Bring the Tequila

-By Elke Zeki

 

A few years ago, when my sister got retrenched, her best friend dropped off a bottle of tequila and a hug. Short term comforts for a very real problem. Four years later, that same bottle of tequila made its way back to my sisters’ best friend when she suffered the same fate.  Retrenchment happens, and as South Africa moves into 2019 it is becoming increasingly common.

Years of corruption and mismanagement have left our economy in turmoil.  In newspapers we read about low GDP growth and ratings downgrades; fluffy concepts that speak more to those in the market itself, than the ordinary man.  However, there is nothing fluffy about a stagnant economy and the impact that has on a person’s daily living and livelihood.  It’s not uncommon for companies to close down or retrench during times like these.  And the reality is that the bottle of tequila may still make its way to many other friends.

Life will always be uncertain and at some point, you will undoubtedly face hardship. Yet some people manage to deal with adversity much better than others. Some people manage to transform that adversity into success. In talking to clients and people, I have been struck by recurring themes within their stories that have helped them overcome adversity.  And I would like to share those valuable insights with you.

 

It’s okay

Most retrenched people share the same emotional scars.  A feeling of inadequacy.  A feeling of loss.  Lacking self-belief or self-confidence.  Feeling vulnerable.

World famous vulnerability and trust expert Brené Brown says, “While vulnerability is the birthplace of many of the fulfilling experiences we long for — love, belonging, joy, creativity, and trust, to name a few — the process of regaining our emotional footing in the midst of struggle is where our courage is tested, and our values are forged.  Rising strong after a fall is how we cultivate wholeheartedness in our lives; it’s the process that teaches us the most about who we are.”

How do you do that? How do you regain your emotional footing to rise strong and wholehearted? How do you overcome your emotional scarring? You acknowledge your emotions.  Acknowledge how you feel and why you feel that way.

Know that its okay to have these emotions.  Working through the discomfort is what Brené refers to as “the rumble”.  She says, “Rumbling with these topics and moving from our first responses to deep understanding of our thoughts, feelings and behaviours gives birth to key learnings about who we are and how we engage with others.  The rumble is where wholeheartedness is cultivated, and change begins.”

 

It’s not personal

Companies retrenching and restructuring are not unfamiliar in times like these.  In most cases it’s not a reflection of your abilities or the value you add.  Don’t take it personally!

If you realise this, you will be more confident and energised when searching for new opportunities.

 

Don’t procrastinate

Rising through retrenchment gives you an opportunity to reflect and learn. It is a time where you can reconsider what is important to you and what your strengths are.    This can certainly help you to focus on the opportunities that best suit your skill set.  Start this process immediately as it takes time and consciously needs to be engaged with.

Procrastination can lead to months of indecisiveness, lack of motivation, low energy and can put you under tremendous financial pressure.

Author of The Passion Paradox, Brad Stulberg says, “Resilience is not about bouncing back.  It’s about moving forward.”

Having a plan and acting daily may not always be easy but it ensures you keep you moving forward and build momentum.

 

Compromise

Sometimes you need to compromise to move forward.  Some of the success stories I heard started with accepting a job below the level they were initially looking for.  However, the new job offered a foot in the door or better opportunities in the future.

You need to ask yourself what your values are.  What is most important and what are you willing to sacrifice?  Maybe you get the best job but it means spending 2 hours in traffic each day.  Are you willing to compromise on this?

Once you know what you will or will not compromise, you can open yourself up to various opportunities.  Even things you never dreamt of or were too afraid to do in the past, like starting your own business or consulting.

 

Support

Firstly, use your network to look for new opportunities.  This is critical and often where the best opportunities come from.

Secondly, lean on close friends and family who offer their unconditional love and support – and perhaps a shot of tequila.

And finally, be kind to yourself and don’t give up.

 

Here are a few great reads for those interested.

Articles talks:

The New Yorker – The art of decision making

World Economic Forum – Doctors in Scotland can now prescribe nature

Medium – Resilience is not about bouncing back, it’s about moving forward

TED Talk – Brené Bown on vulnerability

 

Books:

Brené Brown – Rising Strong

Adam Kay – This is going to hurt

Don Miguel Ruiz – Four agreements

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

The art of budgeting

-By Thiart van der Merwe

 

When it comes to money there are only certain things you can control. One of which is how much money you spend. Whether you earn a big salary or count your pennies you can control the amount of money flowing out your wallet.

Controlling your expenditure successfully always starts with the dreaded B word: budgeting. No one likes the admin of checking their bank statements or facing the black and white truth of just how much they spend on certain things.   But it is probably one of the most important parts of the financial process you have to take control of.

The budgeting approach we use is called the 3 Buckets. It’s a simple process where we break your expenses down into three buckets: Needs, Wants & Wishes. Your Needs bucket will contain expenses such as your bond, life insurance and food. Wants will be the luxury items such as DSTV, Netflix, Fibre, domestic workers etc. and Wishes will be the once-off holidays, hobbies and home renovations.

Anybody can use this approach.  It is best to use actual bank statements covering a period of 3 months or more.  Then break your spending down into an excel sheet or table. When you know how much you spend in each bucket you can start to adjust your expenses and rein in your spending habits if necessary. This is the single biggest tool you have at your disposal.

 

 

Our Budget Template can be found here.

This approach is especially useful for people who live off a fixed amount of monthly money, like retirees. The graphs below illustrate two different retirement strategies. In the first one, the monthly income drawn from the assets stayed the same and adjusted upward by inflation each year.  As you can see, the person ran out of money within 20 years.  In the second strategy, the draw down was more flexible and could be adjusted in periods of low growth. This meant less money for wants and wishes in certain years, but the long-term effect was that the money lasted the person’s lifetime. Being flexible with the amount of money you need could be the one thing that ensures your money lasts your lifetime.

 

Source: PortfolioMetrix

 

Many people think that saving money means they need to adjust their lifestyle drastically. We strongly believe that if you do this budgeting exercise you will be able to figure out an amount you can save without compromising lifestyle expenses, such as needs or wants. If you don’t save any money the best approach would be to start small and get used to the concept of saving. Once you build up a savings account you will be able to pay for various expenses in the wishes bucket from this account, rather than using your credit card.

True financial freedom means that you can stop working tomorrow and that you have enough assets – whether in investments, retirement policies or properties – to provide you with an income for the rest of your life. We typically believe that our salaries are the drivers of financial freedom. However, if you don’t save a portion of your salary today, you will need to work for that salary as long as you need money. So, in fact, it is your financial budgeting and savings that truly buys you financial freedom.

We strongly believe in creating Wealth for Life. But, to do the things you want to do during your lifetime you need to have the capacity to do so. Therefore, we believe you need to control your needs and wants and save the rest in order to truly tick the wishes off your bucket list.

As Joe Biden once said: “Don’t tell me what you value, show me your budget, and I’ll tell you what you value.” Make sure your budget reflects the things that make you happy.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

Financial considerations at retrenchment

-By Michelle le Roux

 

Retrenchment is an unfortunate event that can cause a lot of uncertainty and anxiety.  With it come many financial and retirement implications.   This section offers some guidelines to help you navigate some of the decisions you or someone else may need to make.

 

What happens to my pension fund?

If you belong to a company pension or provident fund, the rules of that fund will determine your access to your retirement capital on resignation or retrenchment.

The rules of thumb for a pension fund are:

  • It can be transferred in full to a preservation fund (at any service provider of your choice). There is no tax consequence for this.
  • You can take a partial withdrawal from the fund (taxable), and the balance will the transferred to a preservation fund (at any service provider of your choice).
  • You can decide to transfer the pension fund to your new employer’s pension fund.

The rules of thumb for a provident fund are:

  • It can be transferred in full to a preservation fund (at any service provider of your choice). There is no tax consequence for this.
  • You can take a full or partial withdrawal from the fund (taxable), and the balance will the transferred to a preservation fund (at any service provider of your choice).

 

Preservation funds are vehicles used to preserve the capital that you have already saved towards your retirement.

The cons:

You are not able to make further contributions.

The pros:

You may make one withdrawal from the fund before retirement, and this can be up to 100% of the value of the fund. This withdrawal is taxable but does allow you access to capital if necessary.

But a word of caution here: if you withdraw some (or all) of your retirement savings you will have to replace it with future savings, and often, this is very difficult to do. Still, if times are really tough and there isn’t another option for financial survival, then a preservation fund will allow temporary relief until you are able to make another plan.

 

Retrenchment packages and tax issues

If you are in the unfortunate situation of being retrenched, it’s important to acknowledge and understand that there are tax consequences to your retrenchment benefits.

If you have been with your employer for at least one year, you are entitled to one week’s salary for every completed year of service. This is called severance pay, or more commonly a “retrenchment package”.

At retrenchment, there are usually one or more of the following components that become payable as a lump sum:

  • Salary for notice period.
  • Accumulated leave.
  • Pro-rata bonus/incentives.
  • Retrenchment lump sum (or “severance pay”).

The first three components are taxed according to your marginal tax rate, in other words, it will be reflected on your final payslip and income tax will be deducted.

The severance pay-component is taxed according to the same table that would have applied at normal retirement. This table applies regardless of your age: if you are retrenched at 35 you will pay the same rate of tax of someone who is retrenched at 55.

This all looks great in principal: if I receive R600 000, the first R500 000 is tax free and I only have to pay tax on the remaining R100 000. Fantastic!

Or is it?

To better answer that question we have to rewind and take it one step back. One of the advantages of saving monthly into a retirement annuity or pension fund (or if you already have previous funds saved in a preservation fund), is the ability to withdraw a 1/3rd of the value in cash at retirement. The balance is then transferred to a life/living annuity that will pay a monthly income during retirement years – or however long the capital lasts.

As tax payers we are all allowed to take a full 1/3rd of the value of the fund cash, and if you have more than one retirement savings product you may take a 1/3rd cash withdrawal on each. The caveat is that you will receive a maximum of R500 000 tax free – this is across all your different retirement savings vehicles and it includes any previous retrenchment lump sums.

 

Let’s take an example:

Mr. Moneybags retires at age 60 with a retirement annuity worth R6m. He is able to withdraw a 1/3rd (R2m) as a cash lump sum. We already know that only the first R500k is tax free, and he then has to pay tax on the R1.5m (total tax of R472 500).

However, if Mr. Moneybags had a retirement annuity of R6m and a pension fund of R4.5m the scenario is slightly different. He is now able to take a 1/3rd of the cash of each (R2m and R1.5m) but is still only able to take the first R500k tax-free, and the portion that he now has to pay tax on is R3m (total tax of R1 012 500).

To get to the crux of the retrenchment-story from a tax perspective, let’s tweak the example one more time.

Let’s now assume that Mr. Moneybags was retrenched a number of years ago, and he received a severance benefit (retrenchment lump sum amount) at that time of R500k. He now retires at age 60 with his retirement annuity and pension fund and wants to take a full 1/3rd withdrawal from each.

Because he previously utilised the R500k tax-free portion when he was retrenched, the entire cash withdrawal will be now be taxed (total tax of R1 192 500).

 

 

The point that we would like to illustrate here is that tax benefits at retrenchment directly impact the level of tax benefit at normal retirement.

If you are retrenched and receive a lump sum benefit, you do not have a choice on how the tax will be applied. You will immediately start using a portion of your R500k tax-free allowance. Thereafter you will have to make a decision at retirement about whether you want to make further cash withdrawals from your retirement savings – being cognisant of having already used your R500k tax-free allowance.  

This is where the specialised advice of a Certified Financial Planner is of critical importance. Paying the tax in order to get the cash out of your retirement savings does make sense in many scenarios, but it will differ from person to person and you need to seek expert advice at this point – the conclusion will be different for each individual.

Let us know if you need help you with cash flow analysis, scenario planning and/or tax estimates for your particular set of circumstances.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

 

Planning for uncertainty

-By Elke Zeki

 

Most people build their wealth over a lifetime.  Very few make enough money once-off or in big tranches.  The power lies in the small compounding effect of a long term, disciplined savings plan.

We would therefore argue that taking a short “break” from your career should not have a significant impact on your retirement.

The biggest risks you face on being retrenched are the short-term survival considerations.  What do you need to do to get through the next year?  What are the biggest pressure points?

 

Liquidity

Having access to cash immediately is important and will give you a sense of security.  This includes money in a cheque account, access bond, credit card, overdraft facility and/or voluntary investments.

You need to be in a position where you can cover expenses for at least 6-12 months.

Yes, retrenchment comes with a severance package, but this is not always guaranteed and often not enough. You cannot rely on this.  You must make sure that you save during the years that you are employed.  Not just towards your retirement funds but voluntary, liquid investments as well.

Not having enough savings may also have the following unintended consequences:

  • You are forced to withdraw retirement savings to fund lifestyle or cover debt until a new job is secure. Sadly, many are forced to do this at great cost.  It is not ideal as these savings (Pension/Provident fund) serve another purpose and withdrawals are taxed heavily.  If you draw your retirement savings you need to make up for it with future savings and that is very difficult to do.
  • Anxiety may force you to take an opportunity quickly that is perhaps not the right job for you. Whereas when you have enough savings to see you through 6-12 months, it gives you time to introspect about what is important to you and what you really want to do.
  • Not having money makes the emotional recovery harder.

 

Losing cover

If your employee benefits include medical aid, life and disability, you will lose the cover.  You therefore need to take out your own cover once unemployed and your budget needs to take these costs into consideration.

 

Taking longer than expected to find employment

This can be financially devastating.  There are two very important tactics here:

First, start looking for new opportunities immediately.  Don’t procrastinate or take time off.

Here are a few short tips on effectively looking for work:

  • Use your network – this will be your best source of possible opportunities. Experts estimate that up to 80% of new jobs are found through networking.
  • When loading your information on LinkedIn or Pnet always uses searchable words to describe your experience and job titles. As an example, I will use Financial Planner and Wealth Manager instead of Director of Foundation Family Wealth.  Use descriptive, searchable words.
  • Have your CV checked and updated professionally.
  • Use quality recruiters if you have no success using social media and platforms such as LinkedIn.

Second, practice frugality.  Said simply, don’t spend.  You have to consciously choose to spend less.  This has an immediate effect on your pocket and is the only way to make your money last longer if necessary.

Substitutions for cheaper brands or buying in bulk are small examples that can make a big difference.  Of course, living frugally will only free up a certain amount of money each month and can certainly diminish your joy a little, but it is a successful, short-term survival strategy.  Your ultimate long-term goal is to improve your income rather than limit spending.

 

Your age

People nearing normal retirement age often find it harder to find employment again.  This event then forces early retirement.  If you have saved enough to fund retirement, it’s okay, but for most people this poses a serious problem.   Our cash flow calculations often show that delaying retirement for a short period may be the difference between retiring successfully and running out of money.  Therefore, the last few years are crucial and losing your job during this time is significant.

 

At Foundation our approach is to navigate uncertainty with empathy and sensitivity.  We also give clear guidance to help you make financial decisions that will enable you to take care of yourself and your loved ones until you find your feet again.

Our approach is after all, the foundation of our motto: Wealth for Life!

Let us know if you need help you with cash flow analysis, scenario planning and/or budgeting.

Are you survival fit?

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

 

Topline Quarterly Review: Q1 of 2019

Recoveries, Buybacks and Politics

The start of 2019 has seen most investors relieved by the recovery experienced on all fronts following a tough end to 2018. Markets bounced back sharply erasing most of the losses incurred in the fourth quarter.

For investors that stayed the course the effects of 2018 are now negligible.  For those that jumped ship it could be catastrophic. A long term outlook is a continued necessity when it comes to investments.  People are more optimistic about equity markets, but that doesn’t negate the need to look at the fundamentals to see if the uptick in prices is sustainable. 

 

Can Trump make economics great again or has he failed already?

US GDP Growth

 

In late 2017 Trump implemented tax reforms to boost the US economy. The desired outcome was to boost growth and allow companies to increase their capital expenditure. Lower tax payments meant increased disposable income and consumer spending, but only temporarily. As tax specialist, William Gale of Urban-Brookings Tax Policy Centre explained: “If you are tired in the afternoon, that will get you through the rest of the day, but a steady diet of sugar and caffeine is not healthy.”

On the corporate side companies held off on capital expenditure and rather bought back their own shares. According to an analyst at Goldman Sachs, the fourth quarter of 2018 saw American companies buy back around $240 billion worth of shares. The graph below illustrates these buy backs by S&P 500 companies. Currently we have a scenario where companies are net buyers of equity and everyone else is selling their shares. Goldman Sachs are expecting mutual funds, pension funds and individuals to sell roughly $400 billion in shares this year. Whether the increased GDP in mid-2018 was solely attributable to the tax reform is a contentious topic.

The question is whether US GDP growth is declining. With a lot of factors pointing to the contrary it is worth taking note of the steady decline in US GDP since Trump took office. This coupled with the fact that we have an inverted yield curve (where short term interest rates are higher than long term rates), points to the increased probability of a recession in America.

 

Brexit, Flextension and the deal that loves to fail

 

A number of deadlines for Brexit have come and gone. British Prime Minister, Theresa May tried and failed to get approval for her Brexit deal three times. The only thing the UK parliament could agree on was that they had to delay Brexit to avoid a no-deal scenario. The European Union has offered an extension to 31 October, with the flexibility to leave before that if the UK parliament can agree to a deal.

The European Court of Justice has said that the UK could cancel Brexit without the agreement of other EU nations. Politically this is unlikely to happen. May has vowed to work alongside the Labour Party to come to some form of agreement, even suggesting for the first time some other options to her Brexit deal.

The “Flextension” gives parliament another 7 months to agree on a deal. While most Brits would be happy to see an end to this dragged-out process, investors would also have a clearer picture of the impact if a deal was finalised. The uncertainty around what deal will be accepted has created volatility within markets. We will keep an eye on discussions between the Conservative and Labour Party in coming weeks that should provide more clarity.

 

South African business confidence and cheap stock

South African Business Confidence

South African Business Confidence dropped to levels last seen after president Zuma fired finance minister, Pravin Gordhan. Political and policy uncertainty, load shedding and growth below 1% were the main contributing factors. Fixing business confidence is crucial if we want companies to invest in our economy.

 

The graph above compares the valuation of the MSCI South African Index to that of our emerging market peers. At its lowest levels it indicates how cheap the South African market really is if compared to our peers.

With a very cheap market and companies sitting on large cash piles it would be possible to unlock value in our markets if we can get business to be more upbeat. Our focus will be on whether Ramaphosa and the newly elected government can instill confidence after the elections.

 

SA and the Elections

On 8 May South Africans will cast their vote at the ballot box and choose between a record 48 different parties. As political parties ramp up their campaigns there will certainly be more volatility and noise in both our equity and currency markets.

The early polls indicate that Cyril Ramaphosa’s ANC has enough support to win the elections with a majority. The big risk within the ANC is whether Ramaphosa’s faction is strong enough to weed out the corrupt and implement policies crucial for South Africa to recover from our growth slump. With names on the ANC’s parliament list that are implicated in State Capture during the Zondo Commission we question whether he is in full control of his party.

Source: PortfolioMetrix

The first quarter of 2019 saw a recovery where assets recovered the losses made in the latter half of 2018. Global equities gained 12% in dollar terms with Emerging Market up almost 10%. Resources on the JSE continued with its stellar performance adding 18% in the first quarter. The SA Inc. basket of shares made up of mainly retailers and banks have been disappointing during the first quarter. Fears of further load shedding and further petrol price hikes have put a damper on consumer spending.

We are living through extraordinary and uncertain times. We believe a diversified portfolio with a long-term outlook will stand you in good stead. As Robert Arnott said, “In investing, what is comfortable is rarely profitable.”

 

 <Foundation Family Wealth is an Authorised Financial Services Provider>

 

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. Read the 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>

 

How do I know my advisor makes the best decisions for me?

-By Michelle le Roux

 

Let’s play a game. I have R10 000 000 that I would like to invest. I don’t know much about the investment world, but I want the best possible return on my funds. Yet I’m worried because stories of scams, dishonest people and fake news are a real and daily occurrence.

Further to this, markets have not performed well over the last three years, investors are feeling deflated, and surveys show that confidence in the financial planning industry now ranks in some of the lowest ranges.

How do I know whom to trust for advice?

Building the basic framework

As Certified Financial Planners (CFP®), we spend years studying, doing our articles, and gaining experience in our fields of expertise. By the time we are in a position to give financial advice to a client, we have convinced our regulators, our compliance officers and are confident ourselves, that we are fit to make investment recommendations.

But how do we convince the client of that? That they can trust us to give sound financial advice.

Qualifications and great track-records go a long way, but what happens behind the scenes – in the mind of the advisor? Specifically, how do we at Foundation Family Wealth make our decisions and how do we decide on what the best advice is?

A client’s circumstances and investment-related fees are a clear initial guideline or starting point for advice.

Secondly, independent firms, such as Foundation, are in the advantageous position of being able to use any provider or product covered by its operating license. In contrast, corporate houses (such as the wealth management division in a bank) tend to use their own products and funds.

So, let’s assume we’ve done the initial work and determined the client’s risk appetite, the investment term and investment goal for the capital. We are now faced with a decision between two products, or even two providers. What do we do?

The answer is simple: we listen to our inner voice.  Not just a random voice, but a highly qualified, practiced one.

The role of ethics

In our line of business, “ethics” is a term that is as common as a regular cup of morning coffee. We need the necessary credentials to do our jobs, but we also have to apply a strong dose of ethics every day. We inherently know when something is right or wrong for our client, but sometimes we have to make a decision between two options where there is no definitive “best” solution.

We then have to rely on our internal inner-checks and balances!

Ethical tests

There is no single test to measure a financial planner’s approach when they are faced with a difficult choice or ethical dilemma. The most obvious and important one would be to ask whether something is against the law, but we are also trained to apply the following[1]:

  • The utilitarian principle – choosing the option that offers the greatest good for the greatest number of people.
  • Kant’s categorical imperative – acting in such a way that the action taken could be a universal law or general rule for specific circumstances.
  • The professional ethic – carrying out only those actions that a disinterested panel of professional colleagues would view as proper.
  • The golden rule – treating other people as you would expect them to treat you.
  • The television test – would you feel comfortable explaining your actions to a national television audience?
  • The family test – would you be comfortable explain your actions to your spouse, your children and your parents?

Ethical regulation

The Financial Planning Institute (FPI) is the professional body that governs Certified Financial Planners®. The FPI stipulates that every CFP® professional must spend a minimum of 36 hours per year towards professional training and development.

The hours spent in training and development activities are tracked and verified, and should you not comply with the minimum, your CFP® designation is withdrawn.

In addition, we have the Financial Sector Conduct Authority (FSCA) as our industry regulator. It has prescribed rules that we have to comply with which includes the setting up and running of our business; what our qualifications need to be; how we handle client interactions (and complaints), and ultimately what constitutes ethical behaviour and contraventions.

The FSCA prescribes that serious ethical transgressions can lead to a fine, a suspension of membership, or even a life-long termination of membership – to be avoided at all costs!

The Foundation Approach

Think of your past financial planners or advisors. Can you think of a bad experience you’ve had? Did you ever terminate a relationship with a financial planner because you felt you’ve been “done in”? Poor advice, fees that weren’t disclosed, lack of accuracy or interaction, any basic breach of trust?

Not surprisingly, most of the clients that walk through our doors have had previous planners or advisors. We see the effect of poor planning on a regular basis. Some are minor setbacks, but others have caused serious financial losses; or portfolios that are structured so inefficiently that it will eventually become an estate administration nightmare.

But here at Foundation, we do planning differently. Our goal is to provide excellent advice with integrity. We do this in the following ways:

  • We ensure that all our financial advisors are CFP® professionals, qualified to provide first-class financial planning. We invest in the continuous training and development of our team.
  • We are independent advisors, we don’t get any fees or remuneration to recommend a specific product or provider.
  • Our fee policy is transparent. We don’t charge upfront fees, transactional fees, or commissions. There is no incentive for us to give anything other than the most appropriate advice.
  • We want to build long-term relationships. We want to be the sounding board for both individuals and families and help to make the best financial decisions for life. Every client has a different story and we customise our advice based on every individual situation.

For the Foundation Team the real measuring stick is the way our clients feel after we’ve left a meeting or ended a conversation. We know that relationships are everything and we value trust above everything else – we understand that how we go about our planning tasks affects this.

We aspire to be planners that stretch beyond a single generation. Eventually, the children of clients become clients themselves – because of the value we added to their parents’ lives.

Our approach is, after all, the foundation of our motto: Wealth for Life!

Contact us if you would like to discuss your current financial plan.

 

<Foundation Family Wealth is an Authorised Financial Services Provider>

 

 

[1] University of the Free State. School of Financial Planning Law. 2018. Regulatory Environment. Bloemfontein.

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>