the wealth perspective - PSG

THE WEALTH PERSPECTIVE FOURTH QUARTER 2015

FOURTH QUARTER 2015 | 1

By considering it all, PSG sees the bigger picture, which gives you the advantage.

Contents Introduction - Corrie de Bruyn

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Investment update - Adriaan Pask

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Industry views - Lizé Visser

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From our trading desk - Shaun van den Berg

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Estate matters - Willie Fourie

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Quarterly insight - Rupert Giessing

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Feature: TV advert - Tracy Hirst

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INTRODUCTION Corrie de Bruyn CEO PSG Wealth

In this edition, Adriaan Pask, Chief Investment Officer, looks back on the tumultuous end to 2015 and shares his insights on what to expect from the markets in the year ahead. In light of the ongoing market uncertainty, Lizé Visser, Executive Director Sales and Client-centricity, explains why the PSG Wealth investment platform is well positioned to meet current and emerging investment needs by offering the broadest range of local and offshore investment products and instruments. She also shares insights gained from your feedback, industry flows and trends about the use of investment platforms. Shaun van den Berg, Head of Client Education, sets out the differences between investing, trading and speculation to help you explain these to your clients. Willie Fourie, Head of Estate and Trust Services, practically illustrates the importance of using particular wording when drawing up a will. Finally, as the tax year-end approaches, Rupert Giessing, Head of Product Development, illustrates the attractive tax benefits offered by retirement annuities and tax free investment accounts. As a special feature for this edition, we also share the story behind PSG’s new television advert.

Welcome to our first quarterly newsletter for 2016

Tax year-end reminds us of attractive opportunities for tax savings

We hope that you enjoyed a happy and safe festive season and wish you every success in 2016. With the year already in full swing, we trust that you will find the insights we have collated for you in this publication interesting and useful as you continue to nurture and expand your client base.

As Rupert Giessing sets out in his article, the end of the tax year is a good time to remind your clients of the significant tax benefits available from certain investments. He specifically focuses on retirement annuities and tax free investment accounts, both of which offer favourable tax incentives that can boost investment growth.

A new year brings with it new aspirations For many, 2016 would have brought a fresh (or in some cases a recycled) set of new year’s resolutions. Certain resolutions tend to crop up time and time again: Lose weight. Quit smoking. Get fit. There are also many who use the start of the new year to re-consider their finances: Save more. Reduce debt. Draw up a will. In these cases, sound financial advice can prove invaluable.

With the option to make lump sum or low monthly debit order contributions, the PSG Wealth Retirement Annuity (RA) and PSG Wealth Tax Free Investment Plan are easily accessible. To determine which investment option will be suitable for which client requires considering the characteristics of each one, such as the benefit of tax rebates in RAs or the fact that investors in a tax free investment plan can access their money before age 55.

Thank you for supporting the PSG Wealth investment platform

The inspiring story behind PSG’s new television advert

According to LISPA (the Linked Investment Service Providers Association), PSG recorded the third largest net new flows in the industry in the third quarter of 2015, which is a new record for us. This increase was mainly driven by independent financial advisers investing client money into non-retirement funding products, for which we thank you. In her article, Lizé Visser shares some general and PSG-specific trends and statistics about investment platforms. With the grave financial market events of 2015 casting a bit of a shadow over the start of the new year, there is a lot of fear among investors. We believe that the wide range of solutions on the PSG Wealth platform is ideal for the uncertain, low-return environment, along with your expert help in guiding investors to appropriate investments.

We are excited to share the news that PSG has launched a brand-new television advert, positioning us as the bigger picture thinkers. The advertisement tells the story of the 1955 Mille Miglia race in Italy. By moving beyond mechanics and realising the critical importance of navigation, legendary British racing driver Sir Stirling Moss and his navigator, Denis Jenkinson, focused on the bigger picture. They used an innovative new navigational approach and set a race record that remains unbeaten today. Read more about this in the feature article we’ve included in this edition, and please share the story and advert with your clients.

We welcome your feedback We hope you enjoy this edition of our newsletter. Please send us any feedback you might have – we always look forward to hearing from you.

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INVESTMENT UPDATE Investment strategy for 2016 Adriaan Pask CIO PSG Wealth

Political and financial events across the globe in 2015 created a volatile market. Uncertainty about China and a pressurised South African economy suffering from the effects of a weak rand, drought and the threats of increasing inflation are two of the key factors still casting a cloud over investment prospects. However, all is not doom and gloom – the US is strengthening, Europe is showing signs of a moderate recovery, and recovery in the UK is still stable. Despite ongoing volatility, we believe there are still rewarding investment opportunities in the markets. The strategy for 2016 will be to carefully navigate these markets to exploit these opportunities.

Expect the market volatility of 2015 to continue The year 2015 was an eventful one in the markets, with events in countries such as Greece, Russia and China reminding investors how quickly seemingly calm seas can turn choppy and how swiftly currencies can stumble. On the domestic front, the rand weakened significantly to R16/$ after President Jacob Zuma replaced former Finance Minister Nhlanhla Nene with a relatively politically unknown candidate, David van Rooyen. In addition, two rating agencies downgraded South Africa’s sovereign credit rating. There were, however, a myriad of highlights for PSG Wealth in 2015. These include a Morningstar award nomination for our multi-management team, another solid result in the Intellidex Wealth Manager of the Year competition, the expansion of our investment research capabilities, and the launch of our new, consolidated online viewing and transactional platform, which offers access to a client’s entire PSG portfolio via a single log-in. National Treasury also introduced tax free savings accounts last year, and PSG Wealth launched our own Tax Free Investment Plan. This development in the domestic savings landscape sends a very positive message from policy makers, showing that they are actively adopting a solution-focused mindset around the need to create a savings culture in South Africa. This was a small but significant step forward. In 2016, we expect that the usual economic players will continue to dominate the global and domestic marketplace. These include the world’s largest economy, the US, and South Africa’s largest trading partner, China.

US rate hikes indicate an increasingly healthy US economy On the face of it, the US economy looks healthy. Unemployment, which peaked at 10% of the workforce in 2009, was down to about 5% by the end of last year and economic growth for 2015 was expected to come in at a relatively solid 3%. The Chair of

the US Federal Reserve (Fed), Janet Yellen, obviously feels that the economy is strengthening sufficiently to cope with higher borrowing costs, as evidenced by the 0.25% interest rate hike announced in December. Historically, initial US interest rate hikes have been followed closely by more hikes. In 2009, for example, rates rose by two percentage points in just twelve months. Although Fed increases will affect asset class returns in 2016, the longer-term story remains positive in that these Fed hikes stem from an increasingly healthy US economy, which is good news for the global economy.

China’s economic performance for 2016 is both uncertain and a great concern The Chinese economic growth train that powered ahead for almost three decades slowed down significantly in 2015. At 6.9%, GDP growth last year was at its lowest since 2009. Many leading economists were at one stage predicting that China was on the brink of a recession. However, despite the lowered infrastructure spend, Chinese economic growth remained reasonably strong during the country’s continued transition towards becoming a consumer-led economy. Although many professional economists and investors maintain that obtaining accurate economic information about China is close to impossible, there is no doubt that there were a few hiccups in 2015. In one instance, regulators allowed investors to borrow heavily to trade on the stock market. This created a substantial bubble, which duly burst (leading to the biggest one-day loss ever on the Chinese stock market) and prompted the government’s arguably misguided and unsuccessful effort to prop up the falling market. The central bank then took the unexpected step of devaluing the yuan to boost exports, leading to further speculation that China’s economy was in worse shape than the supposed 7% growth rate implied. A further indicator that all was not well on the Chinese economic front came from the global fall in demand for commodities.


INVESTMENT UPDATE

In November, the cost of shipping commodities fell to a record low as Chinese demand for iron ore and coal slowed. The huge construction and mining equipment manufacturer, Caterpillar, also posted its 35th consecutive month of falling sales last November, confirming a worldwide slump in construction and mining activity. This slump can largely be attributed to China, which cut back heavily on commodity imports and construction activity. The prediction is that China’s growth rate for 2016 will be 6.5%, but the actual figure is anyone’s guess. China’s performance during the rest of this year is not only uncertain, but of real concern to the global economy. What is a lot more certain is that Chinese demand for South African commodities will be well below the levels seen in 2013 and 2014. Worse still, the fall in demand seen in 2015 is likely to worsen in 2016 as China introduces structural reforms and looks to move its economy towards services and away from a reliance on manufacturing and infrastructure spend.

We are optimistic but cautious about Europe’s moderate recovery Europe has finally exceeded the GDP levels achieved before the financial crisis, even though this feat took twice as long as in the US. A belated quantitative easing (QE) programme has aided the process, weakening the euro during 2015 and boosting exports. Prospects for 2016 look mildly positive, with the economic tailwind produced by the QE programme set to blow throughout the year. European equity valuations remain generally attractive and the generous stance on QE programmes should underpin a moderate recovery in the Eurozone. Investment risk remains material and, although we are optimistic about return potential over the medium to longer term, we proceed with caution when selecting investments in the Eurozone.

Economic recovery in the UK since the financial crisis is still stable The UK performed relatively well in 2015, with growth of around 2.5% and rock-bottom inflation. Economists predict that this will continue in 2016. Low levels of government investment and low labour productivity are material concerns, but these are largely priced into existing growth forecasts. Similar to the US, UK economic recovery has been reasonably stable since the financial crisis and we expect this trend to continue at a moderate pace in 2016.

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South Africa’s 2016 outlook looks dire, but the market has already priced in bad news Although there are a few export-driven positives, South Africa faces a host of economic challenges in 2016 that could derail the economy. The weaker demand for commodities and falling commodity prices will reduce profits in the mining industry and cut government tax revenues. While the weak rand is beneficial for exports, it makes imports more costly. This is not good news for a country that will import substantially more than it exports in 2016. It will also put upward pressure on the inflation rate. Inflation expectations are therefore rapidly increasing, and managing inflation will be an enormous challenge for the South African Reserve Bank’s Monetary Policy Committee (MPC) this year. The committee seems well aware of the fact that the economy is struggling and that most of the inflation is supplyside inflation. Hiking rates may do little to decrease supply-side inflation, and demand-side inflation is already under pressure. Subsequently, we expect the impending rate hikes to be more successful in getting real rates in sustainably positive territory than in substantially lowering inflation. Nonetheless, the hikes are probably needed to normalise monetary policy going forward. The South African forward rate curve (FRA) is pricing in a total rate hike of 0.75% over the next two MPC meetings. Cash is also starting to offer value, with a three-month fixed deposit currently expected to yield close to 8% in nine months’ time. Since domestic economic conditions are under pressure, these hikes will undoubtedly be extremely unpopular. To make matters worse, manufacturing Purchasing Managers’ Index (PMI) numbers are signalling an increasing likelihood of a local economic recession. The South African manufacturing PMI was recently revised downwards from a weak 48.10 to a dismal 43.30. The outlook for our economy is not great. That said, market sentiment is very low and the market is pricing in a lot of bad news already. This does provide investors with opportunities if some bad sentiments do not materialise. More realistically speaking, prices seem to be compensating investors for the prevailing risks.

Our product positioning in light of the state of the local and global economy In light of the above, our local equity positioning remains as follows: • underweight interest rate-sensitive stocks and asset classes • underweight companies whose earnings rely heavily on domestic drivers • overweight multi-national, rand hedge stocks with low non-emerging market exposure • underweight companies that are heavily reliant on improving commodity spot prices, like resources firms • overweight companies with strong balance sheets and healthy cash flows • overweight firms that are expanding their operating margins and gaining market share With regards to property, we remain of the view that the interest rate cycle will affect domestic economic strength, affordability and sentiment. In addition, other income-generating assets with positive correlations to interest rates will become increasingly attractive, placing further downward pressure on listed property. Where we are required by mandate to hold listed property, we prefer to hold shares with the following characteristics: • low price-to-book ratios • low levels of debt/gearing and strong credit ratings • a globally diversified portfolio, or shares that generate earnings abroad (such as New Europe Property Investments plc, Rockcastle, New Frontier, Capco, Intuprop, MAS, Sirius, Redefine International and Investec Australia) • utilisation of structures that offer superior liquidity, such as Real Estate Investment Trusts (REITs) • superior distribution growth track records We maintain our view that offshore equities remain attractive on a relative basis. We are cautiously optimistic about developed market equity returns and remain overweight this asset class. We are, however, underweight offshore fixed interest as we believe that most of these asset classes do not sufficiently compensate investors for the inherent risks. We expect the Fed rate and bond yields to normalise rapidly during the course of the year.

Expectations for 2016 • MPC reverts back to 0.50% rate hikes on the back of accelerating inflation. • Organisation of the Petroleum Exporting Countries (OPEC) meets before their current scheduled meeting date in June to discuss lower prevailing oil prices and their pricing strategy for 2016. • The rand strengthens against other major currencies. On our assessment of purchasing power parity, the rand is currently oversold. • Commodity prices move lower and bottom in 2016. As smaller producers are flushed from the industry, decreased supply improves the outlook for supply/ demand dynamics in 2017. • Growth underperforms value as expensive stocks lose momentum. • South Africa fails to avoid a recession. Leading indicators point toward much tougher economic conditions for local manufacturers. • Inflation breaches the 8% level as the pass-through effects of a weaker currency take effect. • Prime rates move above 11% as the MPC attempts to combat higher inflation. • The full-term budget informs us that everyone will be subject to higher taxes through higher income taxes, company taxes and VAT. • Investors lose money in the perceived safety of offshore bonds as yields normalise. • The World Bank revises their global growth outlook upwards for 2017 and onwards. • European Central Bank (ECB) stimulus is more favourable than generally expected, as the ECB does whatever it takes to kick-start the Eurozone’s economy. • China makes the most of a buyers’ market in commodities and strengthens ties with Saudi Arabia and Iran. • The S&P 500 surprises with stronger-than-expected returns as the US economy marches on. • Japan continues to struggle regardless of current stimulus measures. More fundamental changes to the economic structure will be needed.

Conclusion Considering all of this, it is likely that 2016 could be another rollercoaster year. However, our products are designed to weather these storms and we believe there are still opportunities that can deliver favourable results for our investors over the long term. FOURTH QUARTER 2015 | 5

INDUSTRY VIEWS PSG Wealth’s investment platform: working with you to improve investor outcomes

Lizé Visser Executive Director Sales and Client-centricity PSG Wealth

According to LISPA (the Linked Investment Service Providers Association) statistics for the third quarter of 2015, PSG recorded the third-largest net new flows in the industry. This is a new record for us, and we would like to take this opportunity to thank all supporting and loyal financial advisers for entrusting our platform with your clients’ wealth. In this article I provide some more information about the insights we have gained from your feedback, industry flows and trends about the use of investment platforms.

What are the notable trends from the investment platform industry statistics?

Advisers and their clients are consolidating their use of investment platforms

The increase in net flows for the third quarter was mainly driven by independent financial advisers investing client money into non-retirement funding products. We also noted that there was a surge in the growth of money invested in shares, bonds and other derivative instruments (classified as ‘other’ by ASISA).

The winners appear to be those platforms that offer an unbiased range of products and the flexibility to accommodate a range of pricing models as regulatory regimes evolve. Also notable is the need for lower cost consolidation, administrative efficiency, transparent pricing and client-centric reporting. We have invested significant time, resources and effort in driving a number of projects to improve our service to you over the past year. We are excited about these and we look forward to you and your clients experiencing the benefits of this commitment and work.

Non-retirement savings are the biggest source of overall industry platform flows From an industry point of view, 40% of industry platform assets under administration is non-retirement savings, 29% is held within retirement income generating products and 20% is held within retirement funding vehicles like retirement annuities (RAs) and preservation funds. Only 10% of assets under administration is held within endowment products and voluntary purchase annuities, and 1% is within contributing pension and provident funds.

Our investment platform gives you access to the widest range of investment options

The PSG Wealth platform mirrors these trends

Through the PSG Wealth investment platform, you can access a whole universe of investment options. Many investment providers and platforms only offer a limited range of options. This presents a challenge, as you may not know if you are making the best choice to meet your clients’ needs from an inherently limited range. In contrast, PSG Wealth is truly independent when it comes to investment choices.

48% of PSG Wealth investment platform assets under administration is from non-retirement funding products, 23% is from retirement income generating products and 18% is from RAs and preservation funds.

The PSG Wealth investment platform meets current and emerging investment needs

Independent financial advisers make up the bulk of the overall platform market flows In terms of where the assets are from, 69% of the assets is from independent financial advisers, 20% from insurance-linked tied agents, 5% from offshore advisers, and 5% from investors without an adviser.

Independent financial advisers dominate PSG Wealth platform asset flows 89% of the flows is from independent financial advisers and 11% is from investors without an adviser.

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Through the PSG Wealth investment platform, we offer the award-winning PSG funds, but we also offer the widest range of local unit trusts from other investment management companies. In addition to this, we make the broadest possible range of local and offshore investment products and instruments available to investors and advisers, complemented by the advice and tools to help navigate them. In particular, we have found that advisers and their clients are looking for more instruments to create alpha. In a low-return environment, many clients are in search of investments that offer a cash risk profile, but potential for inflation-beating returns. This isn’t a trivial ask, but they do exist and have the rather gimmicky name of ‘smart-beta’ solutions. These solutions tend to offer a more conservative risk profile than the asset class they are benchmarking themselves against, but the potential for improved returns.

Advisers are also looking for specialist access to share portfolios for high-net-worth clients that seek differentiated and flexible exposure to select equities. Local investments

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In an uncertain economic environment, access to a range of instruments can be helpful The benefits of the widest range of unbiased products, funds, and other investment instruments are immeasurable for clients whose circumstances change over time and for those looking for unique access to new opportunities. But this must be caveated with the usual caution that when it comes to volatile

Retirement annuities

Preservation funds

Living annuities

markets, the most important role that an adviser plays is to reassure, and prevent clients from crystalising losses. So, as you know, reactionary switches and chopping and changing one’s portfolio in reaction to the latest news can indeed reduce wealth rather than grow it. If we are able to help manage the emotional reactions to the inevitable market volatility that we anticipate this year through our communication or any other initiatives, please don’t hesitate to contact us. We are here to serve you and your clients.


FROM OUR TRADING DESK Investing versus speculating: is it worth the risk? Shaun van den Berg Head of Client Education PSG Wealth

Many investors are confused by the terms investing, trading, speculating and gambling. They may see these as being the same thing when they are in fact four different approaches. As a tool to help you explain this to clients, below is a summary of the key differences.

Investing or trading – it comes down to your time horizon and your behaviour The main difference between investing and trading is the time horizon chosen. A trader prefers a short time horizon (anything less than three years), while an investor looks at anything over three years. Although both approaches attempt to profit from a financial transaction, they are very different. The main objective when investing is to build wealth over the long term by buying and holding a diversified portfolio. Many share investors lean towards fundamental analysis by concentrating on financial ratios such as price-earnings (P/E) ratios, return on equity and interest cover to help them find undervalued, quality shares with manageable risk. Investors aim to grow their capital over time, supplemented by reinvesting profits and dividends. They will typically hold their shares through inevitable market fluctuations (with the expectation that the market will recover) and invest consistently year-in and year-out. A trader, on the other hand, buys and sells shares more frequently to try and make (and take) quicker profits. They either buy low and sell higher, sell high to buy back at a lower price (when trading derivatives such as single stock futures) or buy high and sell higher (momentum trading). Traders also prefer to use technical analysis to find high-probability trading setups. When a trade goes against them, disciplined traders exit the trade quickly to minimise losses by using protective stop-loss strategies.

Trading is not the same as speculating The main difference between trading and speculating is the amount of risk you take. Typically, high-risk trades that are similar to gambling are classified as speculation, whereas lower-risk trades based on technical analysis fall into the category of trading. Trading can result in significant financial loss if you do not know what you are doing. Disciplined traders use stop-loss strategies and position-sizing techniques to manage the risk on each individual trade. They also hone their skills by reading technical analysis books or attending trading seminars. Ultimately, prudent traders look for situations that present high rewards but low risk.

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When it comes to speculating, the risk of significant loss is offset by the possibility of a huge gain. Speculators are aggressive traders who take big risks – especially when anticipating future price movements – in the hope of making quick, large gains. As such, speculators must have expertise in the instruments they are trading. These usually include highly leveraged investments such as single stock futures and contracts for difference.

Speculating and gambling While often confused with gambling, speculation involves a calculated risk and is not dependent on pure chance. Gambling, however, depends on random outcomes. Speculators make an educated decision on the direction of a trade, but the risk inherent in the trade tends to be significantly above average.

A long-term approach is always an asset There are generally two types of people: those who seek short-term or immediate gratification, and those who seek long-term gratification. A novice investor may achieve a quick profit on one or two shares over a short period of time. However, the chances of making these kinds of profits consistently without properly understanding the mechanics of the market or having an investment strategy are very slim. In fact, this approach is reliant on hope and luck as a strategy, which isn’t very different from putting all of your money on black at a roulette table. On the other hand, a prudent investor is patient and disciplined. They understand that success is nurtured with hard work over time. This investor is always on the path of continuous improvement: learning about successful investment strategies, researching companies that interest them and staying on top of what is happening to the shares in their portfolio. Their efforts are rewarded by long-term success, which takes skill and dedication.

Encouraging clients to be prudent Some clients like to invest, others like to speculate and some just dabble in the markets on an ad hoc basis. We know that a lot of your valuable time is spent communicating with clients and so we hope that this provides a useful tool to help educate your clients about the different approaches. We hope that this provides a foundation for them to be receptive to your guidance and expertise about how to maximise their returns relative to the risk that they take.

ESTATE MATTERS What your clients say in their wills may have unintended consequences

Willie Fourie Head of Estate and Trust Services PSG Wealth

We all understand that a will is important because it gives direction about how our clients wish their accumulated assets to be distributed to their beneficiaries when they aren’t around to do so. But how they express their wishes and instructions is as important as expressing them in the first place. Wills must be very carefully worded to avoid misunderstandings and misinterpretation.

Ambiguity in wills can cause confusion The nominated executor of an estate is appointed to carry out the directions contained in the testator’s will. Unfortunately, the executor, heirs to the estate and the Master of the High Court of South Africa (who must confirm the validity of the will) often have conflicting views about the will’s provisions. In these instances, they look to the executor for a decisive interpretation of any contentious clauses. Based on this interpretation, the assets within the estate are transferred to the heirs. While heirs may formally object to the executor’s interpretation, such challenges draw out and complicate the settlement of the estate. It is therefore important to ensure that your clients’ wills are written so that they will be interpreted as intended.

Unclear property provisions We recently came across a will where the interpretation of one of the clauses relating to the bequest of a residential property caused some doubt about the true intention of the estate owner. When it comes to property, the testator can assign several different rights to heirs. In our example, the executor’s decision would have resulted in either a usufruct or a fideicommissum being created. A usufruct is a limited or temporary right to use and enjoy a property, but does not constitute full ownership of the property. A fideicommissum transfers property to another person on the condition that the property be passed on to someone else at a given time. The clause in this particular will read as follows: ‘My parents shall have a life right to my residential property.’ This clause seems fairly straightforward and unambiguous at first. The question that comes to mind, however, is what exactly the testator meant by a ‘life right’. Was it a limited real right to use the property or did it mean that the parents would obtain ownership of the property?

General interpretive rules

To answer such questions, three general rules and principles apply: 1. The ‘plain meaning rule’ states that the contents of a will should be taken at face value, using strictly literal interpretations.

2. The second rule of interpretation qualifies the ‘plain meaning rule’, stating that one must consider the testator’s intention in using particular words, and not merely the meanings of the words themselves. The reason for this is that wills are often drafted by laymen, who may not understand that particular words and phrases could have a particular technical meaning. 3. A third important rule is to read the word or phrase that is contentious within the context of the overall will.

Reading the phrase in the context of the will Continuing with our example above, the following clause added to the confusion: ‘My brother shall inherit my property after my parents’ death. He may, however, rent out or sell the property at their request if the money is needed for their maintenance or general wellbeing.’ If the estate owner intended that a usufruct be created for her parents (without transferring ownership to them), her brother would become the legal owner of the property. He could then sell the property, but only subject to the rights of his parents’ usufruct. In the context of the will, there are two indications that this is not what the estate owner had in mind: 1. The wording of the will clearly states that the brother will only inherit the property after the parents’ death. 2. The property may only be sold with the parents’ consent. This clearly points to the creation of a fideicommissum, where successive rights to the property are created as opposed to the simultaneous real rights the usufruct would create. Furthermore, there is a presumption in our law in favour of a fideicommissum over a usufruct. This is because a fideicommissum is less onerous than a usufruct.

Always be as clear as possible Use plain language to avoid ambiguous words and phrases so that the true intention of the estate owner is reflected in the will. Limit the use of legal terminology to an absolute minimum, and only to instances in which the will drafter has a thorough knowledge of the practical implications and legal consequences. For qualified, professional assistance in ensuring that your clients’ wills accurately reflect their final wishes, please contact our specialist fiduciary consultants for guidance. FOURTH QUARTER 2015 | 9

QUARTERLY INSIGHT Your clients can maximise tax breaks to improve investment outcomes

Rupert Giessing Head of Product Development PSG Wealth

The end of the tax year on 29 February is just around the corner. This makes it a good time to remind your clients to consider taking advantage of the tax benefits that certain investments offer. Specifically, the benefit of making additional contributions to their PSG Wealth Retirement Annuities (RAs) or PSG Wealth Tax Free Investment Plans.

Retirement annuity contributions are tax deductible

Investing RA tax rebates can boost investment growth

RA contributions for the tax year ending 29 February 2016 are tax deductible up to the greater of: • 15% of non-retirement funding income (income not used for contributions to a pension or provident fund); • R3 500 less pension fund contributions; or • R1 750

For example, if an investor is self-employed and earns an income of R800 000 per year, they can make a maximum tax-deductible RA contribution of up to R120 000 (15% of non-retirement funding income) for the tax year ending 29 February 2016. If we assume a marginal tax rate of 41%, this contribution would potentially provide a tax rebate of approximately R48 000.

Any excess contributions can be carried forward to the following year of assessment.

If investors choose to reinvest the tax rebates they receive, they can add to their retirement savings without any additional outlay. If you refer back to the example above, and assume an annual increase in income (and therefore also in RA contributions) of 5%, this investor can save an additional R2.1 million by reinvesting the full rebate they receive over a 25-year term (assuming that the same tax rebate continues unchanged).

Contribution limits will change in March Current contribution limits will change from 1 March 2016, when the Taxation Laws Amendment Act is implemented. In a nutshell, what this means is that contributions to pension funds, provident funds and RAs will be consolidated from 1 March. These consolidated contributions will then be deductible up to 27.5% of the greater of remuneration or taxable income. There will be an annual cap of R350 000 on contributions.

If the annual growth rate on the investment was 10%, this could potentially boost the amount available at retirement by almost R7 million in nominal terms. Of course, this is just an illustration (with assumptions that could turn out to be valid or not), but it certainly does show the value of using tax breaks and reinvesting the money saved.

The value of cumulative annual contributions from tax rebates at the end of a 25-year term

Accumulated rebate contributions

R8 000 000 R7 000 000 R6 000 000 R5 000 000 R4 000 000 R3 000 000 R2 000 000 R1 000 000 R 1

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Year Cumulative value (after 25 years) Source: PSG Wealth 10 |

Cumulative rebate contributions

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RAs offer additional tax advantages

Tax benefits compound over the long term

RAs offer further tax benefits, as investment returns generated within these products are not subject to tax. This means that no capital gains tax (CGT), income tax or dividend withholding tax (DWT) is applicable.

Investors can invest a maximum of R30 000 each year and R500 000 over the lifetime of the investment in a tax free investment plan. It is important to remember that these investment limits remain fixed, regardless of any withdrawals made (one cannot ‘replace’ any amounts withdrawn).

Tax free investment plans offer tax benefits with more flexibility

In addition, to really get the additional savings benefit resulting from the tax break, investors should remain invested for a period of ten years or longer. That is when they will really start seeing the compounding effect on the additional returns resulting from the tax savings, as shown in the graph below.

RAs require investors to remain invested until age 55 (although exceptions do apply under certain circumstances). In addition, these investments are subject to Regulation 28 of the Pension Funds Act, which prescribes certain asset class limits.

We have compared an investment in a tax free investment plan to a standard taxed investment. For the purposes of our example, we have assumed that the investor makes an annual lump sum contribution of R30 000 at the beginning of each year (up to the R500 000 lifetime limit). This is invested with a 50/50 split between equity and interest-bearing instruments (with a dividend yield of 3% and an interest rate of 8%). During this time, the investment achieves an annual growth rate of 12%. The savings advantage is illustrated over periods of two, five, ten, fifteen and twenty years for investors with marginal tax rates of 18% and 41% respectively.

As with an RA, investment returns in a tax free investment plan are not subject to income tax, CGT and DWT (but contributions are not tax deductible). However, these products do not prescribe a set investment term and there are no restrictions on when investors can access their money. In case of an emergency, an investor will therefore have immediate access to their savings. Furthermore, there are no prescribed asset class limits within the investment as Regulation 28 does not apply to these products. This allows investors greater equity and offshore exposure, amongst others.

The graph shows that the real benefit of investing in a tax free investment plan is achieved over a period of 10 years and longer. However, returns can be improved over shorter investment periods as well. Outperformance of a tax free investment compared to a taxed investment 30%

27%

% Increase in savings

25% 19%

20% 15%

13%

13% 9%

10% 7% 5% 0

3% 2% 2 years

6%

3%

5 years

10 years

15 years

20 years

Number of years 41% tax rate

18% tax rate

Source: PSG Wealth


QUARTERLY INSIGHT

The PSG Wealth Retirement Annuity and Tax Free Investment Plan: a quick comparison PSG Wealth Retirement Annuity

PSG Wealth Tax Free Investment Plan

Lump sum

R20 000

R6 000

Recurring

R500

R500

Flexibility to stop contributions

Yes

Yes

Maximum annual contribution

Tax deductible to the greater of*: • 15% of non-retirement funding income • R3 500 less current deductions to a pension fund • R1 750

R30 000 a year R500 000 lifetime contribution limit

Investment choices

Unit trusts Private share portfolio

Unit trusts

Investment restrictions

Governed by Regulation 28 of the Pension Fund Act. Asset class limits include: • 75% equity exposure • 25% property exposure • 25% in foreign assets

No unit trusts with performancefees fees. No asset class limits apply.

Minimum investment period

Until investor reaches age 55 (certain exceptions apply in exceptional circumstances).

No restrictions

At retirement

Up to one third can be taken in cash (subject to tax). The balance must be used to purchase an annuity.

Not applicable

Protection from creditors

Yes

No

Estate duty exemption

Yes

No

Minimum contributions

* From 1 March 2016, combined tax deductible contributions to a pension fund, provident fund and retirement annuity will be the greater of 27.5% of remuneration or taxable income, capped at R350 000 a year.

RAs and tax free investment plans – When to use which? An RA is a good investment vehicle to use if the investor is aiming to meet the long-term objective of saving for retirement. RAs have numerous tax advantages over discretionary investments.

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Tax free investment plans can be appropriate for supplementing retirement savings, investing towards education or saving for post-retirement medical expenses.

FEATURE: TV ADVERT Our new television advert – the power of being bigger picture thinkers

Tracy Hirst Head of Group Marketing PSG

PSG recently launched our new television advert. It tells the story of the 1955 Mille Miglia motor race and the record win by Sir Stirling Moss and his navigator, Denis Jenkinson. Moss and Jenkinson secured their win by taking a broader view: they realised the importance of the driver/navigator partnership, used an innovative new navigational technique and spent hours mapping their route ahead of the race. In doing so, they set a record time that remains unbeaten. Similarly, as bigger picture thinkers, PSG considers every detail to ensure the best possible results for our clients.

A momentous event in motor racing history The scene is set in the northern Italian city of Brescia, at the finish line of the 1955 Mille Miglia. British racing car driver Stirling Moss and his navigator, Denis Jenkinson, are celebrating a historic win. They have just completed the close to a thousand mile open-road endurance race in the fastest time ever recorded – indeed, a record that still stands today. Cameras flash furiously around them, the crowd clamours for a closer look and journalists lean in for a shot at the inside scoop. Exactly how did the duo manage this extraordinary feat?

The benefits of adopting a unique approach Our story moves to the build-up to the win. Moss and Jenkinson are racing along the hazardous route. Moss’s eyes are fixed determinedly on the road but Jenkinson’s attention is focused elsewhere. On his lap, Jenkinson holds a Roller-Map, a new navigational device on which they have recorded every twist and turn of the course. Using the Roller-Map, Jenkinson knows exactly what to expect from the stretch of road ahead and he can communicate this to Moss, enabling him to navigate the route quickly and confidently.

Applying a broader perspective While other race entrants focused primarily on optimising the performance of their cars, Moss and Jenkinson took a broader view. Their approach was to consider all the factors that could influence their racing time, both mechanical and otherwise. By recognising the importance of how well they themselves – and not only their car – could navigate the route, they went a step further than their competitors. They were more thorough in their planning, more innovative in their approach and more collaborative in securing a successful partnership. Ultimately, this gave them the edge.

PSG are the bigger picture thinkers in financial services We have used the story of Moss and Jenkinson to highlight how PSG embraces a similar approach. At PSG, we consider all the factors that can affect the end results for our clients across each of our three divisions: PSG Wealth, PSG Asset Management and PSG Insure. We offer our clients access to a full suite of financial products to meet all of their financial planning needs – from investments to insurance and all wealth management services in-between. This is backed by high


FEATURE: TV ADVERT

quality advice, available from a broad network of advisers that spans across South Africa and also reaches into Namibia and Mauritius. To provide the best possible support to both our clients and advisers, we continuously focus on enhancing our operations and technological capabilities, ensuring that we remain ahead in a fast-paced, ever-changing and competitive environment. We know that the best result can only come from seeing the bigger picture, and having the courage to act on it.

How our advert conveys our brand positioning Part of creating value for a brand includes consistently communicating the brand values to the public. Our advert differentiates PSG and communicates our unique selling proposition as the bigger picture thinkers in a number of different ways. 1. Just like Moss and Jenkinson, PSG has the vision of a positive, ambitious and successful end result. We have the desire to achieve great results for our clients, even if it means challenging the norm and doing things differently. 2. PSG takes a rigorous and thorough approach in all that we do. There is no substitute for proper preparation. 3. There is a close analogy between the driver/navigator relationship and the client/adviser relationship. With the right direction and guidance, we foster successful partnerships with our clients along their financial journeys. 4. Using well-known icons gives the advert an international flavour, showing that PSG can compete with our professional product and service offering on a global scale. In addition, the time period and setting is glamourous and aspirational, which encourages positive emotions.

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5. We have given a lot of thought to the treatment of the advert to ensure it underpins our brand image: a. The colour grading fits in with our recently established corporate identity – a warm palette that highlights the importance of our relationships with our clients. b. Because we want the advert to have a long lifespan, we have created intrigue by combining footage moving both forwards and backwards, as well as slow-motion interspersed with moments of speed and power. c. We have included actual stock footage from the event at the end of the advert, which speaks to our authenticity and integrity. 6. The advert will be relevant to many audiences. There are few who can say they have never been in a race before. There are even fewer who can say that winning is not satisfying. 7. The timing of the advert launch supports its messaging. In uncertain and volatile times, it helps to have someone to steer you through difficulty. Good navigation will get you there quicker and safely.

View the advert online and help us spread the message We are delighted to share our new advert with you. To view it online, follow this link: https://www.psg.co.za/about-us/PSG-Bigger-Picture-Thinkers/. Please feel free to leave a comment and to share this link with your clients, family and friends.

Notes


Notes

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Disclaimer PSG Wealth is a brand underneath PSG Konsult Ltd, which consists of the following legal entities: PSG Multi-Management (Pty) Ltd, PSG Securities Ltd, PSG Fixed Income and Commodities (Pty) Ltd, PSG Scriptfin (Pty) Ltd, PSG Invest (Pty) Ltd, PSG Life Ltd, PSG Employee Benefits Ltd, PSG Trust (Pty) Ltd, and PSG Wealth Financial Planning (Pty) Ltd. Affiliates of the PSG Konsult Group are authorised financial services providers. The opinions expressed in this document are the opinions of the writer and not necessarily those of PSG Konsult Group and do not constitute advice. Although the utmost care has been taken in the research and preparation of this document, no responsibility can be taken for actions taken on information in this document. Should you require further information, please consult an adviser for a personalised opinion. Collective Investment Schemes in Securities (CIS) are generally medium- to long-term investments. The value of participatory interests (units) may go down as well as up and past performance is not a guide to future performance. CIS are traded at ruling prices and can engage in borrowing and scrip lending. A fund of funds is a portfolio that invests in portfolios of collective investment schemes, which levy their own charges, which could result in a higher fee structure for these portfolios. Fluctuations or movements in the exchange rates may cause the value of underlying international investments to go up or down. A schedule of fees and charges and maximum commissions is available on request from PSG Collective Investments (RF) Limited. Commission and incentives may be paid and if so, are included in the overall costs. Forward pricing is used. The portfolios may be capped at any time in order for them to be managed in accordance with their mandate. Different classes of participatory interest can apply to these portfolios and are subject to different fees and charges. Figures quoted are from I-Net, Stats SA, SARB, © 2015 Morningstar, Inc. All Rights Reserved for a lump sum using NAV-NAV prices net of fees, includes income and assumes reinvestment of income. PSG Collective Investments (RF) Limited is a member of the Association for Savings and Investment South Africa (ASISA) through its holdings company PSG Konsult Limited. Conflict of Interest Disclosure: The fund may from time to time invest in a portfolio managed by a related party. PSG Collective Investments (RF) Limited or the Fund Manager may negotiate a discount on the fees charged by the underlying portfolio. All discounts negotiated are reinvested in the fund for the benefit of the investor. Neither PSG Collective Investments (RF) Limited nor the Fund Manager retain any portion of such discount for their own accounts. PSG Multi-Management (Pty) Ltd (FSP No. 44306), PSG Asset Management (Pty) Ltd (FSP No. 29524) and PSG Collective Investments (RF) Limited are subsidiaries of PSG Group Limited. The Fund Manager may use the brokerage services of a related party, PSG Securities Ltd.


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