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Q1 2015
intelligence news+insights
Nuance
of the
dance
Maintaining the delicate balance
between state and investor
02
Events that
moved the
market
Stocks sprint
06
Serious about
saving
Tax-free boost
for investing
Cost of
capital
08
Budget basics
How will it
affect
investments?
02
News and insights from Sanlam Investments
Events that moved the market
Stocks sprint despite
global unrest
Q1
3 Jan
9 Jan
Boko Haram blazes
the town of Baga in
Nigeria, leaving up to
2 000 dead.
Paris under siege in
extremist hostage
drama, leaving several
civilians dead.
Source: BBC News Africa
Source: BBC News Europe
17 Jan
15 Jan
15 Jan
Japan pledges $200 million
in non-military aid for the
fight against the Islamic
State in Iraq and Syria (Isis).
The Swiss National Bank
shocks world markets
by removing the Swiss
franc/euro peg.
International Monetary Fund
head, Christine Lagarde, sees lower
oil prices as a boost, but warns the
globe is ‘weak on its knees’.
Source: Reuters
Source: Forbes
Source: Reuters
22 Jan
26 Jan
The €1.1 trillion stimulus programme
announced by European Central
Bank president Mario Draghi
surprises on the upside.
Anti-austerity leftist
party, Syriza, wins
the Greek elections.
Source: The Telegraph
Source: The Wall Street
Journal
7 Feb
5 Feb
4 Feb
Nigeria postpones its
elections by six weeks,
faced with poll disruptions
by Boko Haram.
SA electricity production
in decline after peaking in
2011. Imported electricity
up nearly 19% in 2014.
Jordan declares war
against Isis after the horrific
execution of Jordanian pilot
Muath al-Kaseasbeh.
Source: The Economist
Source: Statistics South Africa
Source: The Independent.co.uk
10 Feb
10 Feb
Strikes hurt 2014
manufacturing production,
which is flat after four years
of positive growth.
US data reveals more than
five million job openings
by end 2014, the highest
level since 2001.
Source: Statistics South Africa
Source: Job Openings and Labour
Turnover Survey
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03
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12 Feb
17 Feb
Economic Freedom Front members are
forcibly removed from parliament during the
most closely watched State of the Nation
address since the release of Nelson Mandela.
SA Consumer Price Index for
January prints at 4.4%; no
surprise after recent oil price
plunge.
Source: The Daily Maverick
Source: Statistics South Africa
20 Feb
19 Feb
17 Feb
US stock indices
soar to record
highs amid Greece
exit fears.
China starts celebrating the
Lunar New Year, spending
around $100 billion on
shopping and eating out.
SA stocks shoot to
record high of 53
153, but closes the
day slightly lower.
Source: Forbes
Source: www.theguardian.com
Source: Reuters
24 Feb
24 Feb
25 Feb
SA Gross Domestic
Product grows by
1.5% in 2014, down
from 2.2% in 2013.
The FTSE/JSE All
Share Index breaks
through the 53 400
level for the first time.
Among other tax raises,
Nene increases total fuel tax
by 80.5c per litre, putting
pressure on headline inflation.
Source: Statistics South
Source: www.moneyweb.co.za
Source: National Treasury
Africa
28 Feb
The Nasdaq Composite Index
breaks through the 5 000
level for the first time in
15 years.
China cuts its one-year
lending rate for the second
time in less than four months,
signalling an easing cycle.
Source: The Wall Street Journal
Source: The Wall Street Journal
3 Mar
4 Mar
4 Mar
Deputy Governor Daniel
Mminele signals that
SARB will keep rates on
hold for a while.
The euro hits an 11-year
low as investors wait for
details on ECB’s bondbuying programme.
India cuts its main
interest rate for the
second time this year,
surprising markets.
Source: SA Reserve Bank
Source: Reuters
Source: The Wall Street Journal
Cover image: gettyimages.com
Images: gettyimages.com, gallo and thinkstock
2 Mar
6 Mar
6 Mar
5 Mar
US unemployment
drops to 5.5%,
the lowest rate in
almost seven years.
Italy’s 10-year bond hits
the lowest yield since
Bloomberg started
collecting data in 1993.
China’s PM, Li Keqiang,
expects growth of 7% in
2015 and calls for a 10%
increase in military spending.
Source: Bloomberg News
Source: Bloomberg News
Source: BBC
9 Mar
18 MAR
18 MAR
The SA rand hits a 13-year
low against the dollar after an
emerging market sell-off in
anticipation of a US rate hike.
SA Consumer Price Index
prints at 3.9% year-on-year
for February 2015, while
retail growth slows to 1.7%.
The Fed cuts its inflation
outlook for 2015 and
dramatically lowers its
projected interest rate path.
Source: Reuters
Source: Bloomberg News
Source: Reuters
04
News and insights from Sanlam Investments
Moving
together in a
delicate
dance
The relationship
between the
State and
investors is
a delicate
one and can
be likened
to a dance
partnership
where first one
partner and
then the other
takes the lead.
Since the days
of Plato, we
have been
contemplating
the relationship
between the State
and its citizens. Ostensibly the state
is in control, fulfilling its obligation in
terms of the social contract to make
sure citizens respect one another’s
rights. But within a democratic
system, the beat to which the state
marches can change, not only
through the mechanism of the voting
booth, but also through consumers’
wallets and investors’ movement
of capital.
IN
SIGHT
To say that the state leads and
investors follow is therefore to
describe only half the truth. Both
parties influence one another in the
loose embrace of the dance. Still,
investors have high expectations of
R10 billion Planned spending cuts announced
by Minister Nene in October 2014.
Source: National Treasury
government institutions, such as the
Reserve Bank, National Treasury, the
Department of Trade and Industry
and other state departments. If these
expectations are not met, capital
finds a home elsewhere.
In an ideal world
If investors today had to draw up a
contract with government to create
an investment utopia, what six points
would they be asking for?
1
Strengthen the sovereign
rating of the country
To draw foreign investment
and to avoid a capital flight, the
government has to steer clear of
any situations that could result in a
sovereign downgrade. Among other
things, it needs to keep a close eye
on its own financial statements, such
as the Budget, the fiscus and the
current account.
Standard & Poor’s, for example,
consider the following five factors in
its sovereign credit analysis:
• Institutional effectiveness and
political risks, reflected in the
political score
• Economic structure and growth
prospects, reflected in the
economic score
• External liquidity and international
investment position, reflected in
the external score
• Fiscal performance and flexibility,
as well as debt burden, reflected in
the fiscal score
• Monetary flexibility, reflected in the
monetary score.
South Africa’s government bond yield
and the normalised exchange rate are
strongly correlated to the sovereign
rating of the country. The higher
the risk of lending to a country, the
higher the government’s lending rate
(government bond yield) will be.
As Chris Hamman, Head of Fixed
Interest at Sanlam Investment
Management points out, ‘Government
bonds, together with the currency,
are the share price of a country. So, if
the management of the country does
a good job, you’ll see bond yields
at a fairly low and stable level, and
the currency and inflation similarly
stable. If management deteriorates,
bond yields will rise and currency
will weaken.’
In November last year, Moody’s
downgraded SA’s investment grade
rating to Baa2, but the actions
announced by Finance Minister Nene
at both the Medium Term Budget and
the 2015 Budget meetings are steps
in the right direction to reduce SA’s
debt and set the country on the road
to recovery and a potential upgrade.
Gauteng: Highest number of taxpayers and largest contributor
to tax assessed.
Source: SARS (2014)
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05
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‘Musical innovation is full of
danger to the State, for when
modes of music change, the
fundamental laws of the State
always change with them.’
Plato
2
Image: gettyimages.com
What do the different ratings mean?
Description
Standard &
Poor’s
Moody’s
Fitch
Prime
AAA
Aaa
AAA
High grade
AA+ to AA-
Aa1 to Aa3
AA+ to AA-
Upper medium
grade
A+ to A-
A1 to A3
A+ to A-
Lower medium
grade
BBB+ to BBB-
Baa1 to Baa3
BBB+ to BBB-
Noninvestment
grade
speculative
BB+ to BB-
Ba1 to Ba3
BB+ to BB-
Highly
speculative
B+ to B-
B1 to B3
B+ to B-
Substantial
risks
CCC+
Caa1
CCC
Extremely
speculative
CCC
Caa2
/
In default with
little prospect
for recovery
CCC- to C
Caa3 to C
/
In default
D
DDD to D
/
Source: Trading Economics
Make it easy to do business
in SA
Uncertainty scares investors
away. Humans need certainty
in terms of interest rates, taxes
and the protection of private
property before they will part
with their money.
appropriate moment.
South Africa moved up two spots to
rank 39th out of 185 countries in the
World Bank and International Finance
Corporation’s Doing Business
2013 report, an annual survey that
measures the time, cost and hassle
for businesses to comply with legal
and administrative requirements.
South Africa fell between developed
countries such as France (34) and
major developing economies such
as Mexico (48), China (91) and
India (132).
4
On the other hand, too tight
monetary controls can stifle
economic growth, diminishing return
on investment. The Reserve Bank’s
skill lies in knowing when to open the
tap of money supply and when to
turn it tight.
The report placed South Africa tenth
for its protection of investors, the
best of all African countries, and it
recorded significant improvements
in the areas of trading across borders
and enforcing contracts.
Achieve the right level and
mix of taxes
In order for company earnings
to grow, investors require the
economy to grow at a reasonable
pace. To stimulate growth, the state
needs to achieve the right mix of
taxes that provide it with enough
funds to develop the country’s
infrastructure and its people, but at
the same time the tax regime should
not be so onerous as to discourage
private investment. The tax structure
should be aligned with GDP growth
and increased employment in order
to translate into better financial
results for SA companies and, as
a result, boost the returns of stock
market investors.
3
5
Maintain appropriate levels
of monetary control
Runaway inflation is the
enemy of investors as it adds to
the uncertainty around the level of
real return on equity that they can
expect. The SA Reserve Bank is
highly instrumental in this regard,
averting looming inflation increases
by raising interest rates at the
Curb state spending and
invest appropriately
Tying in with the sovereign
rating of the country, National
Treasury needs to be disciplined
about controlling the state’s debt
and spend efficiently in line with the
National Development Plan. While
expenses relating to the short-term
relief of the suffering of the poor and
dependent are important, the largest
part of state expenditure should
prioritise long-term growth.
6
Ignite new markets
Government has the power
to implement policies that
could change the face of business.
For example, the government can
grant subsidies for businesses
that use renewable energy, and
thereby boost those markets. The
government can also underwrite the
development of new technology that
will bring the necessary change. Tax
exemptions on a particular sector
trigger investment in it and may
generate growth.
The list above is not nearly
exhaustive. Investors can also
present government with conflicting
requests. For example, importers
would prioritise the protection of
the rand, whereas a weaker rand
would benefit exporters, making
their companies more competitive.
The state then has to balance out
conflicting needs and drive its policy
in the direction that keeps the bigger
economic drum beating.
The state therefore does not have the
luxury of saying, ‘Other dancers may
be on the floor, dear, but my eyes will
see only you.’ It has to consider the
interests of several stakeholders and
navigate through an ever-changing
socio-economic and political
landscape. Not an enviable task.
DISCLAIMER Sanlam Investment Management (Pty) Ltd is an authorised Financial Services Provider. This publication is intended for information purposes only and the information in it does not constitute financial advice as contemplated in terms of the Financial Advisory and
Intermediary Services Act.
06
News and insights from Sanlam Investments
serious
about
The state gets
Tax-free savings
accounts
are being
introduced to
encourage a
savings culture
among South
Africans.
By Quaniet Richards
Head of Investments, Retail
South Africans are
not saving enough
and it’s affecting
the development
NEWS
and growth of
the nation. From
the state’s perspective, it needs
gross domestic product growth
of 5% to relieve poverty among its
citizens and to reduce the persistent
unemployment problem. But growth
cannot be achieved without savings
and investments.
To reignite a savings culture, the
National Treasury has just introduced
tax-free savings accounts (TFSAs).
Designed to encourage long-term
savings, while giving investors access
to their money at any time, these
accounts offer an excellent saving
opportunity.
How does it work?
All the proceeds – dividends, interest
and capital gains – will be tax-free.
However, an individual’s overall
contributions per tax year will
be limited to R30 000. Any
contributions exceeding the annual
cap will be taxed at 40%. Investors
will therefore have to manage their
overall annual contributions carefully
to remain within the limit. Unused
amounts may not be rolled over – it’s
a case of ‘use it or lose it’.
Although a lifetime contribution limit
of R500 000 applies, the total value
of an individual’s tax-free savings
accounts, with all interest, dividends
R6.5 billion Amount the 2015 increase in the
RAF and fuel levy will pocket Treasury.
Source: National Treasury
and capital gains, may over time
exceed R500 000.
What about withdrawals?
Withdrawals will be tax-free.
Investors may withdraw money at
any time but legislation discourages
unnecessary withdrawals: no
amount withdrawn may be replaced.
Every contribution counts towards
the annual allowance and brings an
investor closer to the limit, even if
he or she is only replacing money
withdrawn in that same year.
For example, if someone invested
R20 000 and then withdrew
R20 000 in the same tax year,
he’d be able to contribute only an
additional R10 000 in the same tax
year before reaching the R30 000
annual contribution limit.
Are the tax benefits really
that significant compared to
a taxable investment?
The benefit may be small during the
first few years but as the value of
the investment grows, it becomes
significant. The example below
shows how big the difference
between investing R2 500 per
month in a TFSA and investing the
same amount in a ‘normal’ taxable
discretionary investment – for
example, directly in a unit trust –
becomes over a period of 25 years.
(Contributions cease after 16 years
and 8 months as the lifetime limit
is reached but the money remains
invested for the remainder of the 25year investment period.)
The extent of the tax saving possible with
Tax-free Savings Accounts (TFSAs)
R3 000 000
R2 724 643
R2 500 000
R2 000 000
R2 073 805
R1 500 000
R1 000 000
R500 000
R500 000
R0
Payments
5 years
10 years
15 years
20 years
TFSA
Discretionary product
Source: Sanlam Investments
Assumptions for calculation (currently considered
reasonable for a balanced portfolio):
Balanced TFSA portfolio experiences:
Nominal consistent total return of 10% per annum net of fees, before tax.
Balanced discretionary portfolio experiences:
Nominal consistent total return of 10% per annum net of fees, before tax,
broken down into:
– capital growth of 7% per annum only taxed at redemption at 13.33% (see drop in green line)
– dividend yield of 1% per annum on fund level taxed at 15%
– interest income of 2% per annum at fund level taxed at 40%.
• Investor stops monthly contributions after 16 years and 8 months when
the lifetime limit of R500 000 is reached.
• Investor has a marginal tax rate of 40%.
• 25-year investment horizon
• No allowance for rebates or exemptions
• Investments are monthly in advance.
NOTE: This calculation is for illustrative purposes only. It is not in any
way guaranteed. Actual investor experience can differ widely from that
shown here. Market values move up and down but for ease of illustration
we used smoothed returns. Keep in mind that the end values are nominal
– we do not take inflation into account.
Free State: lowest average taxable income.
Source: SARS (2014)
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07
saving
How does a tax-free savings
account compare with an
RA?
A great benefit of both a tax-free
investment account and a retirement
annuity (RA) is that all the growth
and income of the investment is
tax-free.
Both products have their own
benefits and should not be seen as
competing with each other but as
complementary components of a
holistic financial plan. It’s always a
good idea to seek sound financial
advice before deciding how much to
allocate to each product.
This includes tax on interest,
dividends and capital growth.
However, with an RA, the moment
an investor starts to withdraw a
retirement income, that annuity
income becomes taxable at his
personal income tax rate. In
contrast, withdrawals from a taxfree investment are not taxable.
Is it possible to open an
account on behalf of a child?
On the other hand, RA contributions
are tax-deductible up to 15% of
non-retirement funding income for
the tax year, while contributions to
a tax-free savings account are not
tax-deductible.
Investors should also watch out for
donations tax if they’re paying more
than R100 000 per tax year into their
children’s accounts. They should
declare any amount donated in their
annual tax returns.
Yes, investors can open tax-free
accounts in the names of their
children. When doing this, the
children will be using part of their
tax-free allowance, which limits their
ability to save for themselves via this
type of product later on.
Sanlam Investments’
offering
Sanlam Investments has made its taxfree products available from 1 March
and they are administered by Sanlam
Collective Investments (RF) (Pty)
Ltd and Satrix Managers (RF) (Pty)
Ltd. There are three products,
which include:
• Sanlam Collective Investments
tax-free unit trusts
• Satrix tax-free unit trusts
• the Satrix tax-free ETF range.
The first two products offer all
the flexibility of a unit trust. The
Sanlam Collective Investments
tax-free unit trust is for investors who
prefer actively managed funds and
they can invest amounts from as little
as R200 a month. The Satrix tax-free
unit trust is for those who prefer
low-cost passive investments and
the minimum investment amount
is R500 a month.
How to open an account
For tax-free investments in a fund administered by Sanlam Collective Investments (RF) (Pty) Ltd:
Application forms can be downloaded from sanlaminvestments.com or requested from the Sanlam Collective
Investments call centre at 086 010 0266.
For tax-free investments in a fund administered by Satrix Managers (RF) (Pty) Ltd:
Download application forms from satrix.co.za or request forms from the Satrix call centre at 0860 111 401.
Image: gettyimages.com
Tax-free products can also be bought online via sanlaminvestments.com.
DISCLAIMER: Sanlam Investments consists of the following authorised Financial Services Providers: Sanlam Investment Management (Pty) Ltd (‘SIM’), Satrix Managers (RF) (Pty) Ltd, and has the following approved Management Companies under the Collective Investment Schemes
Control Act: Sanlam Collective Investments (RF) (Pty) Ltd (‘Sanlam Collective Investments’) and Satrix Managers (RF) (Pty) Ltd (‘Satrix Managers’). (RF) (Pty) Ltd. The Sanlam Group is a full member of the Association for Savings and Investment SA. The tax-free savings products are
administered by Sanlam Collective Investments and Satrix Managers. Although all reasonable steps have been taken to ensure the information on this website/advertisement/brochure is accurate, Sanlam Collective Investments (RF) (Pty) Ltd / Satrix Managers (RF) (Pty) Ltd (‘Sanlam
Collective Investments’)/(‘Satrix’) does not accept any responsibility for any claim, damages, loss or expense; however it arises, out of or in connection with the information. No member of Sanlam gives any representation, warranty or undertaking, nor accepts any responsibility or liability
as to the accuracy of any of this information. The information to follow does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act. Use or rely on this information at your own risk. Independent professional financial advice should
always be sought before making an investment decision. Collective investment schemes are generally medium- to long-term investments. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments/units/unit
trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available from the Manager, Sanlam Collective Investments (RF) Pty Ltd / Satrix Managers (RF) (Pty) Ltd, a registered and approved Manager in Collective Investment Schemes in Securities.
Additional information of the proposed investment, including brochures, application forms and annual or quarterly reports, can be obtained from the Manager, free of charge. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective
investments are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of the portfolio and the investor
will differ depending on the initial fees applicable, the actual investment date, and the date of reinvestment of income as well as dividend withholding tax. Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio.
The performance of the portfolio depends on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-div date. Lump sum investment performances are quoted. The portfolio may invest in other unit
trust portfolios which levy their own fees, and may result is a higher fee structure for our portfolio. All the portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No 45 of 2002 (‘Cisca’). International investments
or investments in foreign securities could be accompanied by additional risks such as potential constraints on liquidity and repatriation of funds, macroeconomic risk, political risk, foreign exchange risk, tax risk, settlement risk as well as potential limitations on the availability of market
information. The Manager has the right to close any portfolios to new investors to manage them more efficiently in accordance with their mandates. The portfolio management of all the portfolios is outsourced to financial services providers authorised in terms of the Financial Advisory and
Intermediary Services Act, 2002. Standard Bank of South Africa Ltd is the appointed trustee of the Sanlam Collective Investments Scheme. Standard Chartered Bank is the appointed trustee of the Satrix Managers Scheme.
08
News and insights from Sanlam Investments
The state,
its Budget and
your savings
On 25 February Minister Nene revealed in his first Budget
Speech how the state plans to raise its tax revenue and
stabilise our national debt.
NEWS
How will this year’s Budget impact on the savings of
individuals, the ability of the state and businesses to
invest, and ultimately on the returns earned by investors?
The new
Budget
affects the
state and
investors in
different ways.
SA needs savings to grow the economy
South Africa cannot reduce poverty and unemployment unless it grows by
at least 5% per annum. This is why Minister Nene noted in the Medium Term
Budget that, in addition to enhancing the progressive nature of the tax system,
the ‘short and long-term implications for growth and job creation will be a key
consideration’ in setting tax policy.
Currently, South Africa has a low level of savings (little more than 14% of
GDP), which is insufficient to fund the level of investment required to grow the
economy at 5%. What we need now is an investment ratio of at least 25% of
GDP.
What we save versus what we should save
How tax influences investment
If tax regime becomes more onerous:
By Arthur Kamp
Investment Economist
Cost of
capital rises
Return on
investment
(ROI) falls
GDP 25%
of GDP - Level
of investment
SA needs
R1.8 billion Amount the 2015 increase in excise and alcohol
and tobacco duties will pocket Treasury.
Source: National Treasury (2015)
14%
Capital
deployment/
investment
cut back
of GDP - Current level of
savings too low to fund
required investment
‘Slightly progressive’ – how World Bank views SA’s tax system
‘Highly progressive’ – how World Bank views SA’s state spending
Source: SARS (2014)
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09
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Private fixed investment by businesses is insufficient
Several ways to increase national savings
Because the marginal rate of return on investment is too low at the moment,
private sector fixed investment has fallen. We urgently need to raise economic
growth and to keep the cost of capital low. The tax regime influences
investment decisions by impacting the cost of capital. Businesses will invest
(increase the capital stock and employ people) for as long as the marginal
product of capital exceeds the real user cost of capital. An increase in the tax
rate or a decrease in incentives curbs business investment.
To boost national savings, the state has a few options. These, for example,
include:
• lower income tax (to encourage work and savings)
• increased tax on consumption
• lower tax on savings or amended savings legislation.
In terms of income tax, the 2015 Budget offered only taxpayers earning less
than R450 000 per annum some relief after the bracket adjustment for fiscal
drag. Those who earn more will pay up to 1% more tax every year.
In 2013 SMMEs accounted for 55% of SA employment. Small businesses are
therefore a focal point of our National Development Plan (NDP) and the recent
Davis Tax Committee.
What affects the cost of capital?
Rate of
depreciation of
capital equipment
Government
bond yield
After accounting for fiscal drag relief, the Budget was slightly skewed towards
indirect taxes, mostly taxes on consumption (expenses). Examples include
higher excise duties and duties on alcohol and tobacco products (R1.8 billion
more for Treasury), as well as the increase in the Road Accident Fund and fuel
levy (R6.5 billion more for Treasury). VAT remained unchanged.
In terms of savings tax, on a positive note, the CGT inclusion rate and dividend
tax remained unchanged. Tax-free savings accounts are also in force from
1 March 2015, while retirement funding reforms with the objective of promoting
savings more broadly are also in the pipeline.
Cost of
capital
A fine balancing act
Corporate
tax rate
Unit price of new
capital equipment
SA has taken first steps to curb the cost of capital
Businesses
and individuals
continue
investing and
saving
Low return
on capital
demotivates
businesses
Capital flees
the country
Overall, the user cost of capital is sensitive to:
• the government bond yield
• the rate of depreciation of capital equipment
• the corporate tax rate
• the price of a unit of capital equipment (influenced by currency volatility).
Taxpayers
don’t have enough
disposable
income left
to invest
Enough
state money
available for
socio-economic
development
A better
infrastructure/
resources for
economic
growth
vel
ight tax le
Just the r
tax
Too much
Getting the balance right
To keep the cost of capital low, the state needs to lower its debt ratio to avoid
further sovereign ratings downgrades (which increases the government bond
yield) and to ultimately improve these ratings.
By raising taxes and therefore state revenue, the state would be in a much
better position to deploy its development plan, but this could dramatically
lower the level of private saving and investment.
The spending cuts announced in the Medium Term Budget are a good starting
point. The planned cuts amount to R10 billion in the 2015/16 tax year. If adhered
to, these spending restraints are expected to return government to a position
where it borrows solely for the purpose of capital spending in 2015/16 –
a welcome development.
The state therefore needs to find just the right level and mix of taxation.
At the same time, the efficiency of state spending needs to be closely
monitored.
How to increase savings
Government already spends a large share of its available resources on key
target areas of the NDP, including education, but the efficiency must be
improved. The state’s debt ratio must be stabilised and reduced to lower the
interest burden and free-up resources for spending.
Heading in the right direction
Sensible mix
of taxes and
promotion of
savings
Accelerated
economic
growth
Funding
for national
development
Balanced tax regime and budget a boon for investors
1
Lower income tax
2
Raise tax on
expenditure
(consumption)
3
Lower tax on
savings, for
example, capital
gains tax
As much as the 2015 Budget’s increase in taxes on consumption, for
example, fuel levies, excise duties and sin taxes, may irk consumers, raising
the state’s revenue to help reduce government's budget deficit is a step in
the right direction. Together with the discipline of debt control and efficient
spending in line with the NDP, SA is setting the stage for an environment more
conducive to growth in the long term. A tax structure aligned with GDP growth
and increased employment should not only bolster the security of all SA
citizens. It should also translate to better financial results for SA companies
and, as a result, boost the returns of stock market investors.
Higher company
earnings and
investor returns
10
News and insights from Sanlam Investments
My stock pick
Mondi
Equity analyst
Lazar Naiker
discusses Mondi
Mondi is a leading packaging and paper producer that has operations
focused on Europe, as well as exposure to Russia, South Africa and North
America. Mondi benefits from high-quality, low-cost assets, vertical
integration into paper pulp, and from energy-generating capacity.
expected returns given a weak global consumer, however this
business does appear to be turning a corner and provides a good
base for Mondi to deliver high-value, specialised consumer
packaging products.
What we like
Risks to our view
Mondi has invested capital and rationalised its business in recent years.
The group has been successful in shifting its geographical and product
mix. Increasing exposure to emerging markets and consumers, as opposed
to industrial packaging, has resulted in improving margins and returns.
These positive trends have been despite a relatively adverse macroenvironment and position the group well for any meaningful improvement,
particularly in Europe.
While Mondi’s key grades are relatively well balanced from a supply and
demand perspective, challenges in the graphic paper markets could see
competitors convert capacity to produce packaging in the medium term.
That said, if these conversions were to take place they would take some
time to deliver (two to three years from announcement) and Mondi will
retain its low-cost position.
Capital allocation has been a key success of the group. Over the past
two years Mondi has invested €350 million in projects with returns in
excess of 40%. A large portion of these projects has been focused on
cost optimisation. Further spend of €420 million over the following two
years is expected to yield returns in excess of 20%.
The acquisition of Nordenia in 2012 has been slower to deliver on
In the short term, exposure to Russia could negatively impact if demand
in that region declines, although this is to a certain extent mitigated by
ruble weakness.
The bottom line
While the stock has performed well, up circa 28% YTD, we believe that high
quality management, allocation of capital into high-return projects and
growth from a solid base of operations positions the group well.
€m
Mondi operating profit and return on capital employed (ROCE)
900
18%
800
17%
700
16%
600
15%
500
14%
400
13%
300
12%
200
11%
100
10%
-
9%
2010
Operating profit (LHS)
2011
2012
2013
2014
ROCE (RHS)Source: Mondi 2014 Annual results
DISCLAIMER The past performance of the company is not an indication of future performance. Always seek independent professional financial advice before making an investment decision.
Murray & Roberts Holdings
Murray & Roberts is an integrated engineering and construction services
company. It operates in southern, central and western Africa, the Middle
East, south-east Asia, Australasia and North and South America. The
company operates through four main divisions, namely: Underground
Mining, Oil and Gas, Energy and Industrial, and Infrastructure and Building.
What we like
Murray & Roberts is emerging from a period in which it suffered significant
losses on two major contracts. This is exacerbated by having to operate
in an environment of low levels of government infrastructure spending, as
well as reduced capex from resources companies that are responding to
declining commodity prices.
What we don’t like
The company has significant exposure to the Oil and Gas market in
Australia. It has shifted its focus from the construction of new Liquid
Natural Gas (LNG) plants to the more profitable areas, commissioning
and expanding existing plants.
However, should the lower oil price persist for an extended period, this may
lead to lower earnings from this aspect of the business.
Risks to the investment case
The company has claims to recover these losses and this is being pursued
through various legal processes. The quantum of these claims is in excess
of R2 billion.
Despite the challenging environment, the company has managed to
• An unsuccessful outcome to the various claims resolution processes
• A protracted period of limited spending on projects by governments
and mining companies
• New loss-making contracts that would negatively impact the group’s
cash flow.
Images: supplied
Portfolio manager
Michael Canterbury
discusses Murray &
Roberts Holdings
improve its earnings over the last two years. The company is ungeared and
has net cash of R900 million.
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11
follow us @sanlamintel
Step up your
retirement returns
In 2011 Minister Gordhan announced changes to Regulation
28 of the Pension Funds Act to make sure SA retirement
savings are ‘invested in a prudent manner that not only
protects the retirement fund member, but is channeled in
ways that achieve economic development and growth’.
In short, Regulation 28 is a mechanism the state uses
to protect the investor against large, permanent losses by forcing the
diversification of retirement savings across different asset classes.
IN
SIGHT
How do
you step up
your clients’
returns while
staying within
the limits of
Regulation 28?
By Carl Roothman
Head of Retail
Number of negative return periods and probability of a negative return
18.00%
So how is it possible to step up your clients’ returns while staying within
legislative limits?
16.00%
15.37%
0.31%
Standard
FoHF
0.44%
0.52%
-0.72%
Add’nal Property
Africa
14.00%
What are these limits?
Currently, Regulation 28 permits:
• 75% exposure to equities
• 15% exposure to hedge funds and private equity combined (10% maximum
for each of these)
• 10% exposure to commodities
• 25% exposure to property
• 25% exposure to international assets
• 5% exposure to Africa.
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
FoPE
The adviser’s challenge
As adviser you play a key role in ensuring the best possible retirement
outcomes for your client. Your clients may vary in their investment needs, their
risk tolerance and time horizon, but your younger and your most aggressive
clients often pose a challenge: How do you maximise their long-term returns
(which could otherwise be solved by allocating 100% to equity) while staying
within the Regulation 28 limits (allowing only 75% equity exposure)?
Results of using the levers
The chart on the right shows that the returns of a more typical Regulation
28-compliant portfolio could have been enhanced by more than 0.5% per
year with the use of alternative asset class allocations over the last 15 years
(measured toward the end of 2014).
Image: gettyimages.com
However, these phenomena move in cycles and over the next 10 years this
allocation may even provide the best return of all the asset classes. The
conclusion is that the long-term expected return can potentially be enhanced
by even more than 0.5% per annum without paying too dearly in terms of the
risk taken.
An extra 0.5% per annum makes a significant difference over the long term.
It is worth noting that the Africa allocation would have reduced the total
return over this period, since this geographic collective performed very
poorly over that time.
Source: Simeka Consultants & Actuaries (Jan 2015)
A word on risk
An investment with more inherent investment risk is expected to provide a
better return in the long term in order to incentivise investors to allocate capital
to it. However, that risk can, per definition, lead to losses. Bear in mind that the
higher expected return is by no means guaranteed – particularly over shorter
time periods (less than five years).
The revised Regulation 28 allows you, the adviser, a great deal of flexibility to
adjust the risk profile and increase the potential returns of your client.
* Part of this article is a reproduction of research that appeared in the
Baobab newsletter. It is reprinted with the kind permission of Kobus
Hanekom and Willem le Roux from Simeka Consultants & Actuaries.
Four levers for maximising retirement fund returns
1
Use the 75% equity allocation
Firstly, use the full 75%
allocation to equities,
provided your client has a
sufficiently long investment
horizon to stomach volatility. Over
the past five decades and longer,
equity has outperformed all other
asset classes significantly. Over
the long term, a higher allocation
to equities can enhance portfolio
returns considerably.
R90 billion The accumulated surplus of the national
Unemployment Insurance Fund (UIF).
Source: Simeka Consultants & Actuaries
2
Add alternative and other
investment allocations
Alternative investments,
specifically fund of hedge funds
(FoHF) and fund of private
equity funds (FoPE), offer
relatively uncorrelated returns in
comparison to traditional asset
classes like equity, bonds
and cash.
3
Add more property
There is no maximum on
the combined exposure
of equity and property, meaning
these two asset classes combined
could theoretically take up the
entire portfolio.
4
Use the Africa allocation
Additional geographic
diversification is allowed
through Africa exposure of up
to 5% in addition to the 25%
exposure to international assets
generically. Total foreign exposure
can therefore reach 30%.
City of Johannesburg: highest average taxable income per
assessed individual for 2013 (R318 533)
Source: SARS (2014)
12
News and insights from Sanlam Investments
Achieving balanced growth
through diversification
The Sanlam Investment Management Balanced Fund allows investors to outsource difficult decisions about investing in various asset classes.
The Sanlam Investment Management (SIM) Balanced Fund
is Regulation 28-compliant and therefore meets the state’s
requirements for retirement savings. Because it may not
be more than 75% exposed to the stock market, the fund
experiences lower volatility than a pure equity fund.
By investing in a single fund that diversifies across all major
asset classes, investors outsource the difficult decision of
how much and when to invest in various asset classes. Even
though the fund holds a variety of instruments, it’s
primarily equity-centric, seeking long-term capital
growth. Currently the manager has a strong preference
for offshore assets.
The fund has consistently beaten its peers on a rolling threeyear return basis (shown in chart below), outperforming the
mean of the funds in the Asisa SA Multi-Asset High Equity
category by 1.7% per annum on average.
Annualised rolling three-year returns
20.00
Average outperformance of
1.7% p.a. over seven years!
18.00
16.00
14.00
12.00
10.00
8.00
6.00
2011/01/31
2011/02/28
2011/03/31
2011/04/30
2011/05/31
2011/06/30
2011/07/31
2011/08/31
2011/09/30
2011/10/31
2011/11/30
2011/12/31
2012/01/31
2012/02/29
2012/03/31
2012/04/30
2012/05/31
2012/06/30
2012/07/31
2012/08/31
2012/09/30
2012/10/31
2012/11/30
2012/12/31
2013/01/31
2013/02/28
2013/03/31
2013/04/30
2013/05/31
2013/06/30
2013/07/31
2013/08/31
2013/09/30
2013/10/31
2013/11/30
2013/12/31
2014/01/31
2014/02/28
2014/03/31
2014/04/30
2014/05/31
2014/06/30
2014/07/31
2014/08/31
2014/09/30
2014/10/31
2014/11/30
2014/12/31
2015/01/31
4.00
SIM Balanced A
Asisa SA Multi-Asset High Equity
On a calendar year basis, the SIM Balanced Fund has
also been one of the most consistent funds relative to
its peers. It has proven this by being one of only six
managers to consistently stay in the top half over
Source: Morningstar Direct | Rolling three-year returns up to 31 January 2015
every calendar year from 2009 to 2014 (see table below).
This consistency over time can be attributed to value
added at both tactical asset allocation and individual
security level.
Quartile ranking per calendar year
South African – Multi-Asset –
High Equity
2014
2013
2012
2011
2010
2009
SIM Balanced Fund
2
2
1
2
2
2
Considering investing?
Here are some key facts
about the fund:
Fund category: SA Multi-Asset High Equity
Maximum equity:
75% (Regulation
28-compliant)
Benchmark:
Mean of the Asisa SA Multi
Asset High Equity category
Minimum time horizon: 5 years
Portfolio managers:
Gerhard Cruywagen and
Patrice Rassou
Launch date:
1 February 1995
Initial advice fee (max): 3.42%
Initial manager fee:
2.28%
Annual advice fee (max) 1.14%
Annual manager fee:
Performance fees
(min of 1.25% p.a.)
Fee hurdle: Mean of the Asisa SA Multi-
Asset High Equity category
Sharing rate: 20%
Maximum fee: 2.85%.
If the fund performs in line with the fee hurdle, then the
fee is 1.25% per annum.
Performance fees accrue daily, based on daily
performance, and are paid to the manager monthly.
Total expense ratio (TER):1.86%
The retail class of this fund has a TER of 1.86% for the
year to 31 December 2014. For the period from 1 January
2014 to 31 December 2014 1.86% of the average net asset
value of the portfolio was incurred as charges, levies and
fees related to the management of the portfolio. A higher
TER ratio does not necessarily imply a poor return; nor
does a low TER imply a good return. The current TER
cannot be regarded as an indication of future TERs.
Please check the fund’s fact sheet on www.
sanlamintelligence.co.za/fact-sheets for more
information on the fund. It is available from the
Manager free of charge.
The fund is available
through the following
platforms:
•
•
•
•
Sanlam Collective Investments
Glacier
Stratus
As an option on the Cumulus RA.
Long-term returns
to 31 Jan 2015
3 years
5 years
10 years
SIM Balanced A
15.26%
14.12%
13.87%
(Asisa) SA MultiAsset High Equity
14.29%
12.60%
12.66%
Source: Morningstar Direct | As at 31 January 2015 (annualised returns)
What does offshore exposure mean?
The fund may hold up to 25% in offshore assets. As at
31 December 2014 this allocation was almost fully
utilised (24.4%).
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For more information on the newsletter contact Sonia Jamoulle at [email protected] l 021 950 2999
DISCLAIMER Sanlam Investments consists of the following authorised Financial Services Providers: Sanlam Investment Management (Pty) Ltd (“SIM”), Sanlam Multi Manager International (Pty) Ltd (“SMMI"), Satrix Managers (RF) (Pty) Ltd, Graviton Wealth Management (Pty) Ltd (“GWM”),
Graviton Financial Partners (Pty) Ltd (“GFP”), Radius Administrative Services (Pty) Ltd (“Radius”), Blue Ink Investments (Pty) Ltd (“Blue Ink”), Sanlam Capital Markets (Pty) Ltd (“SCM”), Sanlam Private Wealth (Pty) Ltd (“SPW”) and Sanlam Employee Benefits (Pty) Ltd (“SEB”), a division
of Sanlam Life Insurance Limited; and has the following approved Management Companies under the Collective Investment Schemes Control Act: Sanlam Collective Investments (RF) (Pty) Ltd (“SCI”) and Satrix Managers (RF) (Pty) Ltd (“Satrix”). Although all reasonable steps have been
taken to ensure the information in this document is accurate, Sanlam Collective Investments (RF) (Pty) Ltd (“Sanlam Collective Investments”) does not accept any responsibility for any claim, damages, loss or expense; however it arises, out of or in connection with the information. No
member of Sanlam gives any representation, warranty or undertaking, nor accepts any responsibility or liability as to the accuracy of any of this information. The information to follow does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary
Services Act. Use or rely on this information at your own risk. Independent professional financial advice should always be sought before making an investment decision. Sanlam Group is a full member of the Association for Savings and Investment SA (Asisa). Collective investment schemes
are generally medium- to long-term investments. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments may go down as well as up. A schedule of fees and charges and maximum commissions is available
from the Manager, Sanlam Collective Investments, a registered and approved Manager in Collective Investment Schemes in Securities. Additional information of the proposed investment, including brochures, application forms and annual or quarterly reports, can be obtained from the
Manager, free of charge. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any
deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of the portfolio and the investor will differ depending on the initial fees applicable, the actual investment date, and the date of reinvestment of income as well as dividend withholding tax.
Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The performance of the portfolio depends on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income
reinvestments done on the ex-div date. Lump sum investment performances are quoted. All returns for periods longer than 12 months are annualised. This means that cumulative returns are re-scaled and converted to an average annual return over that measurement period longer than 12
months. The portfolio may invest in other unit trust portfolios which levy their own fees, and may result as a higher fee structure for our portfolio. All the portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No 45 of
2002. International investments or investments in foreign securities could be accompanied by additional risks such as potential constraints on liquidity and repatriation of funds, macroeconomic risk, political risk, foreign exchange risk, tax risk, settlement risk as well as potential limitations on
the availability of market information. The Manager has the right to close any portfolios to new investors to manage them more efficiently in accordance with their mandates. The portfolio management of all the portfolios is outsourced to financial services providers authorised in terms of the
Financial Advisory and Intermediary Services Act, 2002. Standard Bank of South Africa Ltd is the appointed trustee of the Sanlam Collective Investments Scheme.
Image: thinkstock
Source: Morningstar Direct to 31 December 2014