How to invest in volatile times

By Johan Burger, Director and CFP® professional

Johan Burger2017(2)

During volatile times, many investors get spooked and begin to question their investment strategies and portfolios.

Some are even tempted to pull out of the market altogether and wait on the sidelines until it seems safe to dive back in. The thing is, volatility is inevitable. It’s the nature of the beast. It moves up and down over the short term.

Trying to time or read the market perfectly or avoid most of the risk is impossible. Many have tried and failed. Part of the solution is to maintain a long-term horizon and ignore the short-term fluctuations.

For most investors this is a solid strategy, but even long-term investors should know about volatile markets and the steps that can help them to better weather erratic market behavior, especially now that market experts predict an increasingly bumpier ride in the near future.

I am sure you have read that several international experts have warned about a global economic slowdown – the International Monetary Fund included – and there is even talk about a recession in the USA. Trade tensions continue between the US and China; political risk is on the increase and debt levels remain elevated across global governments.

These challenges and the uncertainty it brings has led to volatility in worldwide equity, commodity and currency markets and falling bond yields, and the rising threat of interest rate hikes.

A high-quality approach is one of those investment strategies that seems smart, but only works well on certain occasions. It seems that occasion has arisen.

In industry jargon — quality has no single, strict definition. But the common traits are sturdy businesses or industries not reliant on a strong economy; high and resilient profitability; and strong balance sheets unburdened by debt.

Locally, Brenthurst Wealth has opted the use of more conservative asset classes. We have been reducing SA equity exposure and increased bond exposure in the form of income funds. Two major funds that Brenthurst have been using are; The Counterpoint Enhanced Income and the Mi-Plan Enhanced Income fund. We also have a low equity cautious fund namely the Brenthurst Cautious fund of fund where the local equity exposure is less than 10%. These funds are suited for investors with a low risk tolerance, that are redeeming income from their investments and the objective is to preserve capital with very low volatility.

Regulation 28 funds have underperformed severely the last five years due to the slow growth in the SA economy. Investors with retirement annuities and preservation funds could consider the following options. Either move their exposure to above income funds to more conservative asset classes or in certain cases to redeem and retire from these funds after the age of 55. Last mentioned option should be considered only for certain investors and aspects such as taxable income, total overall offshore exposure in their personal portfolios and tax consequences should be considered.

Offshore, there are several exchange-traded funds built to isolate quality stocks, here and abroad. Brenthurst Wealth launched its Global Equity ETF Fund late last year, the first SA-approved fund offering local investors exposure to the top index trackers in the world; including Vanguard, Black Rock and other global giants. It offers investors exposure to global stock markets at the lowest possible cost. The fund will become a central building block of our global investment portfolios.

In a dynamic investment universe, with increased global volatility and a stagnant local economy, Brenthurst Wealth is continuously adapting and innovating its investment offering to ensure we continue to offer value and new investment opportunities to investors, at competitive prices. We have been advocating a healthy exposure to foreign markets to local investors for more than eight years now and it continues to be a cornerstone of our investment strategy.

Depending on individual circumstances, we are strategically advising between 50% and 80% offshore allocation across discretionary portfolios, in some cases more. Once again, this will vary from one investor to another, based on their personal circumstances, risk profile and objectives. The primary reason for this bullish push abroad is the concentration risk the South African market poses to portfolios. The JSE is a tiny market, representing less than 1% of the global investable universe. Only 10 shares listed on the local bourse make up between 50% and 60% of the JSE All Share Index.

Taking money offshore offers access to a multitude of diverse industries, listed stocks, geographies and themes not available back home. And thus, access to much and many more quality companies and related investment schemes.

This “quality’ approach aims to provide low volatility returns by investing in attractively priced, high quality global businesses and investment products.

We aim to locate investment options with exposure to companies with strong and consistent track records with embedded identifiable strategies, low levels of leverage, strong management teams and good governance structures.

These are companies that have clear and trusted brands, are income-oriented and have high free cash flows, which we believe can compound shareholder wealth through many market cycles.

In times of uncertainty, the quality attributes we seek do not change. Rather, they provide the necessary ingredients for our companies to continue to compound shareholder wealth, and weather the storms the market will bring.

Brenthurst Wealth also launched a worldwide flexible portfolio in 2017, the Brenthurst Worldwide Flexible Fund of Fund. This fund is ideal for investors who want to increase their offshore exposure in local portfolios. This portfolio consists of a wide variety of asset swap funds and key holdings include, the Global Ip Opportunity fund, Investec Global Franchise fund and The Sygnia 4th Industrial Revolution fund. This is a very easy way to gain access to companies not available in SA and include, but not limited to, companies such as Amazon, Apple and Google.

There’s no way to know what the future holds for stocks or a particular segment but becoming more cautious could be the best strategy of all after the run-up of the past decade. Markets are confusing and the investment universe is vast.

It remains highly advisable to consult an experienced, qualified financial advisor to devise a strategy suited to an investor’s personal circumstances. Have a question for Johan Burger? Send email to johan@brenthurstwealth.co.za. For details of our offering, the location of our offices and our team visit our website here: Brenthurst Wealth

Trusted partnerships deliver results

By Brian Butchart, Managing Director and CFP®

Brian Butchart

Trust has always been an integral part of professional financial advice. But as disruptive technologies fundamentally change the way business is done, trust is increasingly becoming the trait that differentiates personal interaction from its automated counterpart and astute investors value this.

Furthermore, investors are more likely to trust an advisor when he/she believes their functional, emotional and ethical needs are being met. Especially if an advisor delivers on their objectives and has the investor’s best interest at heart.

Brenthurst Wealth has taken this a step further, and in another direction for that matter.

We are actively involved and familiar with every ventricle of the funds we invest our client’s money in, building professional relationships with the asset managers we select. The communication lines are open, the strategies are transparent, and we are united in our ultimate investment objectives.

This, we see as a strategic advantage, as it provides our advisors with insights that the average advisor does not generally have access to.

Whilst we may not always agree on the investment thesis, the debate is a critical extension of our intellectual armoury, adding further value.

We see the alignment of asset management and advisory services as a growing trend, as advisors take increasing responsibility for the outcome of investment decisions.

As such we need to have a thorough understanding of our asset managers’ positioning, in order to offer comprehensive advice. This is becoming increasingly difficult with large investment houses where access to decision makers is restricted and communication more generic.

Our close association with Momentum Global Investment Management (MGIM), Mi-Plan and Counterpoint Asset Management, for example, illustrates this clearly and the results speak for themselves.

MOMENTUM GLOBAL INVESTMENT MANAGEMENT

The Brenthurst Global Equity Fund, managed by MGIM since its inception in 2010, outperformed the median manager in its peer group1 by more than 4% over the last 5 years.

The recently launched Brenthurst Global Equity fund, managed by MGIM provides a unique opportunity to invest solely in international ETF’s and index trackers and is one of the most cost-effective global funds approved by the FSCA. The fund delivered stellar returns YTD and since inception just over a year ago.

MGIM has a stable, energetic investment team that understands what investors really need and provide a hands-on approach to Brenthurst with insight and accessibility to their process and research which is in turn conveyed to clients.

MI-PLAN

The Global IP Opportunity Fund2 and the Mi-Plan IP Global Macro Fund2 are managed by Mi-Plan and are Multi Asset flexible global funds, investing primarily in foreign markets. The objective of the portfolios is to achieve capital appreciation over the medium to long term and there are no limitations on the relative exposure of the portfolios to any asset class.

The investment case for us is their focused exposure to the world’s equity markets with the aim of achieving capital growth. We also appreciate their ability to tactically allocate to bonds, property and cash to exploit market conditions and mitigate risk, using diversification by investing across the world’s major exchanges.

The Global IP Opportunity Fund delivered exceptional returns and in a very competitive investment category, with the Mi-Plan IP Global Macro Fund winning the Best (South African- domiciled) global multi-asset flexible fund Raging Bull award for three consecutive years (2016, 2017 and 2018), beating more established and well-known asset managers in this category.
Global IP Opportunity Fund beat the MSCI World Index and JSE ALSI annualised over 5 Years:

Mi-Plan IP

Source: Financial Express

In addition, the local Mi-Plan IP Enhanced Income Fund2 used within our local strategy delivered stellar returns (11.95% over 12 months to end June 2019) beating money market and inflation by a handsome margin.

COUNTERPOINT ASSET MANAGEMENT

Similarly, our relationship with Counterpoint Asset Management is deeper than simply an advisor-asset manager, as we have a direct line to the fund managers and use Counterpoint’s acumen to provide our team with input in terms of asset allocation and investment opportunities. The boutique fund manager boasts a team of very experienced professionals and has delivered an impressive set of results for our clients over the past few years.

The full suite of domestic funds (Balanced, Fixed Income and Equity Funds) remain ahead of their peers, with the Balanced Plus Fund deserving special mention for achieving top quartile performance over 1 and 3 years annualised. Consequently, this year the Counterpoint SCI Cautious and Balanced Plus Funds have regularly featured in the widely read Corion Report, featuring in the top 5 performing funds in their respective categories over multiple periods.

Selecting and establishing professional relationships with these top performing asset managers have proved rewarding for both Brenthurst Wealth and its clients. We are, however, cognizant of the level of risk taken to achieve these results and are wary of managers that have outsized positions that yield impressive returns only to collapse once the position unwinds and therefore tend to focus on managers that consistently deliver.

Brenthurst is well aware of the current global risks posed to investment strategies and therefore value and will continue to build professional relationships such as these, to enable the successful navigation of extreme political, economic and market volatility with the objective of mitigating risk and delivering consistent long-term returns to clients.

* As independent advisors we select investment opportunities from the entire global investment universe across several providers, asset managers and geographies. The funds highlighted here are only a few of the well-established relationships used to construct portfolios; dependent on a client’s particular financial objectives and investment plan. Details about our offering and our team here: Brenthurst Wealth

The frugal life the safest road to wealth

By Mags Heystek, CFP®

MagnusLHeystek2July2017

Temptation can be expensive, especially if you go into debt to satisfy your immediate desires. But it will cost you a lot more if instant gratification distracts your long-term savings goals.

Delaying gratification in the short term can lead to a much bigger payoff in the future. It will take discipline, but resisting the urge now, will be rewarded later, and ultimately brings more peace of mind.

A World Economic Forum (WEF) report released in June found that people around the world will long outlive their retirement savings.

The WEF Report, found that strained government and employee retirement plans have left individuals increasingly responsible for their own retirement, while many find their personal savings to be inadequate.

South Africa’s household savings rate is technically non-existent. According the SA Reserve Bank it was -0.10% in the first quarter of 2019.

To close the savings gap, the WEF report states that individuals and policymakers must take the appropriate steps to ensure investment returns outlive individuals themselves.
Unfortunately, tax policy, for example, is structured in such a way that it punishes investments and income generation.

The more wealth you create, the more taxes you must pay. Wealth taxes as well as regulatory and intermediary levies eat into performance over the long run. Investments are by subject it to a range of taxes, intermediary costs and regulatory charges.
If you want to become financially independent, you will need to save yourself. But you don’t have to go about it alone. An experienced and qualified financial adviser will assist you every step of the way.

One can probably argue that the younger generation is in greater need of financial advice than those before them. They are the most educated generation ever, but when it comes to saving and investing, they remain ill-informed. Growing up in the digital economy has also made them impatient. But they are not alone.

This impatience has also extended to the way a few investors approach investing: they want great returns and they are wanted instantly. This has made investors susceptible to fraudulent get-rich-quick schemes, all at the promise and allure of incredulous gains. Again, an advisor will be available to advise against it, and help investors understand how the supposed ‘greatest investment’ of all time really works, and if it is legitimate or not. Speaking of legitimacy, it is always important to ensure that any advisor, platform, and investment product is fully licensed. Investors have the right to ask all the necessary questions, and at the end of the day, it is their money.

There are no shortcuts to building long-term wealth. Successful investing requires consistency, patience and time. Delaying gratification may be one of the biggest factors to overcome to build wealth.

Studies have shown that those who accumulate wealth tend to be more frugal and live less opulent lifestyles than their peers, even though they can afford it.

While it is never too late to get started, the one advantage of starting at an earlier age is time; millennials could enjoy the added benefit the power of compounding over a longer period, and so build lasting wealth.

The world economy is extremely fragile, and digital options are popping up all over the place. So, chasing yields, making emotional decisions on short term market events and the allure of risky assets like cryptocurrency, will make the independent unbiased guidance from an advisor even more valuable.

But you cannot properly plan for the future without knowing where you stand today. An advisor will assist you in clearly articulating your goals. Objectives goals could be very short term (saving for a holiday), medium term (saving up enough money to buy a property), and long term (saving for retirement).

But what about some of the goals people aren’t even aware of yet? But what happens when things go wrong? Are your expectations realistic? Investors need to understand the good, the bad and the ugly.

The plan put together by a planner will have these outcomes in mind and take personal circumstances into consideration to advise on the most apt options for an investor. There are hundreds of products and services available. Choosing the right one can be a minefield. The advisor will navigate and investor through this complicated environment.

A financial advisor has the expertise and experience to help navigate this complex environment and to instill the principles to achieve your financial dreams and help make sound investment decisions.

He/she will provide realistic expectations on the types of returns one can expect from properly licensed investments. And keep your hard-earned cash out the hands of scam-artists, and your long-term plan intact. So, what are you waiting for?

To speak to a Brenthurst Wealth advisor, view our offering and details about our team here: Brenthurst Wealth

What exactly is Power of Attorney?

By Suzean Haumann and Malissa Anthony

Suzean Haumann 71 (2) Malissa-2017

Power of attorney is one of those phrases that you hear quite often, and there are some very real implications on an individual if they sign over power of attorney. Understanding what power of attorney is, and how it can affect you after certain life events, is important. This is especially the case when someone suffers a mental condition and becomes mentally incapacitated.

Power of attorney is essentially a notice that gives a third party the permission to act on your behalf and make decisions for you. This can be for specific matters (“special power of attorney”) or for all matters (“general power of attorney”), and is a valuable tool to allow people to make important life decisions when they are overseas or become too frail to physically sign documents.

In South Africa, we have seen an increase in power of attorney being signed over from people emigrating South Africa. Emigration is not always a clean process and often times someone leaves the country before all of their financial matters are completely finalised. In this instance they would sign over authority to someone still in South Africa to expedite the process. Practically it is far easier to sign a document in South Africa than to send it to Australia, sign it and return it.

The most common instance where power of attorney is signed over is with the elderly. Especially when that person is too frail to physically sign documents. It is normally a very stressful time when someone becomes too frail to sign documents, and power of attorney can relieve some of the stress. Power of attorney is also considered where someone does not have the mental capability to conduct their own affairs.

It may come as a surprise though that it is not possible under South African law to sign over power of attorney if someone becomes mentally incapacitated. When a person becomes unable to conduct their affairs due to a mental impairment, power of attorney ceases and at this point professional assistance needs to be brought in. The law in fact states that power of attorney ceases to be valid when the person who signed over power of attorney becomes mentally incapacitated and if someone acts on an invalid power of attorney, it can be considered fraud.

So what can be done then when someone is mentally unable to deal with their own affairs if power of attorney is not an option? Well, there are two options, the relatives of that person can apply to either the High Court to be appointed as the curator or as the administrator of the incapacitated person’s affairs.

Curatorship is quite a lengthy process and involves the signing of affidavits by the family of the incapacitated person as well as the legal appointment of a representative, usually an advocate. The application must include medical evidence confirming that the person is in fact mentally incapacitated. Once the process is concluded and approved, the Master of the High Court will issue letters of curatorship granting authority to the curator. The curator is required to fulfil a number of obligations including the submission of annual reports in a specific format to the Master. It is for this reason that curators tend to be admitted attorneys.

Administration is not as strenuous as obtaining curatorship and although a cost is involved, it is the cheaper obtain and also follows a legal process. Initially the Master will grant temporary administration rights to the administrator and after the investigation by the Master is concluded and they deem that the person does in fact need an administrator, then they will confirm the rights to the administrator.

A very important consideration is that when power of attorney is signed over for someone who is mentally incapacitated, the power conferred is absolute. This means that the person who in effect becomes the curator has full power under the law to conduct the affairs of the incapacitated person indefinitely and as they deem fit. There is often times where the family of the incapacitated person do not fully comprehend that all authority is transferred to the curator or administrator.

To help get around this situation, it is possible to move all the property of the individual into a trust prior to them becoming mentally incapacitated, however trusts can become prohibitively complex and lead to unexpected tax consequences. Trusts should only be executed by trust specialists as they will be able to set up the trust in the best way possible for the situation.

There have been recommendations to change the law and make the power of attorney process simpler, however at this point, the bill that was drafted has not yet been published for comment. Hopefully the delays can be overcome, but right now we are still in this complex environment.

In situations where someone becomes mentally incapacitated it is important that the family members of that person partner with someone that has the experience and ability to assist them. Brenthurst Wealth can help take the burden off the family by guiding them through the power of attorney process. Brenthurst is a licensed financial service provider with a qualified legal and fiduciary department well versed in the requirements of setting up power of attorney as well as applying to the Master of the High Court for curatorship and administration of estates of people who are mentally incapacitated.

* To contact Suzean Haumann, CFP®: suzean@brenthurstwealth.co.za, or Malissa Anthony, wills, estates, legal and compliance officer: malissa@brenthurstwealth.co.za. If you need assistance with your financial plan contact the experienced advisors of Brenthurst. Details here: Brenthurst Wealth

Brenthurst Global Equity fund shows its mettle

By Brian Butchart, Managing Director and CFP®

Brian Butchart

Global politics and economics have caused volatility in financial markets in recent times and reports of an expected slowdown have made investors very nervous. During such times of turmoil and uncertainty, an effective diversified strategy and prudent fund selection can provide assurance to manage those nerves.

A popular investment solution to reduce costs and provide effective diversification are index tracker and exchange traded funds (ETFs). An ETF is a fund which tracks a stock market index and trades like regular stocks on the exchange, whereas index funds track the performance of a benchmark index of the market. Research has shown some passive investment solutions have surpassed some of their active counterparts in terms of capital and income growth and as a result, passive solutions have become increasingly popular.

The debate between active vs passive has been raging on for decades. The late John Bogle, founder of Vanguard, was the poster boy for promoting low cost Index funds and there is no doubt based on historical evidence, Index trackers are effective as part of a long-term portfolio to provide cost effective accessibility to multiple asset classes and markets across the world. Vanguard, one of the best-known and established passive asset managers has been very successful in delivering long-term returns to their clients.

The greatest benefit of these type of products is they provide multi – company, industry, country and tradeable asset class exposure at a relatively low cost. The range of nuances within these offerings have also expanded including focus areas like dividend yield, volume, quality or geography with access to multiple themes such as renewable energy, robotics or healthcare to name a few.

ETFs and index trackers are usually low cost, with significantly lower fees than those of actively managed funds. They are easy to understand and use, and investors’ expectations are easy to manage. If you invest in a market index, you know you are going to get the market index return (less a small fee). This all means diversification or risk management can start at a much simpler level. ETFs and trackers allow clients to pool their money in order to allow smaller investors access to asset classes which may be difficult to hold in small denominations.

Although passive investing provides some obvious benefits, various index funds these days give exposure to almost anything. This means that you still need to have some sort of stock picking strategy, which then is no longer passive investing anymore. The combination of a passive selection of investments then becomes an active decision.
Passive investors can also have very different returns as there are multiple indexes that can be tracked, and an explosion of ETF’s to choose from. This is especially relevant as passive investment solutions have increased significantly over the past 10 years. This means the returns passive investors achieve, might vary across the board depending on which index, asset, ETF or market you are tracking.

Therefore, skilled active managers can still add significant value and alpha to long-term portfolios and supportive of an investment solution which combines both active and passive strategies.

There are a number of ETF and tracker funds offering a multitude of investment opportunities and solutions globally, most of which, such as the Vanguard range of index funds are not FSCA approved.

For these reasons and to further ease access to low-cost international equity solutions, Brenthurst established its own fund of this nature in 2018 in association with Momentum Global Investment Management (MGIM) called the Brenthurst Global Equity Fund.

This unique opportunity allows investment into passive ETFs and trackers, actively managed by Glyn Owen at MGIM.

This fund is used as part of our core portfolio together with other passive and actively managed funds to construct bespoke international investment strategies. This investment offers local investors exposure to the top index trackers and ETF’s in the world including Vanguard, Black Rock and other global giants. It not only offers investors exposure to global stock markets but as far as we can determine is the only Financial Sector Conduct Authority (FSCA) approved international fund investing entirely in ETF’s and trackers. The fund is the latest addition to our range of funds giving exposure to leading companies, regions, currencies and countries at a fraction of the cost of other internationally managed equity funds.

The current Top 10 ETF and tracker holdings in the fund:

Fund

These types of investments provide diverse allocation across geographies, investment styles and themes, reduces risk and the recipe has been tested over three, five and ten years. The annual volatility was shown to be substantially lower than most international equity funds due to the diverse nature of the portfolio which outperformed the MSCI world index over 10 years on a back-tested basis. In addition, the lower cost resulted in better outcomes than some of the managed general equity funds over the same period.
The fund delivered a stellar 17% YTD, with assets under management in excess of $18 million and gaining traction.

This combination of both passive and active strategies complements one another and potentially offers superior long-term outcomes as opposed to either investment strategy in isolation.

Any investment strategy, however, should be carefully considered in consultation with an advisor who can address the risks and assess suitability to individual circumstances.

 

Facts and Fallacies of Investment

By Sonia du Plessis, CFP®

Photography for Brenthurst Wealth Management in March 2016 by Jeremy Glyn.

We have all been there, it is a Saturday afternoon and the fire is lit. You are standing around the braai chatting with your friends and one of them pipes up with “you need to get in on this fund, I am getting 20% returns, don’t waste your time with your provider”. Sound familiar? Well, as a financial advisor, I must stress that moving to the fund with 20% returns based on a conversation you had around a braai is one of the most dangerous things you can do. Investments are very tricky to get right, and when you do get it right, it is often not that way for long. The process around selecting the right investment is a critical component in the long term success of an investment.

Investment return does not happen overnight. One of the most important considerations is something called the investment horizon, essentially how long you need to hold an investment for. Risk is good for high returns, but only in the long term. In the short term, risk can be very dangerous because it is volatile. A long investment horizon allows for the compounding effect to really take effect. For example, if you were to invest R100 every year for 10 years, and each year your return was 10%, after year 1 you would have R110. After year 2 you would have R231, and so on. By the end of 10 years you would have R1753. Now, if you took that R100 payment and each year took the 10% return as cash, you would have effectively received R1100 (10 X R110). The difference of R653 is due to the compounding nature of the investment. By keeping your money invested you are not getting a 10% return on the R100 you are investing, you are getting a 10% return on all the money you have in the investment.

Asset managers refer to “timing the market” versus “time in the market”. What this means is that it is almost impossible to tell when exactly the markets will rally and when is the optimal time to invest, so in order to give yourself the best opportunity you should make sure you are invested before the rally. This is termed “time in the market”.
One of the most important decisions to make when choosing what investment is most appropriate is asset allocation. The main asset classes are equities, property, bonds, and cash. The highest risk is normally equities and the lowest risk is cash. Risk and return are linked, over time, the fund with the highest risk will have potentially the highest potential return. It is not reasonable to expect a cash investment to provide you a return on 15%, while at the same time it is not reasonable to expect an equities investment to have no volatility.

When you take out an investment, there are 3 entities that charge fees, the asset manager, the administrator and the financial advisor. Altogether these fees are known as the Effective Annual Cost (EAC). Depending on the type of investment and the amount being invested, the EAC can be anywhere from 1.5% to 5%. There are certain circumstances when the EAC could be outside that range, but as a financial advisor, an EAC of between 2% and 3% is normally appropriate. If your EAC is greater than 3% that is not say you are being ripped off, it might just mean that your investment requires a more hands-on approach and consequently the asset manager is charging more.
Investing offshore has a romance about it, it makes one sound like a savvy investor. The merits of investing offshore versus investing locally makes for a lively debate. When people are looking to invest money offshore they are more often than not looking to protect their capital. Investing in a German bond is perceived to be a much safer investment than a start up on the JSE.

South Africa is a developing country with a liquid currency, this means that asset managers in New York, Zurich, or London will invest in South Africa and divest too based on the mandate of their funds. If the mandate says that 10% of their assets must be invested in emerging markets, then the asset manager will to find the best available emerging market asset to invest in.

Making money through investments is an exercise you need to go through with a qualified financial advisor. Ask questions, but also understand that investing is not an exact science, but there are some concepts that you should keep in mind. The investment horizon is very important, a longer horizon allows for more time to generate a greater return and thus allow for investing in riskier asset classes. Staying invested for the entire investment horizon also opens up the potential for compound interest to work in your favour. Choosing the most appropriate asset mix for your investment is critical, too much risk and you open yourself up to volatility and losing money, but too little risk could result in lost gains. Evaluating the fees being charged and questioning your financial advisor if your EAC is above 3% is a conversation you should be having.

Your investment needs to be suited to your specific needs, and what your risk appetite is. Do not chop and change your investments based on what a friend says around a braai, rather get a financial advisor to investigate options best suited to your needs and give you a professional opinion.

A new option for retirement … the hybrid annuity

By Suzean Haumann, CFP® professional

Suzean Haumann 71 (2)

From March this year all retirement funds must offer their members annuity (pension) options that conform to regulations that came into effect in September 2017. The aim of the regulations is to improve the likelihood that you, the fund member, will choose a pension that will last for the rest of your life.

These so-called default regulations affect three important areas of retirement saving: how your contributions are invested while you are accumulating savings (Regulation 37 of the Pension Funds Act), how easy it is to leave your savings invested when you change jobs (Regulation 38) and the options you have available to convert your retirement savings into a monthly pension for life when you retire (Regulation 39). Members will also benefit from retirement benefits counselling to provide information and explain the implications of these default options.

Retirees are faced with two choices on how to use their savings: choose a life insurance annuity and be guaranteed a life-long income , or go with a living annuity that allows for more control over and access to capital, and the ability to grow capital through investing in the markets. Those are the benefits. The cons include the facts that life annuities don’t allow access to capital at any time and at death the insurance company – not beneficiaries – keeps the balance of the investor’s retirement savings (unless the option to leave a portion of income to a living spouse is exercised). With a living annuity there is a very real risk of running out of money before the investor dies.

A newish hybrid annuity product provides a flexible set of options to optimize balance between self-insuring and being insured for retirement, to counteract these shortcomings. Many financial institutions now offer such an annuity that conforms to the default regulations, and balances retirees’ need for income security with their desire to leave a legacy to their loved ones. This unique solution is known as a hybrid annuity: a life (or guaranteed) annuity inside a living annuity.

A hybrid annuity gives investors more allocation options than a standard annuity. It allows investors to choose the how they want to allocate assets. Currently investors have the choice of investing in three different balanced funds within the guaranteed living annuity. They can then skew their assets to more conservative, fixed-return investments that offer a lower but guaranteed rate of return, or weight them toward more volatile variable annuity investments that offer the potential for higher returns in the remaining living annuity part.

The one-product solution host both a living annuity and guaranteed life annuity in your chosen configuration for example 40% guaranteed and 60% living annuity. The future annuity income escalations (from the guaranteed annuity portion), rest on personalised portfolio construction and return results, which allows for flexibility and higher annual income escalation. The hybrid option also provides for partial capital conversion from an existing living annuity at any given time and compared to a living annuity provides a much more transparent and comparable cost structure.

Other benefits include the fact that the remaining investment capital in a living annuity can still be bequeathed to beneficiaries and the medical underwriting available on some guaranteed life annuities, could now result in a higher monthly annuity income payment, from the insurer.

So, for example let say an investor’s total retirement savings amounts to R1 million and, like most people have done, it is fully invested in a living annuity that offers no longevity protection. There’s a very real risk of funds running out before death. Now, if the investor had invested 50% of his/her retirement portfolio in the lifetime income asset class and the other 50% in traditional asset classes such as equities, bonds, cash more, than 90% of their lifetime spending needs should be met. The proportions will, however, depend on individual circumstances and goals, which should be discussed with a financial advisor.Sygnia and Allan Gray were some of the first organisations to launch a hybrid product, which combines the benefits of both a living and a life annuity: guaranteed income for life and capital to invest and access for emergencies. With this ForLife Living Annuity product the specialist retirement income company – Just Retirement Life – handles the compulsory annuity and Sygnia and/or Allan Gray handles the living annuity portion.

The lifetime income fund as a specific unitised asset class pays an income while the investor is alive. This essentially enables advisers to holistically review an investor’s circumstances and within one product trade-off and balance between the two competing goals in retirement. It’s only the percentage allocation between the traditional asset classes and the lifetime income fund that will differ. Investors can choose to have any percentage of the portfolio, from 0% to 75%, invested in the lifetime income asset class, which provides an income for life and the income depends on the performance of the balanced portfolio.

Like any investment choice, there are drawbacks to hybrid annuities. They allow for a once-off option at retirement to split savings between the life and living annuities. Investors can add to the hybrid annuity, but the guaranteed portion will be insured at the rate and date when the addition is made and not at the initial rate when the investment was started. For this and other reasons it is best to consult a qualified and experienced financial advisor to set up a financial plan best suited to individual needs.