the wealth perspective - PSG

THE WEALTH PERSPECTIVE FIRST QUARTER 2016

FIRST QUARTER 2016 | 1

Thinking differently is fundamental to our investment success. In doing so, we find opportunities in unlikely places, and grow these into success stories.

Contents Introduction - Corrie de Bruyn

2

Investment update - Adriaan Pask

3

Industry views - Lizé Visser

7

Investing and trading - Shaun van den Berg

9

Estate matters - Willie Fourie

11

Quarterly insight - Waldo Booysen

12

Platform update - Marilize Lansdell

14


INTRODUCTION Corrie de Bruyn CEO PSG Wealth

In this edition, Adriaan Pask, Chief Investment Officer, considers current asset class valuations and sets out PSG Wealth’s tactical preferences. Lizé Visser, Executive Director Sales and Client-centricity, looks at the rise of robo-advice and how this compares to, and complements, the traditional advisory model. Given recent capital gains tax increases, Shaun van den Berg, Head of Client Education, traces the evolution of endowments and highlights their renewed relevance. Waldo Booysen, Head of Direct Sales, delves deeper into the tax and estate planning benefits these products can offer. Willie Fourie, Head of Estate and Trust Services, considers the legal restrictions your clients need to understand when drawing up their wills. Finally, Marilize Lansdell, Head of PSG Life and PSG Invest, looks at significant enhancements to the PSG Wealth trading and investment platform over the past year.

Welcome to our quarterly newsletter As always, we have tried to share topical articles that are both relevant and interesting. We hope that you find the content valuable for you and your clients.

The new myPSG platform is up and running As communicated towards the end of last year, we consolidated and upgraded all of our secure transactional systems (such as ‘PSG Online’ and ‘Wealth Tracker’) and launched the new, integrated myPSG platform in December 2015.

myPSG offers easy and consolidated access to client information Not only does myPSG provide clients with an intelligent dashboard view of all their PSG products, it also gives them the ability to view information on other products invested in via their PSG adviser and important documentation such as loaded FICA documents. By using a single login, you as the adviser will be able to access all of your clients’ accounts. Your clients will be able to: • view all of their products and investment values, such as: -- share information -- fund information -- statements -- transactional information • access all PSG transactional screens (subject to your approval) without having to log in separately to each transactional system Viewing and transactional rights are set per account and have been carried through from the old platforms. Importantly, secure online access has also improved as the newmyPSG platform provides a central verification and authentication process. This means that clients only have to remember credentials for one site, which improves data security.

Your feedback is valuable As with the implementation of any new system, users flagged a number of required fixes and enhancements once they actively

trialled the new myPSG platform. I am pleased to note that most of these – including speed concerns – have been addressed. We are focusing on resolving the outstanding requests. Thank you for taking the time to share your feedback. Please continue doing so. The myPSG project is managed by a steering committee that consists of senior managers and executives across PSG (PSG Wealth, PSG Asset Management and PSG Insure). All matters that you log with your investment specialist are presented to a subcommittee that categorises them. Fixes are attended to daily, and enhancements that require further development are prioritised according to their business impact. The subcommittee communicates its actions and decisions to investment specialists weekly, to enable them to provide you with the latest feedback.

Please use the new platform and continue to give us your input It is of the utmost importance to us to offer a state-of-the-art information and transactional platform to you and your clients. To help us achieve this goal, we encourage all advisers to actively use the new myPSG platform – and to urge your clients to do the same. Simply select the ‘Try our new secure site’ option from the login options on psg.co.za and follow the registration process. Please note that we have used ID or entity registration numbers as unique identifiers and that you will need to reset your password the first time you log in.

Farewell from me as CEO After almost 10 years in various executive roles within PSG Wealth, the time has come to take on a new challenge. I have decided to leave the corporate environment at the end of April, and will be joining the PSG Wealth Pretoria East adviser team. In my time at PSG Wealth I have made some great friends and worked with very talented people. I leave knowing that we have a great business, and that it remains in good hands. Marilize Lansdell, currently Head of PSG Life and PSG Invest, will take over as CEO of PSG Wealth. I, and the rest of the business, have full confidence in her. She is of course well supported by the PSG Wealth management team. I wish both her and her team all the best in taking this business to the next level. FIRST QUARTER 2016 | 2

INVESTMENT UPDATE Current views on asset allocation Adriaan Pask CIO PSG Wealth

Domestic equities experienced a decent quarter thanks to a strong recovery in asset prices during March. In contrast, the industrial sector was the only local mainstream sector that delivered a negative return. Financials and listed property were both up at the end of the quarter, and bonds generated strong returns due to a recovery in investment sentiment from December 2015. On the global front, offshore markets continued to show volatility: the S&P 500 in the US generated an astounding 6.78% in March alone, while the Japanese Nikkei 225, Chinese Hang Seng and German DAX indices were all negative for the quarter. Given prevailing economic and financial market conditions, this article sets out PSG Wealth’s tactical view on wealth management.

Domestic equity In our view, domestic equities were slightly overvalued at the start of this year. Despite this, markets continued to rally and the first quarter of the year resulted in a 3.87% return from the FTSE/JSE All Share Index (ALSI). An improvement in sentiment, which was at very low levels at the start of the year but later bettered, drove the prices of most asset classes – including equities – higher over this period. According to our assessment, domestic equities remain about 30% overvalued relative to their historic yield. There are certainly still some expensive pockets in the market, and investors should expect continued volatility at current levels. That being said, skilled stockpickers should be able to find value in selected shares. We remain of the view that nimble investors will benefit from more frequent opportunities created by increased volatility. We are increasingly cognisant of the fact that there are some value traps on the local exchange – some shares are trading at very low price-earnings (P/E) ratios, but the earnings are in a cyclical decline. We feel that risks abound for the inexperienced investor, and that a fair assessment of macroeconomic factors is becoming increasingly important. In addition, as local economic strength is waning, we look for corporate balance sheets and debt structures that will be able to weather the storms. We expect smaller businesses as well as businesses with low cash balances, weak cash flows and high levels of debt to struggle in prevailing economic conditions. In light of the above, our positioning with regards to domestic equity remains as follows: • underweight interest rate-sensitive stocks and asset classes • underweight companies whose earnings rely heavily on domestic drivers

• underweight companies who rely on leverage to grow margins • overweight multi-national conglomerates with actively managed exposure to both developed and emerging markets • overweight companies with strong balance sheets and healthy cash flows • overweight firms that are expanding operating margins and gaining market share

Domestic listed property With regards to domestic listed property, our assessment of fair value shows that domestic property equity is now roughly 20% overvalued relative to its historic yield. In addition, we remain of the view that the interest rate cycle will impact domestic economic strength, affordability and sentiment. This will present headwinds for capital growth in the property sector. We therefore expect property yields to normalise on the back of capital value pressure. There are, however, always some exceptions. Selected property shares are experiencing growing yields, which may present some opportunities. Although broad-based property exposure is ill-advised at this stage, we do believe there are some shares that can make a contribution to a diversified portfolio. Where we hold listed property, we prefer to hold shares with the following characteristics: • low price-to-book values • low levels of debt/gearing and strong credit ratings • globally diversified portfolios, or shares that generate earnings abroad • utilisation of structures that offer superior liquidity and diversification properties, such as REITS • superior distribution growth track records


INVESTMENT UPDATE

Domestic bonds

During our previous quarterly review we stated that we expected interest rates to increase by 0.75% over the quarter. This is exactly what materialised. For the coming quarter we expect a 25 basis point hike in May and another 25 basis point hike in July. This is slightly less than what the South African forward rate curve is pricing in. The curve is pricing in a total increase of 80 basis points over this period.

Despite a surge in yields on the All Bond Index, the index aggregate yield still implies that this asset class remains generally overvalued. The implied premium is roughly 24%. With money market assets starting to offer some value, demand for bonds may dissipate in light of the increased risk of holding them. The relative risk-adjusted returns of bonds are also being compromised by higher interest rates on the horizon. Until recently, the gross real yield on most short-dated money market assets was near zero, and on an after-cost, after-tax basis there was very little to be excited about. However, as rate hikes ensue at an increased pace, we expect this to change quite drastically over the coming months.

Cash is certainly starting to offer value, with a three-month fixed deposit currently expected to yield close to 8% in nine months’ time. We expect cash to play an increasingly important role in our portfolios over the coming months.

Domestic assets Current earnings yields versus long-term averages 14,00 11.9

12.00 10.00

8.2 6.9

7.0

6.00

6.6

4.9

4.5

4.2

4.00 2.00

9.0

8.2

8.00

4.6

4.5 3.6

2.4 1.3

1.1

0 Global cash

Global bonds

Global property

Global equities Average

Domestic cash

Domestic bonds

Domestic property

Domestic equities

Current

Source: PSG Wealth investment division


INVESTMENT UPDATE

Current earnings yields versus long-term averages – premiums and discounts 80% 72.9% 70% 60% 50%

47.2% 32.8%

40% 30%

24.1% 14.6% 9.9%

10% 0

20.4%

19.8%

20%

Global cash

Global bonds

Global property

Global equities

Domestic cash

Domestic bonds

Domestic property

Domestic equities

% Premium (+)/Discount (-) Source: PSG Wealth investment division

Global equity Global equity valuations give a mixed picture. The forward P/E ratios of developed economies seem to indicate that developed market equities may be fairly valued to slightly overvalued. The forward P/E ratios for developing economies appear undervalued. Strong economic recoveries in developed countries such as the US and UK should support further medium-term earnings growth. However, at this stage, poor economic growth in developing economies is not supportive of any positive outlook on earnings. The one forewarning to this assessment is that weaker emerging market currencies have made developing market assets more appealing to foreign investors, which may underpin some demand. Therefore, currency movements are likely to be one of the most significant factors to influence the success of these markets over the short term.

Global equities, although trading at a slight premium, remain the most attractive asset class in our minds. The underlying valuations remain sound and there are many quality firms to choose from. The biggest short-term risk for South African investors is the rand. That being said, there are many effective ways in which professional money managers can manage this risk effectively. We remain of the view that offshore equities remain attractive on a relative basis. Therefore, we are cautiously optimistic about defensive developed market equity returns and remain overweight in this asset class.

Global listed property From a valuation perspective, global listed property is still a more risk-efficient investment than global bonds. Global cash yields, although increasing, remain unattractive. Still, investors should be very cautious in this segment of the market. Extreme property price fluctuations in structures with high leverage or limited liquidity can hold severe capital consequences for investors.


INVESTMENT UPDATE

Global fixed interest and cash We are underweight in offshore fixed interest, as we believe that most of these asset classes do not sufficiently compensate investors for the inherent risks involved. Despite delays, we expect the rates and bond yields of the US Federal Reserve (the Fed) to normalise during the course of the year. Valuations on global bonds remain severely stretched on the back of unchartered monetary policy stimulus and subsequent capital flows to credit instruments. In the US, nominal and real 10-year treasury yields have been falling for the past

30 years, leaving both real and nominal yields historically low. Federal Open Market Committee research supports the view that current yields should increase by roughly 3% to normalise. Although recent statements by the Fed has implied a more dovish stance, rate normalisation will have to materialise at some point in the not-too-distant future. Global cash remains unattractive apart from its liquidity and nominal capital protection properties. For investors seeking offshore diversification, equities offer the best value over an investment horizon suitable for an offshore investment.

Asset classes – tactical asset allocation

EMERGING

DEVELOPED

South Africa

Global

Strategic asset allocation Tactical asset allocation Changes this month Overweight: Tactical recommendation to hold more of the asset class than specified in the strategic asset allocation

Neutral: Tactical recommendation to hold the asset class in line with its weight in the strategic asset allocation

Underweight: Tactical recommendation to hold less of the asset class than specified in the strategic asset allocation


INDUSTRY VIEWS Technology can be an invaluable facilitator for your business

Lizé Visser Executive Director Sales and Client-centricity PSG Wealth

There is a lot of controversy around the rise of robo-advice. At PSG Wealth, we believe that technology cannot replace human interaction – personal advice is crucial to interpret the results that the technology delivers. However, the technology that is being developed as part of robo-advice can be a helpful tool for advisers to improve your value proposition and service for certain client segments. In this article, I explore how you can combine the benefits of technology and personal advice.

Digital investment technology presents opportunities There is a lot of controversy around the rise of robo-advice and its potential impact on the future of personal financial advice. On the one end of the spectrum, there are those who are sceptical about the reliability of technology and its limits in delivering a personalised service. They believe robo-advice will never become a significant player in the industry. On the other extreme, there are those who believe robo-advice will mean the demise of personal face-to-face advice. They argue that future technology-savvy generations will choose robo-advice over a personal face-to-face consultation, and that the systems and algorithms on which robo-advice is based will become more and more sophisticated to meet these needs.

financial advisers, but that personal advice is crucial to interpret the results that the technology delivers. In other words, technology actually offers opportunities for advisers to improve their value proposition and service for certain client segments. Combining the benefits of technology and personal advice (as opposed to choosing one or the other) is a winning combination.

Technology can’t replace the value of human interaction but it does offer benefits Is there a way to embrace the benefits of technology and use this to grow your business and improve the service you offer clients? The table below includes a few examples of how you can do this.

At PSG Wealth, we believe that the technology that is being developed as part of robo-advice can be a helpful tool for

Potential benefits of robo-advice tools for your business Improve operational efficiency

The technology underpinning robo-advice tools can improve operational efficiency if it: • is integrated into current processes • acts as a catalyst for automation and process improvement • enables certain clients to choose their level of service with you or self-service on aspects of the advisory process that don’t need or benefit from a personal interaction (changing address details is one simple example) • cuts down on paperwork and filing

Meet regulatory and compliance requirements

These tools are developed based on industry compliant requirements, which means that they will automatically meet these requirements.

More transparent and systematic

The development of these tools is based on well thought-through processes that can support and even improve aspects of your documentation process. All the details are available on the system at all times.

Enables you to spend more time with your clients

Saving time on administration and general operations means you have more time for faceto-face client meetings, enabling you to build and strengthen client relationships. This is a significant benefit in light of the RDR, which has put the spotlight on the time that you will need to spend with clients.

Enables you to service client segments that you may wish to develop, but can’t afford to service

For example, it may not have been cost-effective for you to provide a service to a client wanting a single product, execution-only process. With robo-advice tools, you can extend your service to these clients in a profitable way.

Enables you to attract clients you normally would not target to broaden your client base

You can provide low-touch advice to the upcoming young professionals who may prefer DIY investing using digital investment technology. When their needs become more complex, you will be their first port of call for personal advice.


INDUSTRY VIEWS

Your value proposition and client segmentation is the starting point

Personal financial advice and technology can be complementary

Before you incorporate technology in your business, it’s important to re-visit your overall business goals and plans. • How would you describe your client value proposition? Who should choose you as their financial planning partner, and why? • What are your strengths and weaknesses (as a business, as a team and as an individual)? • What does your fee structure look like? Is this structure profitable and fair for the range of clients that you have? • Which parts of your business are operating efficiently? Which parts frustrate you because you feel it takes too much time and effort relative to the value that they generate for your business and clients? • Where is your business exposed to risk and how could technology mitigate this?

Your clients value their relationship with you, but there is only so much ‘you’ to go around. Their wealth is still a very personal matter. They want to have the reassurance of someone they can trust to guide them along the way so that they can make the best decisions for their future and their families. Based on these personal relationships and your deep understanding of the advice process and investor psychology, you can define and tailor technology to facilitate elements of your advisory process and improve your business bottom line.


INVESTING AND TRADING The evolution of endowments – and why they’re now more relevant than ever

Shaun van den Berg Head of Client Education PSG Wealth

Given recent capital gains tax (CGT) increases, a new-generation endowment has become even more attractive for medium- to longterm investors in higher tax brackets. Unfortunately, many investors are sceptical of investing in these products due to the negative associations with old-generation endowments that traditionally charged high fees and offered lacklustre returns. This is a good time to review this investment alternative for your higher-earning clients. This article will explain the product features and show how endowments have evolved over time.

Then: old-generation endowment policies Life insurance companies initially offered traditional endowments only, which are policies with both a life insurance and an investment component. Investors pay their contributions over the course of their policy term, for which they then receive life cover and have a lump sum paid out to them at the end of the set period. However, the portion of the premium allocated to life cover became larger over time due to the increased mortality experienced in the face of the AIDS epidemic. This often meant that little to nothing was invested. As a result, endowments without life cover were later introduced to separate life risk and investment risk. However, in many instances the endowments offered by life insurance companies may still pose high fees, especially in the form of early-termination penalties if investors try to access their funds before the end of the investment term. Furthermore, fees are often difficult to understand or determine.

Now: new-generation endowments are more cost-effective and flexible Endowments, especially those offered by investment platforms, have evolved over the years to become much more investorfriendly. Importantly, the fees of new-generation endowments have become far more transparent and there are no longer any surrender or early-termination penalties attached to these products. There are, however, restrictions on the withdrawals an investor can make in the first five years – investors are restricted to one interest-free loan or one surrender (some product providers, such as PSG Wealth, offer access to both). The maximum withdrawal during this period is limited to the capital amount invested plus interest at 5%. No restrictions apply after five years.

Endowments encourage disciplined saving A further benefit is that endowments encourage disciplined saving, as investors contribute regularly to build their investment up over time. The investment can then be used for a significant cash requirement at the end of the minimum five-year period.

New-generation endowments allow investors to structure their investments freely Old-generation products often restrict investors to the funds offered by the life insurance company, although certain companies have started to make other funds available as well. In contrast, a new-generation endowment offers a far wider range of underlying investment options. For example, the PSG Wealth Endowment offers access to 484 unit trust investment options on the PSG Wealth platform, and investors can switch freely between these at any time without cost. Investors are also not restricted to maximum levels of equity and offshore instruments, as is the case with retirement savings products. However, it is important for clients to understand that the value of their investment is not guaranteed as it is linked to the market value of the underlying instruments they choose.

New-generation endowments offer flexible contributions Investors can choose to make a lump sum investment, regular debit order investments or a combination of the two. They can also add a lump sum at a later stage, provided it adheres to the ‘120% rule’. This rule states that an additional lump sum contribution by an individual investor may not exceed 120% of the highest total amount invested in each of the preceding two years. If so, a new five-year restriction period is triggered.

An attractive alternative for high-income earners Endowments are taxed on income at a flat rate of 30%, which makes them an attractive investment alternative for investors with a marginal tax rate of more than 30%. Any interest income from the investment is taxed at 30%, compared to the maximum marginal rate of 41% for individuals. Investors in endowments also qualify for a lower CGT rate of 12.0%, compared to the maximum rate of 16.4% for individuals invested in a standard unit trust-based investment. Furthermore, if the endowment is


INVESTING AND TRADING

part of a trust with only natural persons as beneficiaries, then CGT will be charged at an effective rate of 12.0%, compared to the 32.8% effective CGT rate for trusts. (Read more about the tax and estate planning benefits of endowments in Waldo’s article.)

Consider discussing the benefits of an endowment with your clients Endowments have gained renewed relevance in light of the 2016/2017 Budget. For more information on the PSG Wealth Endowment, please click here.


ESTATE MATTERS Drawing up a will: certain restrictions apply Willie Fourie Head of Estate and Trust Services PSG Wealth

The general principle of freedom of testation is one of the cornerstones of the South African law of succession, which in turn sets out the rules for how an estate is dealt with upon death. Freedom of testation allows people to do with their worldly possessions whatever they choose (provided that their actions are legal). However, there are a few important exceptions of which clients should be aware when drawing up their wills.

South Africans can allocate their assets freely in their wills Freedom of testation means that a client has full discretion when it comes to choosing who to leave their assets to in their will. This is in stark contrast to some European and other jurisdictions, where civil law forms the basis of succession law. In these jurisdictions, civil law imposes forced heirship. This prevents citizens from disinheriting certain people, such as a spouse or a child. If such a person is excluded from a will, they can claim a specified share of the deceased’s estate irrespective of the actual provisions in the will. Freedom of testation means that a client can effectively disinherit any person, including a spouse or a child. However, there are certain important exceptions to this rule. In addition, the provisions of any will must always be legal and moral, and it must be possible to implement these provisions practically.

Exceptions to freedom of testation Exceptions to freedom of testation are all based on the generally accepted duty of support that a person has towards their spouse and dependants. There are three general exceptions: 1. claims for the maintenance of dependants 2. claims by a surviving spouse (in terms of the provisions of the Maintenance of Surviving Spouses Act) 3. claims in terms of the accrual system created by the Matrimonial Property Act Another limitation to freedom of testation is that all wills must comply with the provisions of the Constitution of South Africa. Any provision that is contrary to the requirements for an open and just society will be invalid.

Maintenance obligations Your client’s obligation to maintain and support a child or spouse will be determined by considering their particular circumstances. The Children’s Act provides for the maintenance of minor children and states that it is obligatory to pay maintenance for children until they reach the age of 18 years. After this age, the child can approach the court to extend maintenance payments if they can show with good reason that the need still exists. A case in point would be a student at university, or any other acceptable reason such as a mental or physical impairment that prevents the child from adequately providing for their own needs.

Different marital regimes in South Africa The marital regime of a client’s marriage can have a significant effect on their estate and their spouse’s right to institute a claim for maintenance. There are three marital regimes recognised in South Africa: 1. in community of property 2. out of community of property, without the accrual system 3. out of community of property, with the accrual system

A marital regime may determine a spouse’s right to maintenance The default marital regime in South African law is in community of property. This means that each spouse has an equal (half) share in the joint estate. Practically, even if a client chooses to disinherit their surviving spouse, the spouse will not be left destitute as they already own half of the joint estate. This will also be taken into account if the spouse makes any further claim for maintenance against the deceased’s estate. However, if a marriage is out of community of property without the accrual system and the deceased chooses to disinherit their spouse, this could leave the spouse destitute if they have no alternate source of income. For this reason, Government enacted the Matrimonial Property Act in 1984. In doing so, it introduced the accrual system. With the accrual system, assets acquired before the marriage remain those of the individual spouses, but gains made during the marriage are equally shared when the marriage dissolves (either due to divorce or the death of a spouse). This is especially relevant if one of the spouses is not employed full-time, such as a mother who has chosen to run the household and care for the couple’s children. If clients are married out of community of property and the accrual system applies, they will be unable to disinherit their spouses in their wills.

Assist clients to consider all relevant aspects When helping a client to draft a will or when referring them to a fiduciary adviser for assistance, take care to make sure that the application takes cognisance of their maintenance responsibilities. For qualified, professional assistance in ensuring that your clients’ wills accurately reflect both their wishes and obligations, please consult any of our specialist fiduciary advisers for guidance. FIRST QUARTER 2016 | 11

QUARTERLY INSIGHT How investors can outsmart death and taxes Waldo Booysen Head of Direct Sales PSG Wealth

On 23 February, Finance Minister Pravin Gordhan tabled South Africa’s 2016/17 Budget in Parliament. As part of this, he announced a number of tax amendments that will have a significant impact on investors in the South African economy. The increase in capital gains tax (CGT) inclusion rates, which potentially impacts all investors in discretionary products, has resulted in renewed interest in endowments. This presents an opportunity to discuss the benefits of new-generation endowments, such as the PSG Wealth Endowment, with clients who have higher marginal tax rates.

CGT inclusion rates were increased for all investors

Tax-efficient investing can reduce the impact of higher CGT rates

From 1 March 2016, increased CGT inclusion rates apply for individuals, companies and trusts. To recap, CGT inclusion rates were increased as follows: • for individuals: up from 33% to 40% • for companies: up from 66% to 80% • for trusts: up from 66% to 80%

An endowment has fixed tax rates of 30% on income and 12% on taxable capital gains, with a minimum investment period of five years. This makes it a particularly attractive product choice for medium- to longer-term investors who are either individuals who fall in higher tax brackets (above 30% per year) or trusts with a tax rate of 41%. By investing discretionary money in an endowment as opposed to a standard unit trust-based investment, the effective CGT paid by investors who fall in the highest tax bracket (41% per year) decreases from 16.4% to 12.0%. Trusts benefit from a reduced CGT rate of 12.0% (compared to 32.8%), while both these investors benefit from an 11.0% drop in tax on revenue income. Of course, these tax savings will be added to the investor’s capital value at the end of the investment term, thus offering them a higher net return.

This means that the maximum applicable CGT rates (for investors in the highest tax brackets) are: • for individuals and special trusts: 16.4% • for companies: 22.4% • for other trusts: 32.8% The annual exclusion (capital gains for which no CGT is payable) is R40 000 for all taxpayers.

Higher CGT rates detract from investment returns It may be valuable to explain the practical implication of these increased rates to clients: whenever they disinvest capital from a discretionary (non-retirement savings) investment or switch between different underlying instruments in a discretionary investment, they will now pay more CGT. In practical terms, a withdrawal or switch requires the sale of underlying investment instruments, and they are therefore liable for CGT on the proceeds. Due to higher CGT inclusion rates, the amount an investor will receive after tax when their investment pays out will now be less than in previous tax periods. Individuals that fall within the highest tax bracket will pay 2.87% more in tax, companies will pay 3.92% more and trusts will pay 5.74% more. This can result in significantly lower investment returns over the long term.

This is illustrated in the example on the next page. Assuming annual capital growth of 10%, an investor in the 41% tax bracket who invests R100 000 over five years could earn an additional return of almost 2% in an endowment due to the CGT saving. A trust taxed at the same rate could earn an additional 9%.

Estate planning considerations An essential consideration when investing discretionary money on behalf of clients, is what happens to the investment when the investor passes away. Generally, as standard unit trustbased investments do not allow beneficiaries to be appointed, the value of the investment is included in the investor’s estate, along with their other assets and liabilities. This means that it may be subject to estate duty tax (20%) and executor’s fees (up to 3.99% including VAT).


QUARTERLY INSIGHT

Opening value

Assumed annual investment growth*

Term

Closing value

Investment value after tax Individual**

Trust ***

Standard unit trust-based investment

R100 000.00

10%

5 years

R161 051.00

R151 038.64

R141 026.27

Endowment

R100 000.00

10%

5 years

R161 051.00

R153 724.88

R153 724.88

R2 686.24

R12 698.61

1.78%

9.00%

Difference in investment value Additional return created within the endowment * Only capital growth is used within this example; interest and dividends are excluded ** Individuals in the highest tax bracket of 41% with an annual exclusion of R40 000 already exhausted *** Trusts that are taxed at 41% with all the beneficiaries being natural persons Source: PSG Wealth

Endowments allow investors to appoint beneficiaries

Endowments can ease the tax burden for investors and their beneficiaries

If an investor has appointed beneficiaries, the value of their investment is paid directly to these beneficiaries. Alternatively, a beneficiary has the option of continuing with the investment. This means that executor’s fees are not payable on the investment amount. The endowment is still a deemed asset in the estate of the owner and will be subject to estate duty tax (20%). However, there will be a saving on executor’s fees of up to 3.99% of the investment amount if a beneficiary is appointed.

‘In this world nothing can be said to be certain, except death and taxes.’ Benjamin Franklin. This statement unfortunately remains true, but with an endowment you can help your clients reduce the tax burden on their investment, and on their estate. For more information on the PSG Wealth Endowment, please click here.


PLATFORM UPDATE The PSG Wealth platform: positioned for growth Marilize Lansdell Head of PSG Life and PSG Invest PSG Wealth

Over the past year, we have introduced new investment alternatives, improved functionality and made service enhancements to the PSG Wealth trading and investment platform. This article reviews recent platform developments, the growth in adviser support of our platform and the value it offers you and your clients.

Platform review – how are we doing?

What sets our platform apart?

The PSG Wealth trading and investment platform has experienced significant growth in assets under administration. Even more encouraging is the growing support from our adviser community, many of whom have confirmed our platform as their platform of choice. As at 31 December 2015 (the most recent statistics available at the time of writing), our platform was ranked 11th out of 17 in terms of total assets under administration. However, it was ranked 4th out of 17 when we measured growth in assets under administration.

Our trading and investment platform is designed to help you deliver the best results for your clients by supporting you in achieving their financial objectives. This is why we focus on: A wide range of choice With unrestricted choice, you can tailor truly individualised solutions. Our open architecture platform offers access to: • over 484 unit trust investment options from various asset managers (including unit trusts from PSG Asset Management and risk profiled multi-managed solutions from PSG Wealth) • local and international shares • a range of derivative trading instruments

There are currently over 39 000 unique investors using our platform. As at February 2016, they collectively held 49 094 investment contracts, about 52 315 active local trading accounts and about 3 712 active offshore trading accounts. Platform flows R1 400 000 000 R1 200 000 000 R1 000 000 000 R800 000 000 R600 000 000 R400 000 000 R200 000 000 0 JUN ‘12

DEC ‘12

JUN ‘13

DEC ‘13

JUN ‘14

DEC ‘14

JUN ‘15

DEC ‘15

Year Inflows

Netflows

Outflows

Source: PSG Wealth (excludes extraordinary institutional flows)


PLATFORM UPDATE

Total assets under administration R40 000 000 000 Feb ‘16: R33.6 bn

R35 000 000 000 R30 000 000 000 R25 000 000 000 R20 000 000 000 R15 000 000 000

Jan ‘14: R17.6 bn

R10 000 000 000 R5 000 000 000

DEC ‘13

MAR ‘14

JUN ‘14

SEPT ‘14

DEC ‘14

MAR ‘15

JUN ‘15

SEPT ‘15

DEC ‘15

MAR ‘16

Year Source: PSG Wealth

Your clients can choose their preferred combination of unit trusts in a variety of product wrappers or choose specific instruments to include in a trading portfolio. Flexibility Clients are free to adapt their investments by amending investment instructions or switching between underlying instruments. As a platform, we offer all standard functionality, including lump sum or recurring investments and withdrawals, transfers between platforms or products, cessions, and the management of beneficiaries and dependants. We also offer supplementary features and services such as: • bulk transactions • model portfolio management • flexible phase-ins that allow you to specify the starting date, number of phase-in transactions, number of funds to phase into and a weekly or monthly phase-in frequency Competitive prices Our fees are competitive, clear and simply structured. For investment products, there are no initial fees or unit trust switch fees.

Expert support We understand that your clients are your priority. We offer you the support you need to look after their investments comfortably: • technical support on funds and competitor cost analyses • simple processes and streamlined systems, including book transfer support • free access to in-depth market research • free support tools Security The PSG Wealth trading and investment platform offers safe custodianship.

Changes and developments over the past year The launch of the PSG Wealth Tax Free Investment Plan Following National Treasury’s introduction of tax-free savings accounts in 2015, PSG Wealth launched its own tax-free product on 1 March 2015. At the end of February of this year, a year after its launch, just over 3 300 clients were invested in this product.


PLATFORM UPDATE

We launched new model portfolio functionality Model portfolios can consist of any combination of available instruments and can be mapped to products (wrappers), specific advisers, specific adviser offices or businesses and the advisers linked to them. In addition: • You can assign a discretionary portfolio manager. • You can set up fee rules specific to the model portfolio. • You can process bulk switch and rebalancing instructions. • You can exclude a client or subset of clients from a bulk switch/transaction. • No freeze period applies to model portfolios. We contracted with a new offshore provider In July 2015, we changed our offshore provider to Société Générale Security Services (Socgen). Socgen is a global bank, with a presence in 76 countries. It is the fifth largest bank in the Eurozone. As the second largest custodian in Europe, it is ranked among the top 10 global custodians. By using Socgen’s operations and technology platform, PSG Wealth can further expand our international offering, which will include international funds in the near future. An added benefit is that Socgen is a qualified intermediary in the US, and qualifying clients therefore benefit from a reduction in dividend withholding tax. Since changing to Socgen, the platform has seen good growth in the number and value of offshore transactions.

myPSG has been upgraded Towards the end of last year, we consolidated and upgraded all of our transactional systems. By using a single login, you and your clients are able to access all of their financial products and investment values, view other important information and documentation (such as investment statements and FICA documentation) and access all of PSG’s transactional screens. This improves both functionality and security. (For more information, please refer to Corrie’s introduction to this newsletter.) We have adopted a more client-centric service model As previously communicated to you, our new model offers your office one point of contact for administrative queries and instructions, with access to a dedicated team of client service consultants and processing and authorising administrators who all operate under one team leader. The team is also supported by your investment specialist. This forms part of our ongoing efforts to provide the best possible service to you and your clients by re-engineering our workflow to be more client-centric.

We value your feedback

The platform is here to serve you and your clients, and it is important for us to ensure that we offer all the support and functionality that you need. Please feel free to send us any feedback, input or suggestions.

Value of offshore holdings R14 000 000 000 R12 000 000 000 R10 000 000 000 R8 000 000 000 R6 000 000 000 R4 000 000 000 R2 000 000 000 0 JAN ‘15

MAR ‘15

MAY ‘15

JUL ‘15

SEPT ‘15

NOV ‘15

JAN ‘16

Month Source: PSG Wealth


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, © 2016 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.

