IN THIS ISSUE

From the CEO’s desk

Cash, inflation and

growth assets

Estate duty

NFB FINANCIAL UPDATE

Issue64 October2012

FROM THE CEO’s DESKhy does Mr. Malema keep popping terrible asset to have held. And although recently

up? Probably because I would showing some sustained positives, global bourses

suggest the ANC are so busy fighting have disappointed.Wand jostling for position, influence Cash is desperate in the developed markets, in

and survival at an individual level, that scarce most cases offering net returns where investors are

attention is being paid to very dangerous and "paying" the bank to hold your money, and bonds

manipulative forces, alienated by themselves and offer low yields and capital risk should current

left to their own screwed up devices. cyclically low rates push higher. Notably, this is also

I noted several years ago that the danger with taxable in our hands.

politicians was their tendency to think in terms of A well known global personality recently

short term cycles, not surprisingly accurately summed it up brilliantly in saying that today's

matching election cycles. This short termism has investors are paying the price of yesterday's reckless

resulted in damage beyond comprehension and borrowers (for Borrowers read, Governments, Banks,

manifests in attitudes that, unfortunately, aren't Regulators, etc). Another cynical comment I heard,

restricted to this venerated part of the new S.A. It was that the return you received for putting your

has spread like wildfire to the most vulnerable parts money in the bank used to be called the Risk Free

of our population, creating a sense of desperation Return. It's now called the Return Free Risk!

and expectation, easily exploited by the likes of We have access, both directly and via a few

those in search of power, and potentially protection major business partners, to investments into major

from the law ( - important given past indiscretions) offshore shares, and interestingly South African

by becoming the de facto law makers. Bank's offshore bonds. These can now be wrapped

I mentioned recently that whilst Mr. Malema in an offshore issued product which will achieve tax

was not a model student, he was by no means free returns for South African investors. This

stupid, and once again, this is being borne out in his opportunity is directed to investors who are

recent actions. He is tuned into the psyche of the prepared to invest for growth with acceptable

masses, happy to stir the pot with scant or no regard volatility and risk.

to the societal impact. He has embarrassed the For those who do not have the stomach for risk

incumbent government and organised labour, we have solutions which guarantee a tax free

made promises that he has no way of delivering on return, backed by Major International Banks and

and is getting an extraordinary amount of attention corporate, together with moderate (50%)

from global media, who are always in search of participation in one of two Global indices. The

controversy and chaos. details and relevance of these investments for your

This backdrop, whilst potentially manageable portfolio needs careful discussion with your advisors

worries me and it is indeed these issues which are at NFB.

referred to when the market talks about the This editorial is not intended to urge you to pack

importance of diversification both by geography for Perth, but it certainly is intended to prompt you

and sector. Concentrated risk is when too much to discuss recent developments, revisit what offshore

money is focused on only one, or a few, investment assets are doing, and take advantage of very

alternatives. In South Africa this has been amplified important tax advantages and a range of solutions

by the historical limitations imposed by Exchange which seem to me to be obviously worth some

Controls. consideration.

To a large degree this has been reversed by the Overseas investments need to stand on their

significant relaxations introduced over the last few own. Weakness in the rand, or worse still, major

years, making it possible for South Africans to volatility caused by local political or social events,

materially diversify investments across global and will add to returns (- when measured in rands).

local bourses, stocks, banks and other investments, I hope I am proved wrong about my expressed

making genuine diversification both possible and misgivings, but as a noted patriot, I have seldom felt

relevant. the powers that be are losing the plot as currently is

This decision is complicated by the difficulty in the case.

motivating exactly what to invest in, given the Caveat Emptor.

confused state of economies, governments,

currencies and markets. Offshore property, which in Mike Estment, CFP

SA has been a star performer, has seen losses, CEO, NFB Financial Services Group

vacancies, oversupply and generally has been a

®BA f i n a n c i a l s e r v i c e s g r o u p

CASH, INFLATION ANDGROWTH ASSETS

We find ourselves in an interesting investment

environment: the local JSE is at an all-time high; global

investors remain nervous around Europe; the US with Ieconomic data indicates a stalling economy that is still

trying to find its feet; and lastly, most central banks are

ready to hit the printing press button and push more capital

into their economies as further easing seems to be the order

of the day.

In this environment investors typically turn to safe havens

like gold, cash and money market. Historically cash-like

investments have given South Africans real returns, but no

longer as we find ourselves with a zero or negative real rate

of return. Most central banks have indicated that low

interest rates will be around for extended periods of time

and thus this is a problem not in a hurry to leave.

Source: I-Net Bridge

What is a real rate of return?This is when you are in an investment and your net return is As an aside, inflation is not at its high currently being around

above that of the inflation rate. The danger of a negative 4.9%. With the South African economy struggling, and with

real return is that you lose purchasing power and even with inflation in its target range, the Reserve Bank may cut rates

a capital increase you cannot buy the same amount of further and in so doing, reduce this real return.

goods next year as you did this year. A second thought is to consider the following situation

Some investors have remained in cash or money market where someone is retired and drawing an income of say 5%

funds waiting for signs of a recovery and an opportune time of the portfolio: his or her real return is -5% (assuming a

to switch into growth assets. This may not come for the next return of 5% and inflation of 5%). In a situation like this we

3, 5, 7 years or longer so it is important to illustrate current sometimes get asked if the capital is going backwards,

investment options. however, in reality the capital value would remain flat, but

The first graph indicates that currently the real return the purchasing power is being eroded almost like a “silent

from a money market fund (money market funds typically assassin”.

have a return in excess of cash) is marginally positive. We One solution is to have saved more than necessary in

have used CPI as a proxy for inflation, however, some may your build up to retirement, so you do not have to worry

argue that this is below actual inflation with food, medical about these matters. However, there are not too many who

aid, and electricity costs all rising substantially in excess of can afford this luxury and it is thus important to understand

CPI. what one can do to rectify this. If someone is retired then

they can try to reduce their costs and thus portfolio The chart above more clearly indicates the volatility of the

drawings, and for those in the pre-retirement phase of life it various asset classes. We can see that over the last 8 years

is important to save more to ensure a sustainable listed property or equities have outperformed CPI and cash

retirement. In both scenarios it is necessary to take on a 63% of the time.

certain amount of growth assets in a portfolio that should, The merits of being in these perceived riskier assets is

over time, provide an inflation hedge. evident, but what is the risk versus return trade off?

A third consideration is that although money in the bank The following scatter plot taken over the last 10 years

is referred to as a risk-free asset, recent events have shown illustrates the risk and reward profile of the four typically

there is still the risk of capital loss in the form of default by available asset classes as well as inflation linked bonds

the issuer (bank or government). (another instrument to hedge against inflation).

So what can investors do in this low interest rate and low

inflation environment to give their portfolios a reasonable

chance to enjoy real returns? NFB focuses on long term

sustainable investing and it is with this in mind that the

balance of this article continues.

What are growth assets?They are assets that display capital volatility and often

provide a yield by way of a dividend or interest income. For

my illustration I have not included offshore asset classes and

so examples of assets further up the risk spectrum are

bonds, listed property and shares.

The graph below shows the investment profiles if you

were to hold these riskier assets described above over the

last 10 years. It is evident that an investor would have been

rewarded for holding bonds, listed property and equities as

they have cumulatively and substantially outperformed

cash represented by the green line.

Source: Morningstar

Cash is shown as the blue dot; the All Share Index is the

blue triangle and the Listed Property Index as the red

triangle. The All Bond Index has been included as well as

inflation linked bonds (green square). Inflation linked bonds

have been included as they give an indication of the risk

versus return profile of inflation. They typically trade at a

premium above inflation.

Source: I-Net Bridge Once again we can see that listed property and

equities have significant volatility (risk is shown on the x axis

The previous graph illustrated cumulative returns so let us and returns on the y axis) when compared to cash, but

now look at the year on year returns and include inflation over the long term have rewarded investors with inflation

for benchmarking purposes. beating returns.

The main concern an investor has investing in these

growth assets is the possibility of capital loss, however, this

can be mitigated through active management of the

various asset classes and within the different asset classes

themselves. A unit trust manager has various different

instruments that he or she can invest in for example; in an

equity fund the manager can rotate between financials,

resources and industrials; and in a bond fund the manager

can choose between corporate bonds, sovereign debt or

inflation linked bonds.

The combination of the various asset classes should

match ones time horizon and risk profile and it is essential

that you speak to your financial advisor to ensure your asset

allocation is tailored to your specific investment needs.

Source: I-Net Bridge

Ima

ge

cre

dit:

123R

F St

oc

k P

ho

to

What can investors do in this

low interest rate and low

inflation environment to

give their portfolios a

reasonable chance

to enjoy real returns?

By Jeremy Diviani,

N F B G a u t e n g ,

Private Wealth

Manager

CASH, INFLATION ANDGROWTH ASSETS

CASH, INFLATION ANDGROWTH ASSETS

We find ourselves in an interesting investment

environment: the local JSE is at an all-time high; global

investors remain nervous around Europe; the US with Ieconomic data indicates a stalling economy that is still

trying to find its feet; and lastly, most central banks are

ready to hit the printing press button and push more capital

into their economies as further easing seems to be the order

of the day.

In this environment investors typically turn to safe havens

like gold, cash and money market. Historically cash-like

investments have given South Africans real returns, but no

longer as we find ourselves with a zero or negative real rate

of return. Most central banks have indicated that low

interest rates will be around for extended periods of time

and thus this is a problem not in a hurry to leave.

Source: I-Net Bridge

What is a real rate of return?This is when you are in an investment and your net return is As an aside, inflation is not at its high currently being around

above that of the inflation rate. The danger of a negative 4.9%. With the South African economy struggling, and with

real return is that you lose purchasing power and even with inflation in its target range, the Reserve Bank may cut rates

a capital increase you cannot buy the same amount of further and in so doing, reduce this real return.

goods next year as you did this year. A second thought is to consider the following situation

Some investors have remained in cash or money market where someone is retired and drawing an income of say 5%

funds waiting for signs of a recovery and an opportune time of the portfolio: his or her real return is -5% (assuming a

to switch into growth assets. This may not come for the next return of 5% and inflation of 5%). In a situation like this we

3, 5, 7 years or longer so it is important to illustrate current sometimes get asked if the capital is going backwards,

investment options. however, in reality the capital value would remain flat, but

The first graph indicates that currently the real return the purchasing power is being eroded almost like a “silent

from a money market fund (money market funds typically assassin”.

have a return in excess of cash) is marginally positive. We One solution is to have saved more than necessary in

have used CPI as a proxy for inflation, however, some may your build up to retirement, so you do not have to worry

argue that this is below actual inflation with food, medical about these matters. However, there are not too many who

aid, and electricity costs all rising substantially in excess of can afford this luxury and it is thus important to understand

CPI. what one can do to rectify this. If someone is retired then

they can try to reduce their costs and thus portfolio The chart above more clearly indicates the volatility of the

drawings, and for those in the pre-retirement phase of life it various asset classes. We can see that over the last 8 years

is important to save more to ensure a sustainable listed property or equities have outperformed CPI and cash

retirement. In both scenarios it is necessary to take on a 63% of the time.

certain amount of growth assets in a portfolio that should, The merits of being in these perceived riskier assets is

over time, provide an inflation hedge. evident, but what is the risk versus return trade off?

A third consideration is that although money in the bank The following scatter plot taken over the last 10 years

is referred to as a risk-free asset, recent events have shown illustrates the risk and reward profile of the four typically

there is still the risk of capital loss in the form of default by available asset classes as well as inflation linked bonds

the issuer (bank or government). (another instrument to hedge against inflation).

So what can investors do in this low interest rate and low

inflation environment to give their portfolios a reasonable

chance to enjoy real returns? NFB focuses on long term

sustainable investing and it is with this in mind that the

balance of this article continues.

What are growth assets?They are assets that display capital volatility and often

provide a yield by way of a dividend or interest income. For

my illustration I have not included offshore asset classes and

so examples of assets further up the risk spectrum are

bonds, listed property and shares.

The graph below shows the investment profiles if you

were to hold these riskier assets described above over the

last 10 years. It is evident that an investor would have been

rewarded for holding bonds, listed property and equities as

they have cumulatively and substantially outperformed

cash represented by the green line.

Source: Morningstar

Cash is shown as the blue dot; the All Share Index is the

blue triangle and the Listed Property Index as the red

triangle. The All Bond Index has been included as well as

inflation linked bonds (green square). Inflation linked bonds

have been included as they give an indication of the risk

versus return profile of inflation. They typically trade at a

premium above inflation.

Source: I-Net Bridge Once again we can see that listed property and

equities have significant volatility (risk is shown on the x axis

The previous graph illustrated cumulative returns so let us and returns on the y axis) when compared to cash, but

now look at the year on year returns and include inflation over the long term have rewarded investors with inflation

for benchmarking purposes. beating returns.

The main concern an investor has investing in these

growth assets is the possibility of capital loss, however, this

can be mitigated through active management of the

various asset classes and within the different asset classes

themselves. A unit trust manager has various different

instruments that he or she can invest in for example; in an

equity fund the manager can rotate between financials,

resources and industrials; and in a bond fund the manager

can choose between corporate bonds, sovereign debt or

inflation linked bonds.

The combination of the various asset classes should

match ones time horizon and risk profile and it is essential

that you speak to your financial advisor to ensure your asset

allocation is tailored to your specific investment needs.

Source: I-Net Bridge

Ima

ge

cre

dit:

123R

F St

oc

k P

ho

to

What can investors do in this

low interest rate and low

inflation environment to

give their portfolios a

reasonable chance

to enjoy real returns?

By Jeremy Diviani,

N F B G a u t e n g ,

Private Wealth

Manager

CASH, INFLATION ANDGROWTH ASSETS

Estate Duty

A licensed Financial Services Provider

Johannesburg Office: East London Office: Port Elizabeth Office:

NFB House 108 Albertyn Avenue NFB House 42 Beach Road 110 Park Drive Central Port Elizabeth 6001, Wierda Valley 2192, Nahoon East London 5241, P O Box 12018 Centrahil 6001,

P O Box 32462 Braamfontein 2017, P O Box 8132 Nahoon 5210, Tel: (041) 582-3990 Fax: (041) 586-0053Tel: (011) 895-8000 Fax: (011) 784-8831 Tel: (043) 735-2000 Fax: (043) 735-2001 E-mail:

E-mail: E-mail: Web: www.nfbec.co.zaWeb: www.nfbfinancialservicesgroup.co.za Web: www.nfbec.co.za

info@nfbpe.co.za nfb@nfb.co.za info@nfbel.co.za

ne thing most of us don't look forward to doing is estate of less than R3 500 000 no estate duty is payable. The estate

planning for the inevitability of our death, but it is one of duty rate of 20% is then applied to the Dutiable Estate to work out

those things we all have to do, and should be part of the estate duty payable by the deceased estate. Oour overall financial planning. We would start by Something to remember: if you are married in community of

making sure we have our Will in order, and making sure we have property, one-half of the joint estate forms property in the estate of

enough provisions by way of investment or life cover in order to care the deceased.

for our families and to pay off our debts. However, something that is

often overlooked is making provision for estate duty or planning to

minimize any estate duty.

One way to reduce your estate duty liability is by specifically

bequeathing certain property to your spouse (including the residue

Estate duty is a tax levied in terms of the Estate Duty Act and it is of your estate). Donations between spouses are not taxable and

collected by the Commissioner of the South African Revenue everything left to your spouse will qualify for the section 4q

Service in respect of the estate of every person that has died or dies deduction in terms of estate duty. Any 'deemed property' - life

on or after 1 April 1955. Estate duty of 20% is currently levied on the policies, with your spouse as the beneficiary, will also qualify for the

estates of deceased persons in South Africa. section 4q deduction.

You could also make use of a trust to achieve estate 'freezing',

where growth assets are transferred to the trust. The costs and tax

involved in this option need to be discussed with your wealth

! All “property” of the deceased at the time of death. “Property” is manager.

defined as any right in or to property, moveable or immovable, Another great way to reduce your estate duty liability is by way

corporeal or incorporeal. “Property” would include your residential of a single premium retirement fund contribution. To keep in mind is

property, holiday home, investments, cash, vehicles, jewellery and that all retirement products (RA's, pension funds, provident funds)

the like. are not estate dutiable, therefore you could transfer funds into a

! All “deemed property” of the deceased at the time of death. retirement annuity, where beneficiaries can be nominated (unlike a

“Deemed property” of the deceased includes policies e.g. Life unit trust or share portfolio) and no CGT would be applicable.

policies, Buy and Sell policies. However, if needed, these funds would not be accessible to you

Once all that needs to be included in the estate has been until after age 55 and then only a maximum of 1/3rd can be taken

finalised, there are certain deductions that are allowed: in cash. On death, these funds will not be estate dutiable.

There are also many other issues that need to be considered so

it is best to discuss your specific circumstances with your private

wealth manager.

! Funeral and Deathbed expenses

! Debts due by the deceased

! Admin expenses John died. The net value of his estate is R9 million. He leaves a

! Foreign Property (if acquired by the deceased before becoming legacy of R4 million to his son, Mark, and the residue of his estate is

an ordinary resident in RSA or if acquired by way of donation or bequeathed to his surviving spouse. The residue (ignoring estate

inheritance from a non-resident) duty) is thus R5 million.

! Limited interests reverting to a donor such as a fiduciary,

usufructary, annuity charged upon property or any other like interest Net value of estate R9 000 000

in property Less Section 4(q) – Residue (R5 000 000)

! Bequests to public benefit organisations (e.g. SPCA) Net Estate R4 000 000

! Claim in terms of the Matrimonial Property Act Less: Section 4 A Abatement (R3 500 000)

! Polices, bequests or anything that accrues to a surviving spouse Dutiable Estate R500 000

(section 4q) Estate Duty Payable (20%) R100 000

The Section 4A Abatement, currently at R3 500 000, is

applicable to all estates. Once your net estate has been Note: The actual amount that the surviving spouse will inherit will be

calculated, the abatement of R3 500 000 will be subtracted leaving the balance of the residue after payment of the estate duty, this will

you with your dutiable estate. Therefore, if you have a dutiable come to an amount of R4 900 000 (R5 000 000 – R100 000).

What can I do to reduce my estate duty liability?

What is Estate Duty?

What is included in the Estate of a Deceased Person?

Deductions from Estate Duty include, but are not limited to the following:

Basic Example of Estate Duty Calculation:

What is estate duty and some

pointers on how to reduce this

liability. By Julie McDonald, NFB

East London, Paraplanner

Estate Duty

Ima

ge

cre

dit: 1

23

RF

Sto

ck P

ho

to