At the age of 47, I have inherited an amount of R5 million. My house and car are paid off. I have R2 million in a preservation fund, and am contributing to a retirement fund. I plan to retire at 65 and am married with an antenuptial contract. Hopefully, that is enough information to quell the usual answer of ‘that depends’.
However, my question is a little different. Should I elect to invest in a retirement annuity (RA), or a variety of RAs to spread risk. I am not comfortable with the companies that these funds appear to be made up of for moral reasons.
Ideally, I would like to support dynamic companies that invest in renewable energy, meat alternative products, recyclable packaging, electric vehicles and so on. I am morally against investing in alcohol, tobacco or meat. How likely is it that someone like myself can find an investment vehicle to suit my needs?
Interesting question! The investment world is a dynamic, ever-changing place and I believe it is moving in this direction more and more, which is incredible.
An interesting insert about this can be viewed in the book – Guide to investment strategy by The Economist – 4th edition.
“Would it cost me to invest ethically or sustainably?”
The evidence of this is mixed – but it seems to be the case that investment managers are charging much higher fees onto ethical funds. Something to be wary of when taking into account the returns on these funds is that in most cases they’re much lower compared to peers in the market. The track record for ethical investing, as illustrated by the FTSE4Good series of equity indices, has underperformed the broad market since its launch in 2001. The index screens out companies that are tobacco producers, weapons producers, or nuclear power operators. There are a few other standards to comply with as well: combating bribery, working towards environmental sustainability, ensuring good supply chain labour standards and supporting universal human rights.
The first decision you would have to make is whether you would specifically like to invest in a retirement annuity vehicle?
If you are already contributing to a retirement annuity, you don’t need a second one. I believe in keeping admin fees low and keeping your portfolio as simple as possible. Yes, different products and different investment strategies are advised, but diversifying the investment in terms of the investment strategy will be enough. You can diversify in terms of asset class and in terms of fund managers by following a multi-manager approach. You are allowed to save up to 27.5% of your taxable income and claim these contributions back from the South African Revenue Service (Sars) every year – up to a maximum of R350 000. If you are already optimising your tax-benefit other products can also be considered at this point.
The first options you have will be Shariah-compliant funds. These are investment funds governed by the requirements of Shariah law and the principles of the Muslim religion. Shariah-compliant funds are considered to be a type of socially responsible investing product.
These funds have a few fundamental requirements that need to be met – they exclude investments related to alcohol, pornography, gambling, military equipment, weapons and smoking. There are also other characteristics – for example, earning interest is not allowed; the interest earned will be donated to a charity. These principles definitely make the funds more unique compared to the average fund available in the market – fees are mostly higher, and investment returns much lower compared to their peers in the market. There are different indexes available that are Shariah-compliant, as well as different unit trust funds.
With more and more investors seeking investment havens more in line with their beliefs, more are becoming available. This is in the form of impact investing.
For example, Old Mutual has launched two index feeder funds focused on companies with high environmental, social and governance (ESG) performance relative to their peers.
Typical ESG share options, according to the Old Mutual Responsible Index Funds, include some of the following companies:
- Naspers – consumer services
- Standard Bank – financials
- FirstRand – financials
- Compagnie Fin Richemont – industrials, and
- Old Mutual – financials.
The risk here is a lack of diversification. A well-constructed investment portfolio needs to be diversified optimally to ensure you are protected against all possible market cycles. I advise diversifying with asset classes, as well as fund managers.
Direct share options are also an option: you can choose to invest in companies you believe will have a positive impact on the world. Beyond Meat is a great example of such a company. It addresses the impact areas of health, climate change, natural resources, and animal welfare by developing innovative plant-based alternatives to animal products. A stockbroker can assist you with the detailed strategy and investment philosophy of the company.
More interesting concepts like Livestock Wealth have also been implemented. Better known as crowd farming, Livestock Wealth enables anyone to own real farm assets as they grow on a farm and earn income at harvest. In this case, the assets could be pregnant cows, free-range oxen, organic garden tunnels and macadamia trees.
It’s crucial to keep in mind that building a well-constructed investment portfolio will always consist of a few different products and different strategies.
I believe a few broader goals are important:
- Ensuring a tax-efficient portfolio.
- Planning for retirement, and ensuring you have sufficient provision to last you for 30 to 40 years as people are living longer.
- Having an emergency fund in place; we need to plan for exceptional circumstances as Covid-19 has shown us.
- Ensuring you have a well-diversified portfolio in place; current market circumstances prove that diversification is key, where even cash is not currently the hiding place as the decreased interest rates are providing much lower returns on these funds. Diversifying the asset classes and fund managers in your portfolio is important.
- Having the right (and updated) fiduciary and estate planning in place.
Investment strategies and beliefs can always be accommodated. I would advise talking to an independent financial advisor, making clear what your investment style and risk appetite is, and building a portfolio together from there. This will help address the fundamental planning goals while respecting your personal wishes in terms of the underlying investment strategies.