Taking Stock of Another Year

-By Sunél Veldtman

 

2018 was a tough year

2018 was one of the toughest years of my career. Not only did we see a decline in global share markets, but safe asset classes did not help portfolios either. Most asset classes declined in unison. But that wasn’t the difficult part – volatility is normal in markets. For our clients, 2018 came after grueling prior years. Years that felt like the negativity resulting in slow growth, led to us going nowhere in portfolios. Since 2014, the average equity unit trust fund has barely been positive; and while the negative political sentiment had a brief reprieve with Ramaphoria, it subsequently plummeted as the land grab issue was debated and the extent of corruption became evident.

Warren Buffett says that the stock market is a device for transferring money from the impatient to the patient. Last year, patience was required to stay invested in the markets. It was challenging to help our clients remember this. But their patience paid off, with world markets recording the best January in 65 years.

 

It wasn’t just the markets

However, even more challenging than the markets, was the real fall out of the prolonged pedestrian economic conditions on real people’s lives. Everyone felt the squeeze on disposable income as incomes stagnated while the cost of living increased substantially. Think of the impact on your own budget with the increase in the petrol price, electricity and water costs, municipal rates and the price of transport and food. This on top of a substantial increase in taxes across the board. The squeeze on our Rands has been very real.

Globally, major shifts in geo-politics resulted in heightened policy uncertainty. What will Donald Trump do next? How will the UK extract themselves from the mess called Brexit? How will China respond to further trade wars when their economy is already slowing?

These tough conditions in people’s business and personal lives have led to elevated stress levels, which in turn leads to heightened tensions in relationships and even knee-jerk decisions.

 

Our portfolios held up well

2018 also sorted the wheat from the chaff in portfolio construction. Poorly diversified portfolios performed badly.  All those portfolios with overexposure to previous winners, such as property, had a terrible time. However, Foundation can look back at a great year from a portfolio construction perspective: our clients’ portfolios remained resilient and they produced top risk adjusted returns relative to the markets and competitors (as measured by risk adjusted returns). In difficult times, portfolio construction is crucial – much like the design and construction of a building during high winds or earthquakes, is paramount for inhabitant’s safety.

Great news was that Portfoliometrix, the discretionary fund manager who manages most of our clients’ money, claimed the Best Discretionary Fund Manager award of 2018 in London.  It has highlighted what our research showed:  they are world class investment managers.

Diversification and rebalancing of the portfolios paid off. The typical pension fund portfolio delivered a return of nearly 1%, compared to the losses suffered of around 8% in the equity market last year.

 

Real advice is crucial

2018 was also one of the most rewarding of my career. You may wonder how I can say this, but in these conditions, people need a sounding board. We have helped so many of our clients navigate these difficult times and changes. This is when real advice is crucial.

Knee-jerk decisions can permanently destroy wealth. We strive to help our clients consider their decisions carefully. Daniel Kahneman, Nobel prize winner and author of Thinking Fast and Slow, says that it is difficult to help oneself think through problems and see one’s own biases or worse, erroneous thinking. He says that others can see it better and therefore recommends that we seek this kind of help.

An experienced advisor – one who is trained to observe thinking – can make a crucial difference during these times. We are continually improving these particular skills at Foundation. Traditional training for financial planners never included these skills, but we have and will continue to do so. We believe that our own continued growth in this area better equips us to help our clients in uncertain times.

 

New ways of financial planning

We introduced new financial planning packages for our prospective clients. These packages were designed with their specific needs in mind. They include packages for young professionals; individuals or families who want better planning for their finances; people going through transitions such as divorce, retrenchment or career changes; and an executive package for those with complex financial affairs.

By structuring our approach to these clients and working to their identifiable needs, we have seen some of these plans deliver effective results in a short time. Satisfying moments include the conclusion of extremely complicated divorce matters; helping a client transition to a brand-new dream job; and seeing couples regain peace of mind because their holistic planning fell into place. Financial planning makes a real difference, and these are the fulfilling moments for the Foundation team!

 

Last year was a good one for our team

Elke Zeki, CFP®, Director, had a baby boy, Aidin, in April – a welcome addition to his 2-year-old sister Luca.

Michelle le Roux, CFP®, Financial Planner, passed her fiduciary board examination is now a qualified Fiducary Practitioner SA, FPSA®.

Thiart van der Merwe, CFP®, finished his supervision period and is now a fully-fledged representative for our firm, as a financial planner.

We promoted Melisa Brodie to the Head of Operations and are looking to fill her previous role as administrator of our clients’ affairs.

My eldest daughter finished matric on a high note and left the nest to study further at my alma mater in Stellenbosch.

 

What does the future hold?

Our motto remains: Wealth For Life. We want to continue to help our clients plan and manage their wealth through their lifetime. We want to help them make the money last. But we also want to help them apply that wealth to make their lives worthwhile – to reach their dreams and live purposefully.

This is a challenging motto at a time like this. We are living on the cusp of a new era – potentially, there are huge geo-political shifts ahead. The world as we’ve known it, with the established alliances in the West and contained power in the East, could disappear. Artificial intelligence and the fourth industrial revolution will make today’s top jobs redundant. Global warming will make weather more extreme. Medical science will make breakthroughs that extend lifespans, whilst the stress of modern work life reduces the longevity of corporate careers.

All these factors will play out on our clients’ money and their dreams. How should we react to it?

 

Focus on what we can control

In these uncertain times, we need to focus on the elements of our lives that we can control. We cannot control the sentiment or the stupidity of global politics, but we can control our minute daily choices. We can choose to remain focused on our own goals. We should not give up our dreams because of current sentiment yet, we also need to respond with wisdom.

I am convinced that one of the most important, but neglected, tools of the future for financial planning is personal spending. It is the one area of financial planning that we can respond to immediately and effectively, and allows us to anticipate difficult times – with more impact than changing our income, investments or retirement plans.

We can also control our reaction to the fear whipped up by global uncertainty. We must learn to observe our emotions and then take deliberate action, if any. The temptation is always there to do something about our investment strategy but in most cases, it’s the wrong decision. I wrote about this in more detail last year. [ insert article here]

One of the best ways of dealing with uncertainty is scenario planning – there is no one future view for which we can plan. We must plan for different potential outcomes and future plot how we can control our own response to different outcomes.

 

We must become more human

In her talk on artificial intelligence, Dr. Vivienne Ming, asserts that we can best respond to robots by becoming more human. A large part of jobs, even financial planning jobs, will be consumed by artificial intelligence. We know that a big part of what we do now will be replaced by new AI technologies.

However, what will set us apart will be the quality of the conversations we have; whether we get to the real issues behind the money issues. Our clients will continue to need conversations about their wills, their children’s money habits, their retrenchment, divorce or even impending death. They will continue to need advice about their dreams and plans and how it impacts their money. Our clients will, in an increasingly complex world, still need to thrash matters out with us, not only as money experts, but skilled conversationalists.

We plan to further grow our skills and excellence in conversations and coaching.

 

We need resilience

Perhaps the human quality which will be most required from all of us, is resilience – the capacity to recover from difficult times. We will need a certain elasticity in our lives and money, to survive in difficult times. The good news is that resilience can be learnt, even by adults.

We plan to bring resilience expertise to our clients and team this year. Watch out for our upcoming events.

Finally, we mustn’t become too fearful or pessimistic. This doesn’t mean that we need to see the world through rose-colored lenses. But if our optimism is thoroughly checked by reality, we will be most successful – there is a plethora of academic research on the higher likelihood of success of optimists, read the article here.

. We should be careful not to think that the current situation is permanent or pervasive. Especially if this pessimism causes us to follow ‘all or nothing strategies’ – because then, we will we lose out.

We look forward to continuing planning with you.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

 

Why so blue?

-By Elke Zeki

 

When Ramaphosa narrowly (and to many’s surprise) beat Dlamini Zuma for the ANC’s presidency in 2017, it was a dark time for South Africans.  We were on the verge of being downgraded to junk status and it was impossible to see our way out of the mess Zuma had left us in.

More than a year later, it seems we have made a lot of progress.  We have a new and capable minister of Finance, new boards at all SOE’s (state owned enterprises) and four state “capture” commissions of inquiry to name just a few.

Yet South Africans are still emigrating at a rapid pace and when speaking to our clients the overall mood is bluer than ever before.

We think there are some good reasons for this and see these as key influences behind the uncertainty and fear.

 

The party is still divided

The ANC is still deeply divided, and the Zuma faction will do everything in their power to dispose of Ramaphosa and protect their self-interests.  Talks of nationalising the Reserve Bank and land reform are often controversial topics purposefully brought up to rattle Ramaphosa’s cage and create uncertainty.  If Ramaphosa secures a good result for the ANC in the election this year (>60%), it’s likely that he will act with more authority and direction, which will certainly improve confidence.

 

Unforeseen risks

Land reform is a complex issue that has been neglected by the ANC for decades.  Ramaphosa did not expect it to become a pressing issue, but could not allow the EFF to use it as a campaign against the ANC.  Land reform needs to be addressed in a responsible way that will not impact our economy.  People will remain concerned until formal guidelines have been given and the constitution amended accordingly.

Another unexpected risk is the near collapse of Eskom.  A poorly functioning, mismanaged and heavily indebted Eskom could derail the economy.  This is an ongoing issue impacting all South Africans.  As we stock up on batteries and candles, we wait for a workable long-term solution.

 

We are not an island

It feels bad here at home, but the mood is actually a little blue everywhere.

We are experiencing unprecedented levels of policy uncertainty around the world, which is mainly driven by two things:

  • Trade wars between the US and China: this affects us because we have a small, open economy.
  • Monetary policy uncertainty: the US monetary policy committee (MPC) have been hiking rates in the US, but suddenly signaled that they might pause. This affects us because opportunistic funds flow to counties with higher interest rates and liquid currencies (like South Africa). These funds create even more uncertainty because it can flow out as quickly and unexpectedly as it flows in.

 

Source: Stanlib

 

The world is also slowing down.

  • US economic data is starting to show signs of weaker growth.
  • China is slowing.
  • Europe is hovering near a recession, magnified by uncertainties around Brexit.

It is very difficult for a country like South Africa to grow in an environment like this and the global uncertainties make it even harder to achieve growth targets.

 

Our brains do interesting things

Cognitive scientist and public intellectual Steven Pinker, urges us in his book Enlightenment Now, to step back from negative news and headlines as it plays to our cognitive biases.  He argues that the media exaggerate negative news and this distortion makes us think the world is getting worse.

The notion of cognitive bias was introduced by Amos Tversky and Daniel Kahneman in 1972.  It refers to those glitches in our thinking that cause us to make questionable decisions, and reach the wrong conclusions.

A good example is recency bias, where we make decisions about the future using only the recent past as reference.   South Africans have experienced returns much lower than long term expectations for the past 5 years. The average return over this period is close to zero % and almost unprecedented.

 

Source: Coronation

 

This has strongly influenced sentiment and behaviour.  Coronation and Stanlib recently stated that their strongest flows for 2018 were into income type funds.  Investors are therefore expecting the same going forward and opting for lower risk investments.  This is not necessarily the right approach as markets can easily move quickly and strongly.  If you get the timing wrong, you can destroy capital for ever.

Another example is confirmation bias.  We often make decisions first and then do the research to support this decision.  It’s because of this bias that negative news headlines support our gloomy view.

 

We are all guilty of these biases and experience shows us that you can protect yourself against them by:

  • Diversifying your investments.
  • Focusing on your long-term goals and objectives. This often means staying invested through uncomfortable times.
  • Opening yourself up to the chance that you might be wrong.

After considering all these factors you’re probably thinking it feels so bad, because it is so bad.  If uncertainty prevails for a long time, it can be very damaging to a country and this is exactly what’s happening here.

 

Source: Stanlib

 

SA business confidence has been below average for more than a decade.

However, we believe that with better leadership in place, we stand a better chance of recovery. The election is key and after the election we will be looking out for the following:

  • Signs of prosecution,
  • That the SOE’s operational management improves,
  • More business-friendly policies.
  • Certainty on land reform.
  • Fewer parliamentarians.

These actions will send powerful signals to business and the world that the government means business.  South Africa is hoping to recover while the world is slowing down.  It would be challenging and slow, but not impossible. 

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

Topline Quarterly Review: Q4 of 2018

THE QUARTER WE’D RATHER FORGET! WHERE TO FROM HERE?

 

Aren’t we glad that 2018 is behind us? That said – we’re all asking if there’s light at the end of the tunnel or if that’s actually a train approaching?

The fourth quarter of the year saw a decline in most major indices with the developed world leading the pack. Looking ahead we need to keep an eye out for risks as well as opportunities that will present itself.

 

Unprecedented financial market returns

Souce: PortfolioMetrix

Markets suffered the worst year since the global financial crises in 2018. In addition, Deutsche Bank analyses showed 90% of asset classes were negative – the worst broad-based decline in their recorded history. The graph above illustrates just how bad it really was.

The perfect storm of events created the sell-off.

  1. Firstly, the US Federal Reserve hiked interest rates four times during the year driving money out of equity markets into safer assets.
  2. Secondly, China-US trade wars increased uncertainty, especially for emerging market nations that export goods to China.
  3. Thirdly, emerging markets were rocked by the Turkey crisis and Argentina requesting an IMF bailout.
  4. Finally, geo-political uncertainty topped by the Brexit debacle hiked uncertainty in markets.

 

Brexit and the slowdown of global economies

Source: Sunday Express, UK

The United Kingdom is set to leave the European Union on 29 March regardless of whether there is a deal or not. Subsequent to quarter end, the last deal tabled before parliament was rejected by a large majority. This fueled major anxiety about a no-deal exit which has now become a real possibility. The Bank of England has warned a no-deal Brexit would cause an immediate economic crash predicting Gross Domestic Product (GDP) to fall by 8%. Theresa May will need to partner with a very stubborn parliament to get a deal in place.

There are four possible outcomes:

  1. With a deal in place, Britain will exit the European Union in a more civilised manner with clearer guidance on imports, exports, migration and the border to Ireland (which has been a major issue in the rejected deal).
  2. With no deal in place, Britain will be out of the EU effective 30 March with no agreements on imports, freedom of movement, European citizens living in the UK and vice versa. This would increase uncertainty.
  3. Britain could cancel the entire process if a democratic process is followed and citizens vote to remain within the European Union. They will be able to cancel Brexit altogether without consent from the 27 EU members.
  4. Brexit could be delayed if all EU members agree to do so, which will only delay Brexit by a couple of months.

The Chinese economy has also been slowing with figures reporting GDP growth of 6.6%, the slowest in 28 years. The trade wars certainly played a role and will continue to do so in the year ahead. With a current truce in place until the end of March we can only hope that the two nations come to some form of agreement. China seems willing to work toward a deal to buy more goods from the US. Whether Trump will be happy with that remains to be seen.

The International Monetary Fund (IMF) recently published its outlook on economic growth. While the forecast for global growth in 2019 has softened to only 3.5% they predicted a slight uptick in 2020. When asked about the rising risks and slowing economy, Christine Lagarde, Managing Director of the IMF, answered, “Does that mean that a global recession is around the corner? The answer is ‘no’.” 

 

Economic data turning positive?

Source: Investec Asset Management

The Purchasing Managers Index is a monthly survey that provides leading indications of business conditions in the manufacturing sector. The reading in December was the highest in 2018 and a general indicator for growth in this industry.

This could signal an uptick in economic activity, however there are certain headwinds. Load shedding could be a big factor that could negatively impact productivity.

The technical recession experienced in the second quarter of 2018 was short lived with third quarter figures coming out better than expected at 2.2% growth from the previous quarter.

Despite inflation remaining in the range of 3 to 6%, the Reserve Bank hiked the repo rate by 0.25% in late November, sighting longer-term risks to inflation as the reason for this pre-emptive move.

Eskom and load shedding seem to be the biggest risk facing a continued local turnaround in 2019. In late 2018 a coal supply constraint caused most of the bouts of load shedding. Public Enterprise minister, Pravin Gordhan wants to avoid Stage 2 load shedding in the coming months.

Locally, we also have national elections to be contested in May. The populist rhetoric will continue up to the elections and should be largely ignored. A strong result for the ANC will strengthen the president’s hand in the necessary steps to create more policy certainty.

With corporate South Africa’s strong cash position, a good outcome could lead to an uptick in sentiment and subsequent investment into our economy and financial markets.

 

Local equities providing real opportunities

Source: Coronation

Local markets are looking very cheap now. This comes after five years of poor returns. Some of the top shares on the JSE, such as British American Tobacco, Naspers and Aspen are trading at half of their Price/Earnings multiples of three years ago – in layman’s terms “a half-price sale”.

The slide above is an indication of asset managers in South Africa increasing their exposure to local equities. The snapshot is a view of Coronation’s Balanced Plus Fund’s significant increased allocation to local equities and suggests local stocks provide excellent value at current levels.

 

Asset Class Currency 1 Month 3 Month 2018 YTD 2017
Local Equity ZAR 4.3% -4.9% -8.5% 21.0%
Local Bonds ZAR 0.6% 2.8% 7.7% 10.2%
Local Property ZAR -1.1% -4.0% -25.3% 17.2%
Local Cash ZAR 0.6% 1.8% 7.3% 7.5%
Resources ZAR 12.3% -4.5% 15.5% 17.9%
Industrials ZAR 2.4% -6.5% -17.5% 22.5%
Financials ZAR 0.6% -2.1% -8.8% 20.6%
R/US Dollar -3.7% -1.7% -16.2% 9.5%
R/Pound -3.6% 0.7% -9.4% 0.9%
Global Equities USD -7.0% -12.8% -9.4% 24.0%
Emerging Market Equities USD -2.7% -7.5% -14.6% 37.3%
Local Equity USD 0.5% -6.4% -21.3% 33.6%

 

Bonds and cash were the only two asset classes that provided positive returns, both yielding above 7%. The property sector was hardest hit with a decline of 25%. Resources stood out as the only sector with positive returns of 15.5% for 2018. The Rand weakened 16% to the dollar as we entered 2018 with optimistic, perhaps unrealistic, expectations of the new ANC president. The rising interest rates in the US also led to a strengthening dollar.

These are trying times for any investor. There is a temptation to jump ship to safer assets with so much uncertainty and bad news. We must reiterate that a change in strategy at such a low point could be catastrophic. Despite all the bad news, markets seem very cheap and could recover extremely fast when sentiment changes. If you were not invested for 5% of the best months since 1960 you would have a zero return from equities over the entire period. The year ahead could include one of those months. Missing out could lead to permanent value destruction in the long-term.

In uncertain times a long-term strategy is the best suitable option. A diversified approach towards investing will hedge against any one specific event. Speculating on which industry, asset class or country would come out tops is a difficult long-term strategy to maintain. As William Feather said: “One of the funniest things about the stock market is that every time one person buys, another sells, and both think they are astute.”

 

 

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

The Best Gifts to Yourself

-By Sunél Veldtman

 

This year our family embarked on an adventure, although it wasn’t one that we had planned.

When you wake up every morning too exhausted to face the day, this “adventure” is knocking on your door. When you are told repeatedly by specialists to reduce your stress levels, you know you have no choice but to go on this journey. Something had to change, and we are very much still changing the way we live. I guess you could call it a journey to conscious living.

The funny thing is, I’ve always thought that I lived consciously. After all, I’ve read countless books on time management, healthy relationships, parenting and health. I’ve never thought of myself as stressed. I exercise, watch my diet and work on my relationships. Clearly, my body experienced stress, signaled by my subconscious.

What has this got to do with financial advice, you may ask. How we live has a direct impact on our money. Investing in your wellness is a long-term decision with potential for a high return. Lower healthcare costs. Higher earnings potential. Higher productivity. Greater enjoyment of your money. The opposite is true, sometimes disastrous, when you’re faced with burnout or a terminal illness, the direct result of stress. It’s the best financial advice I can give to my clients. Live well.

What I have learnt on my journey can be summarised in four words, or gifts. My hope for you is that you give yourself and your family these gifts in the year ahead.

 

Slow

We create stress by our frenetic pace. Most of the craziness is self-inflicted but driven by our culture. Where I live in Johannesburg, everyone lives and works at a hectic pace. Instead of “Howzit?”, we ask, “Are you busy?” We consider it a sign of success.

I’ve come to realise that it’s the opposite. It’s a sign of an unconscious decision to be swept up in the torrent of the ruling culture.

It is possible to stay in this city and your job but change your pace. It involves being committed to your values and priorities and saying “No” to most other things. It asks of you to become aware of your pace and the impact it’s having on your well-being. When was the last time you made time for thinking about your work? When was the last time you did something unhurried like cooking a meal without doing something else at the same time? When was the last time you drove somewhere without fitting in a phone call? When was the last time you noticed the birds in our city?

It all starts with our thoughts. We obsess about what we should have done, what we shouldn’t have done and what we have yet to do. Our lives reflect our thoughts. Meditation has helped me to slow down my thoughts. Frenzied thoughts produce anxiety. Since calming my thoughts, I am able to benefit from a slower life.

Give yourself the gift of slowing down. Start with your thoughts.

 

Sleep

“For years, studies upon studies have shown how bad sleep weakens the immune system, impairs learning and memory, contributes to depression and other mood and mental disorders, as well as obesity, diabetes, cancer and an early death.” This is according to an article published by the New York Times entitled Sleep is the New Status Symbol.

We’ve lost our connection with one of the most natural things: sleep! We need to reconnect urgently to this source of wellness, creativity and success. Our society praises people who survive on little sleep. We should change that. We should be bragging about how much we sleep.

This year I learnt the value of sleep, after suffering for the first time in my life from insomnia. I am now religious about sleep. I’ve started a sleep routine, a ritual for winding down: switch off from screens, relax in an Epsom salt bath, use essential oils, and an easy read to send me off to dreamland.

I’m waking up before my alarm clock. It’s improving my energy levels, productivity and quality of life.

May sleep be with you!

 

Sabbath

Most ancient cultures or religions had a form of the Sabbath, a day for rest. In our modern Western culture, we destroyed this tradition with a seven-day trading week. We have lost something in the process.

If we don’t stop, at least one day a week, and break our routines, we never find rest. Rest is essential to our wellbeing but also vital for productivity. If you think that working or keeping busy for seven days a week makes you productive, think again.

In his book Deep Work: Rules for Focused Success in a Distracted World, Cal Newport stresses the importance of rest for productivity and creativity and specifically doing the type of work that will be essential to success in the future.

You can read a summary of the book here.I highly recommend this book. Even for parents, this book will highlight the importance of play, sleep and nature and the danger of screens.

Our family has slowly claimed back our Sundays to be a rest day – a day of pottering, simple lunches and sitting around a fire. It takes conscious decisions to stay away from shopping or entertaining. For me, it’s a day of spiritual reflection, journaling and connecting with myself.

I hope that you will create a routine of rest every week.

 

Support

As I get older, I value the support of my friends and family more than ever. A phone call at exactly the right time, a cup of tea shared, or a hug from a friend can save the day.

Research lists loneliness as the top health risk  . Loneliness is a phenomenon of modern society. Social media, work pressures, security concerns and the loss of community have all contributed to increasing loneliness.

It takes courage and determination in our isolated society to seek friendships. We need to consciously build on existing friendships and cultivate new ones. It should be a top priority in our diaries. If our jobs or lives leave us permanently too exhausted to see friends, we need to wake up to the risks of such a life.

We should also ask for support. We should tell those closest to us what we need to feel supported. It’s not a sign of weakness to state your needs. Sometimes this means, being honest with others about the impact of their behaviour and choices on you. And sometimes simply saying ‘No’!

Gift yourself the gift of healthy friendship in the year ahead.

May you be blessed with Slow, Sleep, Sabbath and Support – these are worth giving to yourself and your family and worth striving for in the new year.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

The Finance Series for Millennials: #5 How to Manage your Finances over the Holiday Period

 

-Thiart van der Merwe

 

In this series of articles, we’re giving you the advice you need on how to set yourself up for financial freedom. Our aim is to give you practical steps each month – action points that you can take immediately. Follow these steps over the course of the series and you will be set up for financial wellness.

Our fifth article focuses on managing your finances over the holiday period.

When it comes to holidays and spending most of us are in the same boat. We have that feeling that for the next two weeks we will close our eyes, enjoy ourselves regardless of the cost and sort it out in the New Year. We don’t want to think about budgeting, reigning in our spending or any of that whilst on holiday…sound familiar?

The big problem is the dreaded overspend we are faced with in January and how to get out of it. Some of us might take months to pay off our holiday spend and live in debt for longer than needed.

Instead of explaining the financial impact of overindulgence, I am going to suggest some tips to try out over the next month. It might not be the magical wand that keeps you debt free over the holidays, but could save you a lot of money.

Set up a daily budget

Give yourself a daily allowance for discretionary spend over the holidays and stick to it. At the end of each day, tally up what you’ve spent to check if you have kept within your budget. If you have overspent on one day you will need to exercise more self-control the following day. Budgeting takes self-discipline but it’s a great tool if you can manage it. Work out your daily budget before you go on holiday.

Avoid the “I will buy it there” mentality

It may be easier to shop for toiletries and groceries once you’ve arrived at your holiday destination rather than packing everything you will need. I totally understand that it’s convenient, but it’s also a waste of money. Buying a new bottle of shampoo, shower gel, spices for the braai etc. adds up. Most of us have these things in our pantry or bathrooms. Just pack what you will need and save yourself the unnecessary spend.

Use your credit card last

No one wants their holiday spending to ambush their monthly budget. To make sure this doesn’t happen, we put all our holiday expenses on our credit cards and feel great because all looks well according to our debit card balances. But this is misleading – and we forget to keep track of our credit card spend until we receive our statement at month end.

Try to pay all your holiday expenses as and when you incur them. At least limit the credit card spend by paying mostly with your debit card. Again, this will take self-discipline but could save your bacon in January.

Avoid the triple threat of eat outs

Close to my heart but oh so expensive – going to a restaurant for all three meals of the day. For me, and I am sure for many of us, food will be the item on your statement that shocks you the most in your post-holiday recon. Even though we love the convenience of eating out, we don’t need to do it three times a day. If you are one for dining out, limit yourself to eating out once a day. Eating out may add value to your holiday but be selective about where you eat and spread out your treats over your holiday. PS: Try local hang outs, they’re generally cheaper as well.

Christmas presents

At big family gatherings everyone needs a present. The bigger the family, the bigger the debt. There are many crafty ways to make gift-giving affordable. Pick a name out of a hat and everyone buys one present or be creative and give handmade presents. Celebrate the time together with family and enjoy the moments rather than filling your stockings with unwanted goods.

Evade the Sale

The big red banner that will pop up in most shops this festive season: SALE. It will be there before Christmas to lure you in and stay there afterwards to show you what you have missed. Ask yourself one question, “Do I really need to buy this item”? If you don’t need it there is no reason to buy it, even if it is marked down 50%.

None of us want to go on holiday and constantly think about money. We don’t want to stay home and miss out on fun activities either. Paying off your December bills in June is just as bad. By putting in place a holiday spending strategy, you will be able to enjoy your time off and avoid debt.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

How Much are You Willing to Pay for a Bottle of Wine?

-By Elke Zeki

 

For most of us there is something romantic about being a wine farmer. I find it amusing how the wine farmer always seems to get the most letters on the popular local dating show “Boer soek ‘n vrou”.  Yet earning a living as a wine farmer in South Africa has become hard. So much so that many industry experts believe it’s unsustainable. At the current rate many wine farms will not survive.

A recent video by DGB called “The Inconvenient Truth – South African wine industry”  revealed a few alarming statistics. It seems the current average return on investment for a wine producer is 1%.  It doesn’t take an investment guru to know that this is not enough for any business to survive. Many producers are replacing their vineyards with better-yielding fruits.

An alarming 35% of wine producers in South Africa are making a loss. They’re simply not getting enough for their grapes.  Johann Krige from Kanonkop says that on average wine producers get $1 200 a ton for their grapes compared to $10 000 a ton in the US.

 

 

For producers to charge more for grapes, the price per bottle needs to increase.  The report reckons a structural increase of at least 30% would be necessary.

The South African wine industry is a global leader in terms of traceability, compliance and sustainability.  Yet the world pays much less for a similarly rated South African wine compared to other regions.

 

Why is it that the world and South Africans are not willing to pay more for their favourite bottle of Cab Sav?

It all comes down to perception.  Even though our wine industry is old, the world has only been exposed to our wines since the early 90’s, when we became a democracy.  Since then, the world was flooded with cheap and cheerful South African wine. This created a perception that we are now struggling the shake off.

Yet we’re making some of the best wine in the world.  These winemakers can easily compete with the world’s best.  Recently, the acclaimed global wine critic Tim Atkin rated the 2015 Kanonkop Paul Sauer a perfect score of 100 points.  Kanonkop has also been the only winemaker to be crowned the international winemaker of the year three times. Yet we pay considerably less for a bottle of Kanonkop Paul Sauer than we do for similarly rated international wines.

Surely this is not sustainable. It’s a complicated issue with many moving parts.  We need to produce more and better-quality grapes. There needs to be support from government and a focus on tourism.  But most importantly, we need to start paying prices that South African winemakers deserve. So the next time you select your favourite bottle of wine, think about what you would be willing to pay for that bottle.
<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

Want to Make Drastic Changes to Your Financial Planning Strategy? Read this First.

-By Sunél Veldtman

 

In my three decades of working in investments, I have rarely seen investor confidence as low and pessimism reign as we are seeing now. The past three years have been grueling for South Africans. Not only has our own economy hovered in no-growth terrain for years, but global developments seem disturbing. I suspect that many of our readers are questioning their financial planning strategies. It feels like time for action. We have identified three critical questions for making drastic changes to your strategy and even your advisor.

 

Do you have a strategy or a plan?

Any investment should be part of a holistic financial plan for your future. It should never be considered on its own but as a tool to a goal in the plan. We know that financial plans rarely turn out exactly as we set it out, but a plan is better than no plan at all. People with no plans are rarely better off than people with plans. Our experience at Foundation Family Wealth shows us how planning can bring both relief and positivity to our clients.

Your cash flow should inform your financial plan. We believe strongly in this principle at Foundation. Your current and future income and obligations should form the basis of your investment decisions because it is the basis of your risk profile. For example, if you plan to build a house next year, you should have money in the bank to cover that cost.  If you plan to send your kids to overseas universities in five years’ time, then you should have overseas investments that can grow in line with that need. If your financial plan is not based on your current and future cash flows, you should review it.

Any well thought out investment portfolio will often include a poorly performing investment. You should not expect to have well performing assets in your portfolio. You should be concerned about such a portfolio.

A plan and a well-designed investment strategy should not be based on one view of the future. We love to think that we can predict the future. We also prefer to see the future through our own filtered lens of our past. It is how our brains work.

We also feel more comfortable if our friends confirm our views. It is precisely why money moves in crowds, at exactly the wrong time to the wrong assets. When the most recent returns on the local share market are at their lowest, money moves out of shares into safer assets, which often and sadly leads to wealth destruction. To benefit from the long-term gains available in risky assets like shares and property, you should avoid this behaviour at all cost. When everyone around you starts moving money around, review your plan. Your plan should have foreseen these circumstances.

Financial plans should include the very high probability of low short-term returns! You cannot expect any financial advisor to have the impossible ability to foresee exactly when low returns will occur, – but worthy financial advisors should have forewarned you that a well-diversified portfolio is likely to deliver low returns at some point.

Any financial plan that promises you high and steady returns is a fraud: that combination of returns does not exist. Low and steady, yes. High over the long-term, but up-and-down in the short term, yes. If your financial plan is based on ‘guaranteed’ high returns or even steady returns, you should review it.

 

Am I making this decision due to the most recent experience?

Over the past three years, you were fortunate if you received over 6% per year growth on your long-term investments. The local equity market barely beat inflation over this time. It is also likely that one element in your investment portfolio performed poorly, even lost you money, such as property which declined over the past three years. On the positive side, global investments performed well in Rand and USD. Headlines in South Africa hardly foster confidence in further investments in the country. You may be thinking of making changes such as moving all your retirement money offshore or to the money market.

It is very difficult to see right now that there is the possibility that local equity markets may recover and that we may look back in three years’ time to a reverse situation. It is very difficult to imagine a different outcome to our most recent past. This is human.

We think that the recent past will repeat itself. It seldom does. Statistically, the winners over the most recent past are more likely to be the losers in the near future. You

We also mistake certain ways of thinking as logical or given. For example, most people believe that there is a strong correlation between economic growth and investment returns. In fact, a recession does not necessarily mean low future returns – the inverse is more likely – a recession is more likely to be linked to high future returns.

If you are considering changes due to your most recent experience, think again. It may be exactly the wrong decision.

 

Am I making this change because I want to DO something?

When your car breaks down, you take it to a mechanic to get it fixed. They diagnose the problem and find a remedy.

It may be obvious when your car is broken. How will you know when your financial plan is broken? Perhaps you are experiencing normal volatility of any good financial plan. Upheaval is part of any plan.

However, the media ‘experts’ make out as though volatility needs to be fixed and can somehow be avoided.

The power of compounding over long time periods is necessary for investment success, which means that your investments should be left untouched. Warren Buffet’s key to success is not his investment selection skill, but his long-term view, which allowed his investments to benefit from compounding.

In addition, investment growth does not come in a straight line. Poorly performing investments can catch up astonishingly quickly. Just this year we experienced that a fund with a poor three-year return, gave 15% in six months, catching up quickly to the long-term expected growth. Just because an investment gave you slow growth over the most recent past, does not preclude fast growth in the future.

We like to act, especially when we’re experiencing pain. The pain of poor investment results is no different to physical pain. We just want to fix it. It also leads to us looking for advisors who will take decisive action based on strong directional views. It not only sounds more intelligent and convincing – but also makes us feel safe.

At Foundation we believe that no one can predict the future. We must plan for uncertainty. We take different potential scenarios into account and think about the impact of those scenarios on our clients’ holistic financial plans, considering all known risks to their plans. To some this may seem like indecision but to us and our long-standing clients, who have reaped the benefits, it’s the only way to build robust financial plans and secure our clients wealth.

To find out the difference between a financial planner and a wealth manager, click here.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

Foreign Investment Allowances

Every South African resident over the age of 18 has a discretionary investment allowance of R1m per calendar year. In addition, you are allowed to take a further R10m offshore for foreign investment purposes – but you will need to apply and obtain a Tax Clearance Certificate.

As these foreign investment allowances are set per calendar year, you need to keep records of any amounts that you take offshore every year.  Unused portions of these allowances are not carried over to the next calendar year, and investors who are keen to make foreign investments may forfeit an opportunity to get more funds abroad if they don’t utilise their full allowance annually.

With the end of the year in sight, it may be a good time to get the administration in order for your tax clearance certificate – it remains valid for 12 months.  If you are considering taking monies offshore, we can help with the application process and the underlying investments. Foundation Family Wealth is highly experienced in taking funds abroad and we will ensure that process is easy and without hassle.

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

Should I Accrue Wealth with My Spouse?

-By Michelle le Roux

 

A few months ago we took a bird’s-eye view of the different marital regimes in South Africa (read the article here)This month we’re focusing on marriages outside of community of property, with the inclusion of the accrual system. This seems simple on paper, but can get technical and confusing.

 

Out of Community: The Two Basics

Being married outside of community of property is commonly referred to as being married with an “ANC” (ante-nuptial contract). While the provisions of the ANC can be as detailed as you want it to be, it usually means that spouses keep the assets that they acquired before the marriage separate. In addition, spouses do not have a claim on those assets at dissolution of the marriage through divorce or death.

From here on (after the wedding, that is) there are two options:

  • We share a home, but not a wallet. We continue to accumulate our own assets and keep our financial affairs separate. Our assets and liabilities are our own, equally so for profits and losses. At death the two estates remain separate.
  • We build wealth together. We make accrual applicable – we each keep assets accumulated individually before the wedding, but share in each other’s assets accumulated during our marriage.

Anyone who entered into an ANC after 1984 is automatically married with the accrual system, unless accrual is specifically excluded.

 

Commencement values

When a couple includes the accrual system, they have to take note of what their estates are worth at the start of the marriage. This is called the commencement value. Both parties have to agree to these values at the start otherwise it can become a point of contention at a later stage (if either party disputes the commencement value of the other). Take divorce as an example – where one or both parties make a case that the spouse’s commencement value was overstated or completely incorrect. The larger the commencement value, the smaller the accrual, and the possible claim.

What is excluded from the commencement value?

Not all the receipts of funds and assets during the marriage will necessarily be included in the accrual calculation. This list includes:

  • An inheritance received during the marriage from any third party;
  • Donations between spouses;
  • Payments for damages suffered by a spouse (e.g. lawsuits for slander);
  • Any asset specifically excluded from the accrual system under the ANC;
  • Future assets that you do not own yet, but this will have to be described in great detail.

 

Calculating the Accrual Claim

When the marriage is dissolved by death or divorce, the net value of each estate is determined. The larger estate then has to pay half the difference to the smaller estate. The simple format for the calculation is:

 

The commencement value in the ANC is first adjusted for inflation to make provision for any change in the value of money since inception of the marriage.

 

Accruals and Estate Planning

Regardless of the possible impact at divorce, the accrual system is also significant in estate planning. An accrual claim is always calculated and implemented before the bequests in a will are carried out.

If one spouse dies (or both simultaneously), the accrual will be calculated. This could play out in one of the following ways:

  • if the surviving spouse had the smaller gain, he/she will have a claim against the deceased’s estate, or,
  • if the surviving spouse had the bigger gain, he/she will be forced to make a payment into the deceased’s estate.

In the first case, the surviving spouse’s accrual claim will rank behind other creditors, but ahead of heirs. This could mean that heirs are unable to inherit if the estate is illiquid or insolvent.

It’s important that the ANC and the will speak to one another so that there are no unintended complications. If there are not enough liquid assets in an estate, it’s worth investigating the possibility of a life policy that will provide extra liquidity to meet an accrual claim at death.

 

To Accrue or Not…

There is no simple answer to this! It’s not a question of “what’s right?”, or “what’s better?”

Consider this:

 

Whether or not you choose to include the accrual system will depend on your relationship and your specific needs. This is something that you need to decide as equal partners.

 

Important Boxes to Tick Off

  • Do you have sufficient knowledge of the different marital regimes before you sign on the dotted line? Are you certain of the implications?
  • If you opt for the inclusion of accrual:
    • Agree and document the commencement values of your estates before the marriage;
    • Set up a system where you can keep accurate track of accruals, as it occurs. Keep supporting documents.
  • If you are already married with the inclusion of accrual, have you recently revised your estate planning to ensure that there is enough liquidity in your estate to meet the obligation of an accrual claim?

Foundation is able to assist with estate planning and accrual calculations. Contact us if you would like more information. Know the numbers and the possible shortfall while you can still plan and make provision for it.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

 

 

Topline Quarterly Review: Q3 of 2018

The third quarter of 2018 was a tough one for emerging market economies. Turkey led the way with the Lira weakening significantly. Argentina applied for a $50 billion bailout from the International Monetary Fund, and the tit-for-tat trade battle between the US and China didn’t help the cause. South Africa fell into a technical recession as economic growth contracted for the whole of 2018.

 

Economics & Politics: A match made in heaven?

Source: SA economic review presented by Kevin Lings (Stanlib)

 

In September, President Ramaphosa announced a stimulus package to ignite growth and create jobs. Much of this had to do with restructuring government spending – however there was the announcement of an Infrastructure Fund that speaks to the two graphs above.

Over the last eight years infrastructure and fixed investment from Stated Owned Entities was non-existent. On the other side you have corporate South Africa hoarding billions of Rand’s in cash.

President Ramaphosa invited the private sector to partner with government to invest in infrastructure expansion and maintenance, which could lead to job creation and potentially be a catalyst for economic expansion. The newly appointed Infrastructure Execution Team will need to ensure projects are finished timeously as this has been a problem with similar partnerships in the past.

Smaller changes such as changing visa requirements for minors and certain countries could also lead to a boost in the tourism sector. The inflow of investments could lead to job creation on various fronts, which we drastically need.

 

Naspers falls from grace

Source: PortfolioMetrix

 

Naspers is the biggest company on the JSE making up more than 18% of the All Share index. Naspers’s major holding is a Chinese tech stock – the biggest social media and games publisher in China called Tencent. Tencent was rocked by a sell-off in tech stocks globally, but more importantly, the Chinese government has not issued a gaming license since March of this year. This creates uncertainty on the future potential for growth and the share price has tumbled since.

Given the size of Naspers in the All Share Index – this has serious ramifications for our local markets (as can be seen by the swings in the grey line above). At the time of writing this article, Naspers is down 11% for the year up to the end of September and down 21% for the year. Active fund managers are unlikely or even limited by regulation to assign such a big weighting to one stock – but it’s still worth noting that no company or sector is too big for a correction.

 

Technical Recession: What Now?

Source: StatsSA

 

In September, South African Gross Domestic Product (GDP) growth was in the red for a second consecutive quarter, which means that we are now in a technical recession for the first time since the financial crisis in 2009. With unemployment over 25% since 2016 and business confidence at very low levels, this comes as no surprise.

Agriculture was the main detractor down 29% from the previous quarter. Mining made a healthy contribution towards growth as commodity prices recovered. But what do we do to get out of this? The investor conference at the end of the month could provide some answers. The conference is part of President Ramaphosa’s drive to get $100 billion in new investment into our country. Some analysts predict that we might exit the recession as soon as the third quarter, which would mean that we see growth above 0%. The growth targets have been revised from 1.5% to 0.6% for the year so analysts are not expecting a massive turnaround.

 

Turkey: Is South Africa next?

Source: SA economic review presented by Kevin Lings (Stanlib)

 

Contrary to South Africa, Turkey reported second quarter GDP growth north of 7% in 2018. This was, however fueled by foreign-currency debt racked up by the corporate sector. As the economy was overheating, inflation jumped above the central bank’s target all the way to 16%. President Erdogan did not allow the central bank to raise interest rates to combat inflation. This led to the Lira weakening by 40% which means the foreign debt got a lot more expensive in a matter of weeks.

The single biggest difference between South Africa and Turkey is our corporate debt levels compared to GDP. As per the graph, SA Corporate Debt to GDP sits just under 40% where Turkey’s is well over 50%. Secondly, we still have an independent Reserve Bank that has managed to keep inflation well within the inflation band of 3-6% and has the flexibility to hike interest rates when needed.

Even though Turkeys situation has negatively affected the Rand and all emerging market economies, it is highly unlikely that we will see a similar situation locally. The situation in Turkey brings with it uncertainty which in turn contributed to the selloff that we have seen in recent months.

 

In Summary

Source: PortfolioMetrix

 

Locally, resources led the way over the quarter, continuing its stellar performance up 21% in 2018. However, equities in total declined by nearly 4% over the quarter. Cash was the best performing asset class (+ 1.7%) for the quarter. The Rand lost ground to the dollar due to the emerging market selloff. The US also raised their interest rates for the third time this year and suggested a possible four hikes to come, which could lead to further dollar strength.

Global equities had a good quarter, ending up 4.3%. America led the way with the S&P 500 up more than 7% this quarter bringing the total return to 10% in 2018. Japan’s Nikkei index reached a 27-year high on renewed optimism for earnings growth and a weaker Yen.

With global markets running hot, emerging markets out of favour and South Africa still sorting out its own house – it may seem hopeless. We have rarely seen a more pessimistic environment. The reality is that we’re all hoping for a quick fix to an eight-year mistake. This process of dismantling the Zuma-era-damage will take longer than anticipated, but if we look closer we are certainly on a better path compared to a year ago. Furthermore, Rand weakness is not necessarily bad for investor returns – a large portion of the local market is exposed to global currencies. Goldman Sachs called South Africa “the big emerging market story of 2018”.  They may have been out by a year.

There is not much correlation between current economic conditions and future investment returns. At times of pessimism, remaining calm and invested in growth assets, is key. In the wake of this, we leave you with a final quote by Benjamin Graham, also known as the father of value investing: “The intelligent investor is a realist who sells to optimists and buys from pessimists.”

 

<Foundation Family Wealth is an Authorised Financial Services Provider>