Certainty vs. scenarios: All the ways in which we get the future wrong

-By Sunél Veldtman

 

Imagine the scene: The men are standing around the braai talking about the future with Donald Trump as the most powerful president in the world. One by one, they voice their definitive opinion on why he will be “good for the economy” or “bad for world peace”. There are only strong opinions around this braai. Titbits of information from people in the know, CNN and twitter feeds are shared. There is pressure to sound sure of yourself and interesting.

Let’s face it: we do not like uncertainty.

We feel better when experts confidently explain our uncertainty away. It does not matter that the experts get it wrong more than they get it right. It also does not matter that we know the media sell sensation. We still like to believe opinions communicated with authority. It feels like certainty.

This is one of the reasons why the forecasting industry missed Brexit and Trump and financial markets reacted with shock. It could have been excusable after Brexit – but clearly a Trump win was more likely after Brexit and there should have been a higher probability put on that likelihood.

In the weeks before the US election, most polls forecasted a Hillary win. Even respectable forecasters like Nate Silver had a Hillary win as the most probable option. However, a Trump win was not that unlikely, given the large group of undecideds.

Imagine the scene around the braai again. Imagine someone points out that there are a few potential scenarios and starts exploring the permutations. No one likes a commentator who ‘uhms’ and ‘ahs” about different potential outcomes and likelihoods. Despite the fact that everyone knows that he is right, it just doesn’t feel good.

And it’s the same with investments.

Investments are all about probabilities. It is a trade-off between short-term certainty and long-term gain. Investments in equities for example are highly uncertain in the near future but have a higher degree of certainty on beating inflation in the long-term.

It is our role as advisors to talk clients through the degree in which they want to participate in these trade-offs. We can never promise certainty. We undermine our credibility by doing so.

Furthermore, our strategies cannot be surprised by a highly-likely outcome, even if we didn’t believe it to be the most probable. A strong possibility is not a certainty.

I often see financial advice geared to one ‘most probable’ outcome. Often that outcome is an extrapolation of the recent past. Think back to the many pieces of financial advice in 2015 to invest overseas when the rand was reaching new lows daily. That advice was based on a likely outcome, which in turn was largely influenced by events in the most recent past.

In fact, when the rand was trading around R17/USD, it was increasingly statistically less likely for that trend to continue. However, it was very difficult to contemplate even a small likelihood of a significantly stronger currency at that time.

A financial plan should be based on the likelihood of at least a few different scenarios. We have to think of various potential outcomes, attach probabilities and plan for all of them. The painful truth is that as advisers, we cannot promise that all will be rosy in the future. We have to face, with our clients, the painful potential outcomes of some scenarios and discuss the implications upfront.

In the process, we may not sound confident but in the end, we will build credibility.

 

Seven reasons why SA is in a better state than ever

-By Thiart van der Merwe

 

As South Africans we tend to look at our glass half empty. We over-exaggerate the bad stuff and gloss over the good.

In light of this, we decided to look at seven reasons why we are in a better place as a country than we’ve ever been. So pour yourself a glass half full (at least) of champers and toast with us. Make this your dinner table talk this December and watch everybody perk up.

 

Raindrops are falling on our heads

After one of the worst droughts in our country’s history, we really can start singing in the rain again. Although dams levels are low, we have already seen the positive effect of the rains on our farming industry. Estimates suggest we have already planted 35% more maize this year in comparison to 2015.

The graph below shows the effect on the maize price which is likely to drive food inflation to around 2% in 2017.

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Source: Senwes

 

The poverty level has decreased considerably.

At a recent leadership convention Adrian Gore highlighted some important strides made in the last 20 years. The next graph illustrates the improvements made in living standards. Band 1-3 signals people living in terrible conditions and bands 8-10 the upper echelons of our society. We need to take note of this as it’s remarkable that as a collective, South Africa is much better off today than 20 years ago.

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Source: South African Institute of Race Relations, report titled Life in South Africa: Reasons for Hope

 

Supporting this statement is the black middle class that currently stands at almost 6 million people. This is three times more compared to 12 years ago. The significance of this is an increase in the consumer base that can have a positive impact on various sectors of our economy.

 

Our constitution works

2016 was a big year politically for South Africa. The independence of our courts stood out. Zuma was forced, by law, to pay-back-the-money. This emphasized that no one is above the law.

We saw signs of a maturing democracy at the polls in August. There are now three parties in the race and this bodes well for South Africa going forward.

The most recent events shows that within the National Executive Committee there are members that want Zuma out. The NEC has historically backed Zuma and this highlights his waning power and the lack of tolerance for poor leadership.

People from all corners of the country are coming together to #SaveSouthAfrica. The unity shown might be just what we need to come together and make South Africa great.

 

Treasury our Treasury

Finance Minister, Pravin Gordhan, has shown resilience throughout 2016 – fighting off attacks from all angles. The recent delay in the nuclear deal added to Fitch and Moody’s decision not to downgrade South Africa. S&P decided to keep our foreign rating unchanged which means we survived a downgrade for now. This is a significant effort from Finance Minister Gordhan and the Treasury, and we can only applaud their efforts in what was a tough political environment. With a strong budget in 2017 and an uptick in commodity prices – we might stave off a downgrade altogether.

 

South African development is on the rise

In 2016, South Africa’s ranking in the World Economic Global Competitive Report improved by two places to 47th and we improved in 10 out of 12 categories. It is important to note that we reversed a downward trend in 2015 and we’re on the rise again.

Improvements came in the form of enhanced local and foreign competitiveness and education.  The results show that we are still well ahead of most emerging markets.

South Africa retained the first ranking out of 138 countries for auditing standards, protection of minority interests and the ability to finance through equity markets. The country is second or third for soundness of banks and financial services, efficacy of boards and regulation of the stock exchange.

Read the full report here.

 

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Source: World Economic Forum’s report on global competitiveness for 2016/ 2017

 

We’re on top of the world in sport

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Let’s just forget about rugby for a second. The Proteas created history with a pink ball and thrashed the Aussies in three consecutive test series down under.

Wayde van Niekerk led an inspired SA Olympic team claiming 10 medals in Rio. His 400m will go down in the history books as one of the greatest accomplishments by a South African athlete. If that doesn’t tug at your heartstrings then nothing will.

There’s no doubt that we live in uncertain times. The uncertainty makes us anxious and certain events even stir anger. Sometimes it is necessary to sit back, take a breath and look at how far we’ve come. We should not let bad press overshadow the good stories we have to tell. We are Proudly South African.

 

South Africa is the world’s favourite place

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Move over London, New York or Paris. The new culinary capital city of the world is in South Africa and it’s Cape Town. It is also the #1 creative city in the world and the best city in the world as a travel destination.

It is not only Cape Town that is attracting attention. Johannesburg has been named “the new cool capital of the Southern Hemisphere”.

Tourism has increased strongly as foreign visitors appreciate our people’s warmth and creativity and our country’s natural beauty.

We hope that you will enjoy some of the same over the festive season!

 

http://www.howitravel.co/most-creative-cities-2016/

http://www.capetown.travel/trade-media/tm-news/cape-town-accolades/cape-town-accolades-and-awards

http://www.gq-magazine.co.uk/article/best-things-to-do-in-johannesburg-south-africa

 

 

 

Cheers 2016! Pair your wine with your year.

-By Elke Zeki

 

I gave myself a fun little exercise to do this morning.  In one minute I had to write down what came to mind first when reflecting on this year.

Here goes:

  • I became a mom
  • Erol is a dad
  • Trump what?!
  • The Saxonworld Shebeen and other Zupta shenanigans
  • It seems that more than ever before, market and investor behavior was driven by uncertainty and fear
  • I love Bali
  • Where are the mangos?

It’s become a custom for me to write an article on wines to try over December. This year I thought the list above could be my inspiration…

 

I’m someone’s Mom. Cheers. I’m raising my glass full of Silverthorn The Genie. 

Such a life changing and wonderful occasion calls for bubbly! My current favorite is definitely the salmon pink Silverthorn MCC with hints of rosewater and Turkish delight.

01

 

Erol is a DAD. Let’s pull out the Tokara Five-year Potstill Brandy.

He needs something stronger than the bubbles. Society often focusses on what poor mom has to endure with a newborn, and forgets how huge this is for the dad.  It’s been amazing seeing the transformation.  This beautiful brandy is best served neat with dark chocolate (when the baby is in bed)!

 

02

 

Trump what?????

This calls for lots of cheap wine.  You will wake up with a headache but it will be worth not remembering a thing!

 

03

 

Saxonworld Shebeen and the Gupta shenanigans

King Fisher Premium Lager. This Indian favorite will go down a treat at your next braai. Or you could pack a cooler box and head for the lawns near the old Zoo Lake Bowling Club. Don’t forget to invite Brian.

 

04

 

Markets and fear. Somebody get me a homemade green smoothie please?

It’s been a tough year and we all need to take care of ourselves.  A green smoothie is packed with energy boosting, disease-fighting goodness and the perfect way to start your day. Has also been known to help with the morning after the night before.

 

05

 

I love Bali. Please pour me another Caperatif/ or Inverroche gin?

We were privileged enough to travel to Thailand and Bali this year to celebrate good friends getting married and Erol’s 40th. It was an unforgettable trip and again made me realize how much I love scuba diving and rustic, tropical destinations. And there’s nothing better than a refreshing drink on a hot and humid day. My two favorites are Caperatif and Inverroche gin. Both are best served with a good quality tonic (http://www.barkerandquin.co.za/ ) and some lovely fruit like cucumber and lemon rind.

 

 

06 07

 

Where are the mangos? Chenin Blanc revival.

The drought this year has been the worst most of us have ever experienced.  Who can forget the heartbreaking photos of cattle and other livestock dying of hunger across Southern Africa?

I love mangos and it’s not until this week that they have made an appearance at the green grocer for the first time this season.  This drought has affected thousands and no one more so than the farmers.  Its forever altered my view on water and how we should use it sparingly.

The shortage of mangos made me think of the fresh-and- fruity iconic white wine – Chenin Blanc. Meant to be consumed young, it’s a refreshing and approachable style of wine. One of the county’s oldest and most widely planted grapes, it’s often used as the cornerstone or workhorse for brandy distillation and bulk blends.

Today however, Chenin Blanc is having a moment of reinvention and reintroduction into the world – proving that a noble variety can produce world-class wines.

Here are a few of my favorites to try:

  • Babelonstoren Chenin Blanc
  • Millineux Kloof Street Chenin Blanc
  • AA Badenhorst Secateurs Chenin Blanc
  • DeMorgenzon DMZ Chenin Blanc
  • Kleine Zalze Family Reserve Chenin Blanc

 

08 09 10 11 12

 

 

As I look at this, it’s clear that it’s been a whirlwind year, but I look at 2016 with fondness because it has given me so much to be thankful for.

Over the festive season, I hope you get some time to reflect on your year and what it’s meant to you.

Cheers, Elke.

 

Plan for these five things in 2017

-By Sunél Veldtman

 

Foundation Family Wealth is about “Wealth for life”. We help our clients to make their money last for their lives. We also want to help our clients use their wealth for their lives – to make their lives fulfilling. Wealth includes our time.

This article looks at the simple things we can do with our time and money to make us happier. Why happy? Well, we’ve lost the art of happiness. The research on happiness is unambiguous about the basics. They say: plan for these five things and you’ll be happier. Yet few people get these basics right.

 

Focus on your personal economy

With the world in turmoil, the most important knowledge is not the kind you get from CNN or The Economist. Knowing what’s happening in the world, might make you feel in control and/or make you an interesting dinner guest.

However, your financial future is helped very little by that information. In fact, it may cause fear and lead to actions that harm your portfolio.

You need to understand your personal economy. We can only control our own key personal metrics – our income and spending, how much we owe, and what we own. Although the state of financial markets will have an impact on these metrics, our own actions have a much bigger impact.

In the New Year, focus on what you can control. Ask yourself these questions:

  • Do I know my key personal economy metrics?
  • How can I reduce spending? Spend only on that which you need and experiences that you value.
  • How can I earn more now and in the future? Are you being paid what you’re worth? Do you need a new job or career? Invest in yourself.
  • How can I build wealth? One of the ways in which you build wealth is by increasing your contributions to your retirement savings and investment vehicles. Start taking actions to reduce your debt.

By being in control, you will have less stress. You will be happier.

 

Rest

It is interesting that all major religions celebrate a day of rest each week. Post-religious modern society has disregarded these traditions. We are poorer for it.

We need rest for our health. We need rest to restore our creativity. We need rest for peak performance. We need rest to connect to people.

Make a resolution to set a day apart each week for rest. This day should include sleeping, feasting and gentle restorative activities. Gardening. Play music. Baking. Make new traditions or revive old ones.

One of the ways our family is resting involves lighting a fire on a late Sunday afternoon for a small braai. Nothing fancy. Just sitting around reconnecting and celebrating our wonderful summer’s evenings.

Rest also includes sleep. We don’t know how to sleep anymore. Sleep is essential for our health. Sleep is essential for our work. Switch off the screens and sleep.

Watch this video where Arianna Huffington talks about the importance of getting more zzz.

 

Connect

The leading cause of health problems is not poor diet, lack of exercise or environmental issues. The leading cause of health problems is loneliness.

Research published in the journal Perspectives on Psychological Science shows that loneliness can increase the likelihood of death by 26%. This is not only because of the obvious risk for mental illness. Loneliness depletes our immune systems, increases our risk for dementia and heart problems and leads to a more sedentary lifestyle.

Technology and housing trends are increasing the risk of loneliness. More people are living alone and behind high walls than ever before, and technology like texting and social media has made it easier to avoid forming real relationships.

Make time to connect. Start a hiking club or a wine appreciation society. Make regular dates with friends. Rediscover Sunday lunches.

If your life is too busy or too tiring to connect, think again.

Maybe you need to watch this video by cultural analyst Sherry Turkle.

 

Start moving

Sitting is the new tobacco.

This year I joined a walking group. We don’t walk particularly fast or far, but it has been a lifesaver. Not only am I getting fit but I’m realising that those chats are feeding my soul.

As an introvert, I have always favoured exercising on my own. It was me time. I am now addicted to the therapy of walking with other women.

Whatever you fancy, just start. Alternatively, try something new.

The feel good hormones released in our bodies while we exercise are essential for wellbeing.

Keep moving during the day. Get up from your desk and walk around. Do stretch exercises. Just keep moving.

 

Give

My biggest new year’s resolution is to give back. I know that the research shows that giving (money and time) rather than receiving it – actually make us happier. Yet, other than in my immediate environment, I am not involved.

I plan to get involved somewhere. Somewhere where I am challenged. And where it will require sacrifice.

I hope you will join me in this challenge.

 

Words Worth Reading

If you have wondered, like me, why people chose Trump when it is so clearly not where the next generation will take the world, this is a must-read.  Otto Scharmer – Co-founder u.lab, Senior Lecturer, MIT; Thousand Talents Program Professor, Tsinghua University writes on the making of Trump – the blind spot that created him.

It’s a long, analytical and extremely thought-provoking read.

Read more here

 

Robert Schermers on Organizational Change writes a great read on 6 Principles to Create Human-Centred Business.

“Teams and organizations more often apply business sense to humans, rather than applying human sense to business. And yet, human sense and empathy are essential drivers for both business results and positive societal impact by brands and companies…”

Read more here

 

Seth Godin is the author of 18 books that have been bestsellers around the world and have been translated into more than 35 languages. He writes about the post-industrial revolution, the way ideas spread, marketing, quitting, leadership and most of all, changing everything. In this short read he’ll give you a long list of things to think about.

Read more here

What to do with the fear of the future?

-By Sunél Veldtman

 

I have never really been gripped by fear.  Until recently. Donald Trump and Brexit; the potential of Marie le Pen; and the rise of the right and the step backwards of Putin has gripped my heart with fear. Locally, there is much to be fearful about. President Zuma is going nowhere. Instead, he is massing an army of supporters to divert attention from his allowance of ‘state capture’ by referring to the influence of the West and the hold of white capitalists on society. It sounds like Robert Mugabe. Even more frightening is the prospect of Julius Malema being our own version of Trump.

What is scary is the ability of politicians to build campaigns on lies. ‘Post-truth’ is the word of the year according to the Oxford Dictionary. Emerging research shows that there are whole groups of social media accounts, real and fake, manipulating public opinion to believe lies. Telling people that they are worse off than they actually are, and that there are easy policy changes that will improve their welfare significantly, is the order of the day.

Of course, there are reasons why people feel more discontent. One of them is inequality – the wealthy have benefited more than the masses from capitalism. People look around and see how the wealthy are living and they are angry.

There is clearly a wave of discontent gripping the world. It has the potential to change the world as we know it. It is an era of rage. And there are unstable and dishonest politicans at the helm of major nations. We have reason to fear.

But how do we respond?

I met a man last week, Philippe, who told me that, he decided very early on in life, that he was going to be financially free. He never wanted to be stuck in a situation because of a lack of money. He saved more than half his salary and had three years’ of income in his bank account by the age of 30.

I asked him what made him do it. His answer surprised us both. “I had no fear.”

In other words, he believed in his own ability to craft his future.

At a time like this, the financial industry can tell you that you will be ok based on past experience and complicated models. They have no choice. They do not know the future any better than you do. Following strategies that have worked in the past is not a bad option if you don’t know what will work in the future.

In fact, history tells us that optimism pays more than pessimism in the long-run.

There is one thing that you and I can do differently. We can decide to silence fear.

We can decide like Philippe, to carve out our own destiny by controlling our own behaviour and believing in our own abilities. This is a time to save, not spend. This is a time to build wealth, not flaunt it. This is a time to live lightly.

Stop fear.

US Presidential Election 2016

We haven’t paid much attention to US elections in the past…Democrats, Republicans, Bush, Clinton or Obama – there has been a broad acceptance of neo-liberal capitalist policies supported by globalisation. Yesterday, that changed.

Once again, we woke up to a shock result for world markets but clearly not for the scared and fed-up Americans who voted for Donald Trump. The people have chosen Trump and his campaign for change, and that is precisely what financial market participants fear. More change and more uncertainty on top of the uncertainty created by Brexit.

Once again, global markets are in turmoil. There is always uncertainty (in markets), but this kind of uncertainty pulls the rug out from under economies.

Here are our assessments as to why the market doesn’t like a Trump victory:

  1. Trump is an unknown. Unlike any president in our living memory, Trump has not served inside his political party or in government. We do not know whether he will deliver on his promises because we do not know how he will function within the American political system.
  2. Trump promised to renegotiate trade deals to bring back manufacturing jobs to the USA. This threatens globalisation and global trade. Economics 101 taught us that countries should spesialise in what they are good at and trade the rest. Globalisation and global trade has been leading factors in global growth. Trump promised to renegotiate long existing trade deals and the markets do not like the highly uncertain outcome of these negotiations.
  3. Trump also promised to stop immigration. Immigration has been one of the reasons the American economy has grown, unlike other developed economies where the lack of population growth has stalled economic growth, (Japan is the best example).
  4. The market fears the impact of Trump’s confrontational style on global political stability. At a particularly tense time in history with Russia, Turkey, Syria and the Middle East at dangerous crossroads, an unknown and seemingly volatile US president is cause for concern.
  5. Trump also indicated that he does not support the current US Federal Reserve governor. He is not in favour of the current monetary policy support for financial markets. It probably means a new, hawkish governor will be appointed in 2018.

We need to stay calm. In the words of my twelve year old daughter:”I don’t know why you are worried; politicians don’t do what they say they will do.” They seldom deliver on their promises, partly because the system does not allow them to.  Some good may still come (thanks to Graeme Codrington for some of these points):

  1. He will only be in power for four years. My sixteen year old said on the way to school this morning: “Thank goodness, he’ll be gone by the time I reach the job market.” Laws take a long time to change and he will probably find that the political system will bury many of his plans.
  2. The American political system has been gridlocked for some time. Obama could not deliver because he did not control both the houses. Trump will and may be able to bring some of the changes needed to make the system more efficient.
  3. There are checks and balances in place in the system, which should keep him in check.
  4. The political system needs to change (that’s what people voted for) and perhaps Trump’s unorthodox ways might break the system so that people will have better choices in the future.
  5. The Americans will wake up to the fact that deals are difficult to change, just as the British did. Mexico, Canada, China and the rest of the world will not just say “Mr Trump have your way just because you are a star. “
  6. Trump may shake up the establishment, which may be a good thing for competition and accelerate change in government and business.

Brexit and Trump sends a powerful message to politicians around the world. There is a definite move towards the right. The people are electing champions for equality and nationalism. The people are voting against the establishment and for jobs.

 

On globalisation

There is increasing evidence that globalisation, although good for global growth, has been bad for equality. It has benefited the educated and the wealthy more than the poor and uneducated in developed countries. Those disenfranchised communities have not been taken seriously and the establishment has not helped to soften the blow. Of course, the lives of the poor in developing countries have improved but this barely features in politics in richer countries.

The permanent loss of jobs in the developed world cannot only be ascribed to globalisation. Technological changes and digitisation are already eating away even white-collar jobs.

Globalisation and technological advances are inevitable. However, politicians need to listen and help their people to deal with the fall out of these changes.

 

On global political risks

We are perhaps witnessing a once-in-a-lifetime shift in global sentiment. This is a tidal wave. Some of the potential future scenarios are indeed frightening. Breaking treaties, inequality and the rise of ‘saviour’ politicians are the stuff of world wars.

How this wave will collide with the unstoppable forces of globalisation and technological advances is uncertain.

 

On investments

Once again, this election result shows that betting on a particular outcome, worldview or scenario is dangerous. Diversification is your only protection against the unthinkable happening.

In addition, in years to come, the ability to change personal behaviour including personal spending habits might be the best protection against an unknown future. May saving come back into fashion!

 

No matter what, stay calm.

In the words of Warren Buffett, “For 240 years it’s been a terrible mistake to bet against America and now is no time to start.”

 

For more reading on the topic, please follow the links below.

PortfolioMetrix Special Report: “Globalisation and Rage – Explaining Trump, Brexit and the Demise of Openness”
Stanlib Economic Focus – Presidential Election 2016

 

 

Fees and Investments

Last month I gave you good reason to buy a more affordable car… http://www.foundationsa.com/index.php/2016/09/12/splashing-out-on-a-car-or-investing-in-your-future/

Assuming everyone did that and is now looking to invest the balance – let’s look at how the fees are charged on investments.

For many, investing can be intimidating. We tend to seek out people with more knowledge than we have, to sort out our finances and invest on our behalf. This is perfectly acceptable. But, why is it that people do not know what they pay for this investment advice? Do you walk into a store and buy something without looking at the price? If you do this, and your name is not Whitey Basson, then perhaps we can sit down and discuss your future…

When investing, there are fees charged on your investment. They are broken down as follows:

 

Initial Advice Fee:       

If a financial advisor or broker sells you an investment product, they have the option of charging you up to 3% upfront commission. If you bought a retirement annuity with monthly premium of R1 000, the upfront fee could be as much as R5 000.  The problem with a locked-in upfront fee is that you will pay a penalty fee should you decide to change service providers before the retirement annuity matures.

 

Financial advisor Fee:             

A financial advisor can charge you up to a 1% ongoing fee based on the assets they manage for you.  Are they doing anything do deserve this fee?

 

Portfolio/Fund Management Fee:       

The underlying investment portfolio is usually managed by a professional.  Whether a direct-to-market share portfolio, Unit trust fund or Exchange Traded Funds (ETF), there will be a management fee applicable.  This can range from 0,4% (ETF’s) to 2,5%.

 

Performance Fee:

Sometimes a fund or portfolio manager charges a performance fee on outperforming a set benchmark.

 

For our analysis, I will assume that there are no upfront fees charged.

The net effect of the various layers of fees means you can pay anything from 1.5% to 4% in fees annually. These fees are taken off your investment monthly. Some fees are taken within the investment so you don’t see it on the statement. In essence your investment needs to return more than the total fee percentage before you start making money.

Let’s assume you invest R5 000 a month for the next 25 years and your investment grows at 7% above inflation.  All figures and graphs have been adjusted for inflation to illustrate the value in today’s money. Below is \an illustration of three different fee scales over a 25-year period.

What this illustrates, is that if you managed to start your investment career at a fee around 1.5% instead of 3.5% then you would have saved roughly R430 000 over a 25-year period. Given that you only invest R5 000 a month this is a lot of money. To put this in perspective we show the value of your actual investment taking these fees into consideration.

The effect of compounded interest means that your investment could be roughly R830 000 more should you have chosen the option with lower fees. This indicates that 26% of your investment had been allocated to the higher fee option. From another perspective it means that more than half your contributions to your investment were allocated to fees, given that you made R1.5 million in contributions over the period.

You need to ask yourself what your financial advisor is doing to warrant an ongoing fee. The services that you should expect are:

  • Helping you set financial goals and objectives
  • Structuring a strategy for your investments based on your risk appetite
  • Revisiting and rebalancing your portfolio
  • Annual or semi-annual review meetings to ensure your investments and goals stay aligned
  • Ongoing support and assistance with important financial decisions

The advice is this: don’t lock yourself into an investment without knowing what it is or what you are paying for. Ask what the product fee and underlying fund/portfolio management fees are? Ask yourself if your financial advisor is worth the fee they charge? If your financial advisor cares about your long term goals and charges an ongoing fee – your interests are aligned. An upfront fee does not incentivise a financial advisor to look after your investments over the long term.

If you have taken the step to start saving, it is a step in the right direction! Don’t ruin the experience by overpaying on fees or not getting the level of service you deserve.

I will leave you with some sound advice from Warren Buffet: “Do not save what is left after spending but spend what is left after saving.”

 

Market Overview: Q3 of 2016

This quarter we faced unanswered questions on Brexit, entered a new era of politics in the USA, and changed guard at local, municipal level. Still at home, political interference continues to play a central role. As with the great Ali vs Foreman matchup in the 70’s – Finance Minister Pravin Gordhan is taking all the hits. One can only hope that he lands a knockout punch and reaffirms South Africa’s position as a country with a solid future.

 

Asset Class Currency 1 Month 3 Month 2016 YTD
Local Equity ZAR -0.94% 0.48% 4.82%
Local Bonds ZAR 2.98% 3.42% 15.05%
Local Property ZAR 1.09% -0.73% 8.82%
Local Cash ZAR 0.60% 1.86% 5.41%
Resources ZAR 4.48% 8.07% 35.88%
Industrials ZAR -3.52% -2.05% -1.95%
Financials ZAR 1.35% 0.85% 2.47%
R/US Dollar 6.54% 6.10% 11.26%
R/Pound 7.31% 8.76% 21.79%
Global Equities USD 0.61% 5.30% 6.60%
Emerging Market Equities USD 1.29% 9.03% 16.02%
Local Equity USD 6.00% 7.01% 18.12%

 

Local equities remained flat over the quarter with property being the only sector with negative returns.  The Rand has continued its strength – up 6% against the dollar. Currently local equities tend to do better when the Rand is weak. Rand-hedge shares like Naspers, Billiton and Richemont make up more than 30% of the index. Local bonds have made a remarkable comeback since the Nene debacle in December and are up 15% in 2016.

Brexit weakened the pound considerably. It’s clear that there is a lot of uncertainty as to how Britain will approach the exit – and when they will trigger Article 50 of the Lisbon Treaty that solidifies this intention to withdraw from the EU. Theresa May has replaced David Cameron as PM and her main focus is on preserving the UK economy through this turbulent economic stage.

Emerging market equities have remained in favour this year after their three-year dip. With South African equity outperforming the emerging market index (in dollar terms), one can only dream about the returns we could see without a Zupta state. With another postponement of a US interest rate hike and subdued interest rates in the rest of the developed world, inflows to emerging markets could continue as investors are seeking greater yields. Many of the emerging markets have also made progress with their economic policies.

Fundamentally, South Africa remains in a low growth environment. The graph above illustrates the structural decline in the South African Gross Domestic Product (GDP) growth over the past few years. It is hard to see a significant change to the growth outlook given that business confidence is at a 30 year low. However, second quarter growth of 3.3% year-on-year surprised – a cyclical uptick is possible. One positive development has been that inflation has retreated.  Inflation has normalized at about 6%, which indicates that we are nearing the end of the hiking cycle in interest rates (if not already at the end).

Finance Minister Gordhan was summoned to court in early October for alleged fraud relating to his time at SARS. The mini budget that will be delivered at the end of October will be crucial. We can only hope that sanity prevails and that he will be able to deliver this speech. If not, we will almost certainly head for a ratings downgrade.

This will show whether fiscal spending has been tightened and will be significant to the rating agencies.

The current political environment creates unusual uncertainty. A leadership vacuum seems to have been replaced with intent by the Zuptas to usurp Treasury and economic policy. It seems to have torn the ruling party into many different factions. Recently, increasingly strong opposition to President Zuma’s leadership has replaced the familiar silence from within the party. Without policy certainty, there is an unstable environment for business and the financial markets to operate in.

On the other side of the pond we have a presidential race worth watching – one that could also have serious economic consequences. Analysts are pointing to a comfortable victory for Clinton and the Democratic Party. Clinton is not expected to rock the boat. Should Trump be elected it could send shockwaves through the markets and could create similar policy uncertainty. Interestingly, both candidates have recognised the need for fixed investment spending – a crucial element to sustained economic growth in the USA.

http://www.foundationsa.com/index.php/2016/09/12/whats-going-on-with-world-growth/

We have alerted our clients for some time that below-average returns could be expected. It is never easy when it happens.

For a long period, investors experienced unsustainable, above-average returns. In a way, we were borrowing from the future. We are now repaying those returns with below-average returns.  We do not know when returns will normalise, but recommend that our clients remain committed to their long-term plans, precisely because we cannot predict the turnaround.

The temptation is there to “do something”. This is hardly ever the right strategy. We still believe that a long-term view is more beneficial to you than short-term interventions to try to anticipate the outcome of certain events.  

We leave you with the famous saying from Mark Twain on market timing: “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”