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Now is a good time to take stock and update your financial affairs

The South African equity markets have moved sideways over the last five years and many investors must be wondering if they are on the right path to inflation-beating investment returns. Maybe it is time for a review? And while you are reviewing your investments, consider reviewing your life insurance policies and your will.

Reviewing investment risk and geographic diversity

In theory, investors who take higher investment risks earn higher returns, especially over the longer term. The table below shows that the ‘high risk/ high return’ relationship has held in South Africa for periods of over ten years but has broken down since 2013. Data from November 8 2018 shows that for the last five years, the average return for investors in multi-asset (MA) income funds has been higher than returns from funds with higher equity exposure.

More alarming is the fact that over the last three years inflation has outperformed general equity, as well as MA high, MA medium and MA low categories.

Years

General Equity

MA High

MA Medium  

MA Low

MA Income

CPI (%)

Max equity exposure

100%

75%

60%

40%

10%

 

15 (2003)

13.80

11.62

10.65

9.43

7.96

5.59

10 (2008)

11.23

9.47

9.06

8.34

7.42

5.28

5 (2013)

4.31

5.46

5.48

6.21

6.94

5.28

3 (2015)

1.59

2.89

3.22

4.71

7.30

5.26

1 (2017)

-6.40

-3.31

-1.90

1.29

7.09

4.60

Source: FE Analytics, published by Profile Media.

The figures show the average annualised performance of the SA general equity funds, MA high, MA medium, MA low and MA income funds, as well as inflation as measured by CPI. Dates to November 8 2018

So how should investors respond to these alarming statistics? At Rosebank Wealth Group we find that clients who understand their portfolio mandates sleep easier than those who do not.

Textbook wisdom has it that once investors have decided on a particular mandate or investing strategy, it is set in stone. We do not subscribe to this philosophy; we follow the ‘core and satellite strategy’. This strategy requires that the ‘core’ allocations remain the same, but that satellite investments should be flexible, providing for the possibility of increasing or decreasing exposure to different asset types as values change and as the need arises. In this way, investors can take advantage of assets that are under-priced, while keeping their broad strategy intact.

This model also provides a useful framework for investing in different sectors and/or different geographies. For example, with respect to geographic diversification, South African investors must remember that our economy makes up just 0.44% of the world’s $80 trillion economy. In the February 2018 budget it was announced that South African unit trust funds could invest a higher proportion of unit trust fund portfolios offshore: up 5% from the previous combined total.

If you haven’t been approached by your financial advisor to chat about this increase in offshore exposure, maybe this is the time to initiate that conversation.

Reviewing life insurance policies

Many of Rosebank Wealth Group’s new clients come to us with a clutch of life insurance policies which are no longer suitable for their current needs.

The need for life insurance decreases over time, as bread winners simultaneously accumulate savings and reduce contingent liabilities.

As you get older it is more likely that your home loan is paid, education costs have been met and so on. However, it is normal practice with insurance companies’ life cover to increase as you get richer. This is seldom appropriate.

In our view, your level of cover should be finessed to cover your needs and the balance should be invested (by you, with an advisor) in assets of your choice and a geographic location to complement your overall investment strategy.

Secondly, insurance should be priced depending on the likelihood of a claim. Some insurers try to increase their market share by devising new products which are sold at ‘discounts’ to new clients. This is done in the sure knowledge that not many policy holders review their life policies on a regular basis, as they are intimidated by switching to a new life insurer.

Your advisor can assist you to ensure that you are paying a fair rate for appropriate life insurance.

Reviewing your will

Wills should be reviewed on a regular basis, so as to accommodate legislative changes, the appointment of executors and special bequests. Those with assets in more than one country may require more than one will to meet the regulatory requirements of different legal regimes.

In addition, the relative estimated values of bequeathed assets may change. What might have seemed fair and justifiable just ten years ago might be different today.

With effect from February 2018, the South African estate duty rate increased from 20% to 25%, on the dutiable amount on estates worth more than R30 million. Estate duty on estates with a net value of more than R3.5 million, is still charged at 20%. If your estate is affected by this change, we would suggest that some estate planning with your financial advisor would be advisable. Further, your heirs will appreciate any effort you make to reduce estate duty liability.

On a final note, most financial advisors have access to excellent software packages that illustrate different economic scenarios, overlaid with different interest rates, different levels of living expenses and so on. These tools are invaluable in illustrating the ripple effects of different decisions on the value and longevity of investment portfolios.

ADVISOR PROFILE

Trevor Lee

Rosebank Wealth Group (Pty) Ltd

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