up? Probably because I would showing some sustained positives, global bourses
suggest the ANC are so busy fighting have disappointed.Wand jostling for position, influence Cash is desperate in the developed markets, in
and survival at an individual level, that scarce most cases offering net returns where investors are
attention is being paid to very dangerous and "paying" the bank to hold your money, and bonds
manipulative forces, alienated by themselves and offer low yields and capital risk should current
left to their own screwed up devices. cyclically low rates push higher. Notably, this is also
I noted several years ago that the danger with taxable in our hands.
politicians was their tendency to think in terms of A well known global personality recently
short term cycles, not surprisingly accurately summed it up brilliantly in saying that today's
matching election cycles. This short termism has investors are paying the price of yesterday's reckless
resulted in damage beyond comprehension and borrowers (for Borrowers read, Governments, Banks,
manifests in attitudes that, unfortunately, aren't Regulators, etc). Another cynical comment I heard,
restricted to this venerated part of the new S.A. It was that the return you received for putting your
has spread like wildfire to the most vulnerable parts money in the bank used to be called the Risk Free
of our population, creating a sense of desperation Return. It's now called the Return Free Risk!
and expectation, easily exploited by the likes of We have access, both directly and via a few
those in search of power, and potentially protection major business partners, to investments into major
from the law ( - important given past indiscretions) offshore shares, and interestingly South African
by becoming the de facto law makers. Bank's offshore bonds. These can now be wrapped
I mentioned recently that whilst Mr. Malema in an offshore issued product which will achieve tax
was not a model student, he was by no means free returns for South African investors. This
stupid, and once again, this is being borne out in his opportunity is directed to investors who are
recent actions. He is tuned into the psyche of the prepared to invest for growth with acceptable
masses, happy to stir the pot with scant or no regard volatility and risk.
to the societal impact. He has embarrassed the For those who do not have the stomach for risk
incumbent government and organised labour, we have solutions which guarantee a tax free
made promises that he has no way of delivering on return, backed by Major International Banks and
and is getting an extraordinary amount of attention corporate, together with moderate (50%)
from global media, who are always in search of participation in one of two Global indices. The
controversy and chaos. details and relevance of these investments for your
This backdrop, whilst potentially manageable portfolio needs careful discussion with your advisors
worries me and it is indeed these issues which are at NFB.
referred to when the market talks about the This editorial is not intended to urge you to pack
importance of diversification both by geography for Perth, but it certainly is intended to prompt you
and sector. Concentrated risk is when too much to discuss recent developments, revisit what offshore
money is focused on only one, or a few, investment assets are doing, and take advantage of very
alternatives. In South Africa this has been amplified important tax advantages and a range of solutions
by the historical limitations imposed by Exchange which seem to me to be obviously worth some
Controls. consideration.
To a large degree this has been reversed by the Overseas investments need to stand on their
significant relaxations introduced over the last few own. Weakness in the rand, or worse still, major
years, making it possible for South Africans to volatility caused by local political or social events,
materially diversify investments across global and will add to returns (- when measured in rands).
local bourses, stocks, banks and other investments, I hope I am proved wrong about my expressed
making genuine diversification both possible and misgivings, but as a noted patriot, I have seldom felt
relevant. the powers that be are losing the plot as currently is
This decision is complicated by the difficulty in the case.
motivating exactly what to invest in, given the Caveat Emptor.
confused state of economies, governments,
currencies and markets. Offshore property, which in Mike Estment, CFP
SA has been a star performer, has seen losses, CEO, NFB Financial Services Group
vacancies, oversupply and generally has been a
®BA f i n a n c i a l s e r v i c e s g r o u p
CASH, INFLATION ANDGROWTH ASSETS
We find ourselves in an interesting investment
environment: the local JSE is at an all-time high; global
investors remain nervous around Europe; the US with Ieconomic data indicates a stalling economy that is still
trying to find its feet; and lastly, most central banks are
ready to hit the printing press button and push more capital
into their economies as further easing seems to be the order
of the day.
In this environment investors typically turn to safe havens
like gold, cash and money market. Historically cash-like
investments have given South Africans real returns, but no
longer as we find ourselves with a zero or negative real rate
of return. Most central banks have indicated that low
interest rates will be around for extended periods of time
and thus this is a problem not in a hurry to leave.
Source: I-Net Bridge
What is a real rate of return?This is when you are in an investment and your net return is As an aside, inflation is not at its high currently being around
above that of the inflation rate. The danger of a negative 4.9%. With the South African economy struggling, and with
real return is that you lose purchasing power and even with inflation in its target range, the Reserve Bank may cut rates
a capital increase you cannot buy the same amount of further and in so doing, reduce this real return.
goods next year as you did this year. A second thought is to consider the following situation
Some investors have remained in cash or money market where someone is retired and drawing an income of say 5%
funds waiting for signs of a recovery and an opportune time of the portfolio: his or her real return is -5% (assuming a
to switch into growth assets. This may not come for the next return of 5% and inflation of 5%). In a situation like this we
3, 5, 7 years or longer so it is important to illustrate current sometimes get asked if the capital is going backwards,
investment options. however, in reality the capital value would remain flat, but
The first graph indicates that currently the real return the purchasing power is being eroded almost like a “silent
from a money market fund (money market funds typically assassin”.
have a return in excess of cash) is marginally positive. We One solution is to have saved more than necessary in
have used CPI as a proxy for inflation, however, some may your build up to retirement, so you do not have to worry
argue that this is below actual inflation with food, medical about these matters. However, there are not too many who
aid, and electricity costs all rising substantially in excess of can afford this luxury and it is thus important to understand
CPI. what one can do to rectify this. If someone is retired then
they can try to reduce their costs and thus portfolio The chart above more clearly indicates the volatility of the
drawings, and for those in the pre-retirement phase of life it various asset classes. We can see that over the last 8 years
is important to save more to ensure a sustainable listed property or equities have outperformed CPI and cash
retirement. In both scenarios it is necessary to take on a 63% of the time.
certain amount of growth assets in a portfolio that should, The merits of being in these perceived riskier assets is
over time, provide an inflation hedge. evident, but what is the risk versus return trade off?
A third consideration is that although money in the bank The following scatter plot taken over the last 10 years
is referred to as a risk-free asset, recent events have shown illustrates the risk and reward profile of the four typically
there is still the risk of capital loss in the form of default by available asset classes as well as inflation linked bonds
the issuer (bank or government). (another instrument to hedge against inflation).
So what can investors do in this low interest rate and low
inflation environment to give their portfolios a reasonable
chance to enjoy real returns? NFB focuses on long term
sustainable investing and it is with this in mind that the
balance of this article continues.
What are growth assets?They are assets that display capital volatility and often
provide a yield by way of a dividend or interest income. For
my illustration I have not included offshore asset classes and
so examples of assets further up the risk spectrum are
bonds, listed property and shares.
The graph below shows the investment profiles if you
were to hold these riskier assets described above over the
last 10 years. It is evident that an investor would have been
rewarded for holding bonds, listed property and equities as
they have cumulatively and substantially outperformed
cash represented by the green line.
Source: Morningstar
Cash is shown as the blue dot; the All Share Index is the
blue triangle and the Listed Property Index as the red
triangle. The All Bond Index has been included as well as
inflation linked bonds (green square). Inflation linked bonds
have been included as they give an indication of the risk
versus return profile of inflation. They typically trade at a
premium above inflation.
Source: I-Net Bridge Once again we can see that listed property and
equities have significant volatility (risk is shown on the x axis
The previous graph illustrated cumulative returns so let us and returns on the y axis) when compared to cash, but
now look at the year on year returns and include inflation over the long term have rewarded investors with inflation
for benchmarking purposes. beating returns.
The main concern an investor has investing in these
growth assets is the possibility of capital loss, however, this
can be mitigated through active management of the
various asset classes and within the different asset classes
themselves. A unit trust manager has various different
instruments that he or she can invest in for example; in an
equity fund the manager can rotate between financials,
resources and industrials; and in a bond fund the manager
can choose between corporate bonds, sovereign debt or
inflation linked bonds.
The combination of the various asset classes should
match ones time horizon and risk profile and it is essential
that you speak to your financial advisor to ensure your asset
allocation is tailored to your specific investment needs.
Source: I-Net Bridge
Ima
ge
cre
dit:
123R
F St
oc
k P
ho
to
What can investors do in this
low interest rate and low
inflation environment to
give their portfolios a
reasonable chance
to enjoy real returns?
By Jeremy Diviani,
N F B G a u t e n g ,
Private Wealth
Manager
CASH, INFLATION ANDGROWTH ASSETS
CASH, INFLATION ANDGROWTH ASSETS
We find ourselves in an interesting investment
environment: the local JSE is at an all-time high; global
investors remain nervous around Europe; the US with Ieconomic data indicates a stalling economy that is still
trying to find its feet; and lastly, most central banks are
ready to hit the printing press button and push more capital
into their economies as further easing seems to be the order
of the day.
In this environment investors typically turn to safe havens
like gold, cash and money market. Historically cash-like
investments have given South Africans real returns, but no
longer as we find ourselves with a zero or negative real rate
of return. Most central banks have indicated that low
interest rates will be around for extended periods of time
and thus this is a problem not in a hurry to leave.
Source: I-Net Bridge
What is a real rate of return?This is when you are in an investment and your net return is As an aside, inflation is not at its high currently being around
above that of the inflation rate. The danger of a negative 4.9%. With the South African economy struggling, and with
real return is that you lose purchasing power and even with inflation in its target range, the Reserve Bank may cut rates
a capital increase you cannot buy the same amount of further and in so doing, reduce this real return.
goods next year as you did this year. A second thought is to consider the following situation
Some investors have remained in cash or money market where someone is retired and drawing an income of say 5%
funds waiting for signs of a recovery and an opportune time of the portfolio: his or her real return is -5% (assuming a
to switch into growth assets. This may not come for the next return of 5% and inflation of 5%). In a situation like this we
3, 5, 7 years or longer so it is important to illustrate current sometimes get asked if the capital is going backwards,
investment options. however, in reality the capital value would remain flat, but
The first graph indicates that currently the real return the purchasing power is being eroded almost like a “silent
from a money market fund (money market funds typically assassin”.
have a return in excess of cash) is marginally positive. We One solution is to have saved more than necessary in
have used CPI as a proxy for inflation, however, some may your build up to retirement, so you do not have to worry
argue that this is below actual inflation with food, medical about these matters. However, there are not too many who
aid, and electricity costs all rising substantially in excess of can afford this luxury and it is thus important to understand
CPI. what one can do to rectify this. If someone is retired then
they can try to reduce their costs and thus portfolio The chart above more clearly indicates the volatility of the
drawings, and for those in the pre-retirement phase of life it various asset classes. We can see that over the last 8 years
is important to save more to ensure a sustainable listed property or equities have outperformed CPI and cash
retirement. In both scenarios it is necessary to take on a 63% of the time.
certain amount of growth assets in a portfolio that should, The merits of being in these perceived riskier assets is
over time, provide an inflation hedge. evident, but what is the risk versus return trade off?
A third consideration is that although money in the bank The following scatter plot taken over the last 10 years
is referred to as a risk-free asset, recent events have shown illustrates the risk and reward profile of the four typically
there is still the risk of capital loss in the form of default by available asset classes as well as inflation linked bonds
the issuer (bank or government). (another instrument to hedge against inflation).
So what can investors do in this low interest rate and low
inflation environment to give their portfolios a reasonable
chance to enjoy real returns? NFB focuses on long term
sustainable investing and it is with this in mind that the
balance of this article continues.
What are growth assets?They are assets that display capital volatility and often
provide a yield by way of a dividend or interest income. For
my illustration I have not included offshore asset classes and
so examples of assets further up the risk spectrum are
bonds, listed property and shares.
The graph below shows the investment profiles if you
were to hold these riskier assets described above over the
last 10 years. It is evident that an investor would have been
rewarded for holding bonds, listed property and equities as
they have cumulatively and substantially outperformed
cash represented by the green line.
Source: Morningstar
Cash is shown as the blue dot; the All Share Index is the
blue triangle and the Listed Property Index as the red
triangle. The All Bond Index has been included as well as
inflation linked bonds (green square). Inflation linked bonds
have been included as they give an indication of the risk
versus return profile of inflation. They typically trade at a
premium above inflation.
Source: I-Net Bridge Once again we can see that listed property and
equities have significant volatility (risk is shown on the x axis
The previous graph illustrated cumulative returns so let us and returns on the y axis) when compared to cash, but
now look at the year on year returns and include inflation over the long term have rewarded investors with inflation
for benchmarking purposes. beating returns.
The main concern an investor has investing in these
growth assets is the possibility of capital loss, however, this
can be mitigated through active management of the
various asset classes and within the different asset classes
themselves. A unit trust manager has various different
instruments that he or she can invest in for example; in an
equity fund the manager can rotate between financials,
resources and industrials; and in a bond fund the manager
can choose between corporate bonds, sovereign debt or
inflation linked bonds.
The combination of the various asset classes should
match ones time horizon and risk profile and it is essential
that you speak to your financial advisor to ensure your asset
allocation is tailored to your specific investment needs.
Source: I-Net Bridge
Ima
ge
cre
dit:
123R
F St
oc
k P
ho
to
What can investors do in this
low interest rate and low
inflation environment to
give their portfolios a
reasonable chance
to enjoy real returns?
By Jeremy Diviani,
N F B G a u t e n g ,
Private Wealth
Manager
CASH, INFLATION ANDGROWTH ASSETS
Estate Duty
A licensed Financial Services Provider
Johannesburg Office: East London Office: Port Elizabeth Office:
NFB House 108 Albertyn Avenue NFB House 42 Beach Road 110 Park Drive Central Port Elizabeth 6001, Wierda Valley 2192, Nahoon East London 5241, P O Box 12018 Centrahil 6001,
P O Box 32462 Braamfontein 2017, P O Box 8132 Nahoon 5210, Tel: (041) 582-3990 Fax: (041) 586-0053Tel: (011) 895-8000 Fax: (011) 784-8831 Tel: (043) 735-2000 Fax: (043) 735-2001 E-mail:
E-mail: E-mail: Web: www.nfbec.co.zaWeb: www.nfbfinancialservicesgroup.co.za Web: www.nfbec.co.za
[email protected] [email protected] [email protected]
ne thing most of us don't look forward to doing is estate of less than R3 500 000 no estate duty is payable. The estate
planning for the inevitability of our death, but it is one of duty rate of 20% is then applied to the Dutiable Estate to work out
those things we all have to do, and should be part of the estate duty payable by the deceased estate. Oour overall financial planning. We would start by Something to remember: if you are married in community of
making sure we have our Will in order, and making sure we have property, one-half of the joint estate forms property in the estate of
enough provisions by way of investment or life cover in order to care the deceased.
for our families and to pay off our debts. However, something that is
often overlooked is making provision for estate duty or planning to
minimize any estate duty.
One way to reduce your estate duty liability is by specifically
bequeathing certain property to your spouse (including the residue
Estate duty is a tax levied in terms of the Estate Duty Act and it is of your estate). Donations between spouses are not taxable and
collected by the Commissioner of the South African Revenue everything left to your spouse will qualify for the section 4q
Service in respect of the estate of every person that has died or dies deduction in terms of estate duty. Any 'deemed property' - life
on or after 1 April 1955. Estate duty of 20% is currently levied on the policies, with your spouse as the beneficiary, will also qualify for the
estates of deceased persons in South Africa. section 4q deduction.
You could also make use of a trust to achieve estate 'freezing',
where growth assets are transferred to the trust. The costs and tax
involved in this option need to be discussed with your wealth
! All “property” of the deceased at the time of death. “Property” is manager.
defined as any right in or to property, moveable or immovable, Another great way to reduce your estate duty liability is by way
corporeal or incorporeal. “Property” would include your residential of a single premium retirement fund contribution. To keep in mind is
property, holiday home, investments, cash, vehicles, jewellery and that all retirement products (RA's, pension funds, provident funds)
the like. are not estate dutiable, therefore you could transfer funds into a
! All “deemed property” of the deceased at the time of death. retirement annuity, where beneficiaries can be nominated (unlike a
“Deemed property” of the deceased includes policies e.g. Life unit trust or share portfolio) and no CGT would be applicable.
policies, Buy and Sell policies. However, if needed, these funds would not be accessible to you
Once all that needs to be included in the estate has been until after age 55 and then only a maximum of 1/3rd can be taken
finalised, there are certain deductions that are allowed: in cash. On death, these funds will not be estate dutiable.
There are also many other issues that need to be considered so
it is best to discuss your specific circumstances with your private
wealth manager.
! Funeral and Deathbed expenses
! Debts due by the deceased
! Admin expenses John died. The net value of his estate is R9 million. He leaves a
! Foreign Property (if acquired by the deceased before becoming legacy of R4 million to his son, Mark, and the residue of his estate is
an ordinary resident in RSA or if acquired by way of donation or bequeathed to his surviving spouse. The residue (ignoring estate
inheritance from a non-resident) duty) is thus R5 million.
! Limited interests reverting to a donor such as a fiduciary,
usufructary, annuity charged upon property or any other like interest Net value of estate R9 000 000
in property Less Section 4(q) – Residue (R5 000 000)
! Bequests to public benefit organisations (e.g. SPCA) Net Estate R4 000 000
! Claim in terms of the Matrimonial Property Act Less: Section 4 A Abatement (R3 500 000)
! Polices, bequests or anything that accrues to a surviving spouse Dutiable Estate R500 000
(section 4q) Estate Duty Payable (20%) R100 000
The Section 4A Abatement, currently at R3 500 000, is
applicable to all estates. Once your net estate has been Note: The actual amount that the surviving spouse will inherit will be
calculated, the abatement of R3 500 000 will be subtracted leaving the balance of the residue after payment of the estate duty, this will
you with your dutiable estate. Therefore, if you have a dutiable come to an amount of R4 900 000 (R5 000 000 – R100 000).
What can I do to reduce my estate duty liability?
What is Estate Duty?
What is included in the Estate of a Deceased Person?
Deductions from Estate Duty include, but are not limited to the following:
Basic Example of Estate Duty Calculation:
What is estate duty and some
pointers on how to reduce this
liability. By Julie McDonald, NFB
East London, Paraplanner
Estate Duty
Ima
ge
cre
dit: 1
23
RF
Sto
ck P
ho
to