THIRD QUARTER | 2019 WHERE WEALTH AND LIFESTYLE MEET PWM CONNECT Old Mutual Private Wealth Management (PWM) is a business unit of Old Mutual Life Assurance Company (South Africa) Limited, a juristic representative of Acsis Licence Group (Pty) Ltd. Both companies are authorised Financial Services Providers. UNPACKING THE JSE’S SLOW- MOTION BEAR MARKET THE PERILS OF DYING WITHOUT A VALID WILL OFFSHORE TRUSTS – TRUSTEES AND A CAUTIONARY “POEM” JOHNSON & JOHNSON’S RESULTS BEAT MARKET EXPECTATIONS KEEP YOUR CHIN UP
Transcript
THIRD QUARTER | 2019
WHERE WEALTH AND LIFESTYLE MEETPWM CONNECT
Old Mutual Private Wealth Management (PWM) is a business unit of Old Mutual Life Assurance Company (South Africa) Limited, a juristic representative of Acsis Licence Group (Pty) Ltd. Both companies are authorised Financial Services Providers.
UNPACKING THE JSE’S SLOW-MOTION BEAR MARKET
THE PERILS OF DYING WITHOUT A VALID WILL
OFFSHORE TRUSTS – TRUSTEES AND A CAUTIONARY “POEM”
JOHNSON & JOHNSON’S RESULTS BEAT MARKET EXPECTATIONS
KEEP YOUR CHIN UP
PWM CONNECT: 2019 | 2
WHAT’S INSIDE
A WORD FROM RUDOLPH 3
UNPACKING THE JSE’S SLOW-MOTION BEAR MARKET 4
THE PERILS OF DYING WITHOUT A VALID WILL 7
OFFSHORE TRUSTS – TRUSTEES AND A CAUTIONARY “POEM” 9
JOHNSON & JOHNSON’S RESULTS BEAT MARKET EXPECTATIONS 10
KEEP YOUR CHIN UP 11
LIFESTYLE EVENTS 12
PWM CONNECT: 2019 | 3
A WORDFROM RUDOLPHWelcome to our spring edition of PWM Connect. We are fast approaching
year-end and have a few months left to deliver on our New Year's
resolutions set for ourselves at the start of 2019.
In the previous edition, I mentioned that we are in the process of setting up
a new RFA business structure and proposition, which would be registered
as Private Wealth Management (Pty) Ltd. This new structure will afford
us the opportunity to operate as a Registered Financial Advice (RFA)
business. We are making good progress with setting up the structure and
will position and launch the new PWM to you during the last quarter of
this year. Watch this space!
I would like to assure you that our transitioning to the new business structure
will not affect any of our clients, their investments or the relationship you
hold with PWM in any way. PWM will remain a client-centric, advice-led
business. Please speak to your fi nancial planner should you have any
questions regarding our RFA journey.
In this edition of PWM Connect, we will focus on estate planning and
look at the perils of not having a will. Protecting your offshore investments
and family wealth can be challenging and in this regard, Lighthouse Trust
shares an insightful article on the importance of having an offshore trust.
Izak Odendaal, Investment Strategist at Old Mutual Wealth, provides an
overview of the local economy and the performance of the Johannesburg
Stock Exchange.
Kind regards
RUDOLPH VAN ECK
Head of Private Wealth Management
PWM CONNECT: 2019 | 4
UNPACKING THE JSE’S SLOW-MOTION BEAR MARKETIZAK ODENDAALINVESTMENT STRATEGIST, OLD MUTUAL MULTI-MANAGERS
ECONOMIC & MARKET OVERVIEW
The returns from local equities over the past fi ve years have been poor. At the time of writing in late August, the FTSE/JSE All
Share Index delivered an annualised 5-year return of just over 4%, behind infl ation and cash. This compares very poorly against the average return over the past 25 years of 15%. The FTSE/JSE All Share Index is at 54600, a level it fi rst crossed in April 2015. Though the headline index has not experienced a 20% peak-to-trough decline at any time over this period – the traditional defi nition of a bear market – the majority of the 163 individual shares are, or have been, in a bear market.
WHAT WENT WRONG? The connection between the local economy and the continued poor performance of the JSE is often overstated. Chart 1 below shows that the JSE has performed broadly in line with other non-US stock markets over the past fi ve years and longer, measured in a common currency. Over this period only US equities have performed really well.
The shares on the JSE can be grouped in various ways, most commonly by economic activity (resources, fi nancials and industrials), but for this article we’ll group them differently. The fi rst group is mining and resources companies. These are the reason why the JSE was created in the fi rst instance in 1887. The fortunes of these companies depend largely on global commodity prices and the rand exchange rate.
Secondly, there are companies that primarily sell to local customers, and there is no question that many have struggled as economic growth has stalled. This year in particular has been tough for the local fi rms.
Many of these companies responded to the weak economy of the past few years by expanding abroad, with decidedly mixed success (just in the past month Sasol, Woolthworths and Truworths have had to write down the value of overseas investments). Some of the debt-fuelled global expansion stories have come completely unstuck (Steinhoff and Aspen).
A third grouping consists of global companies that have virtually nothing to do with the South African economy but have secondary listings on the JSE for a number of historic quirks. BAT and Richemont out of the old Rembrandt stable were long the main examples. More recently, Quilter was spun out of Old Mutual and Bidcorp out of Bidvest. The raging demand for global property exposure among local investors even saw European property companies seek an inward listing on the JSE. Hammerson, Sirius and Capital & Regional joined the struggling UK-focused stalwarts Intu and CapCo on the local market.
These global companies on the JSE mean South Africans can get global and rand-hedge exposure without using offshore allowances or breaching prudential limits. But it is important to note that these shares do not replicate a truly diversifi ed basket of global shares. Specifi cally, the exposure to the Brexit-plagued UK economy is high, and exposure to the high-fl ying US market is low. In global equity benchmarks such as the MSCI All Countries World Index, the US accounts for about 55% and the UK for 5% (South Africa’s weight is less than 1%).
Finally, Naspers is in a category all of its own. It is a South African company whose foreign acquisition (Hong Kong-listed Tencent) was so successful that it not only dwarfs its domestic operations, but those of most other local companies combined. Naspers is now the largest share on the JSE by some distance, and its gyrations have an outsized impact on the local market. Had it not been for Naspers, the overall performance of the JSE over the past decade would have been much worse.
MSCI ALL COUNTRY WORLD EXCL. US FTSE/JSE ALL SHARE
US S&P 500 MSCI EMERGING MARKETS
CHART 1: SA, US AND NON-US EQUITIES OVER THE PAST DECADE IN US DOLLARS, REBASED TO 100
PWM CONNECT: 2019 | 5
ECONOMIC & MARKET OVERVIEW
Over the past fi ve years, each of these four unrelated groups of shares has experienced periods of weakness for different reasons at different times. Added together, it meant that the overall market moved sideways. • General mining shares fell 60% in 2014
and 2015 as commodity prices fell and investors worried about high debt levels and overcapacity. Since 2016, they have rebounded. Sasol’s problems in completing its new US chemical plant means it has underperformed the rand oil price by a large margin.
• Among the locally-focused shares, banks performed reasonably well over the past fi ve years, delivering a 9% annualised return (i.e. it was better to invest in the bank shares than leave your cash in the bank). Life insurers tend to track the market and have moved sideways. Among retailers, the supermarkets (and Clicks) have performed better than clothing retailers. The latter group are also guilty of questionable offshore acquisitions. Hospital groups also expanded abroad, and the index has halved over fi ve years. Construction shares have lost 60% over fi ve years, partly due to the decline in government capital spending. Food producers are down 40% since early 2018. Interestingly, Telkom is up 50% over fi ve years, showing that state-owned companies can be turned around with strong independent management.
• The globally focused companies performed very well supported by rand weakness up to the end of 2015, but since then have suffered from a number of stock-specifi c problems. Specifi cally last year, non-mining rand hedges fell despite the rand weakening. British American Tobacco lost 40% and Richemont 20% in 2018, for reasons that have nothing to do with South Africa. The British property companies have predictably tanked.
• Naspers is up an incredible 270% over fi ve years, but not in a straight line. It was fl at in 2016 and lost 20% in 2018. It is positive so far in 2019.
WILL WE EVER SEE GOOD RETURNS FROM THE JSE AGAIN? Much has been said about the negative impact of corruption, over-regulation and state ineffi ciency on the economy. Neither of these is entirely new though, and the economy performed well at times over the past 25 years despite these constraints. Nor did they stop the JSE from performing well when the global environment blessed us with high commodity prices and abundant capital fl ows. As recently as 2016, deep into the Zuma presidency, investors still enjoyed double-digit annual returns from local equities over the preceding fi ve years.
What is different now is that business confi dence is completely shattered, in some ways worse than it was during the Zuma years. Perhaps this refl ects the old dictum that happiness is reality minus expectations. Expectations of Ramaphosa’s “New Dawn” were high, and while there have been important reforms, things are not moving quickly enough. But this pessimism is surely overdone. We’ve survived far worse as a country.
For local equities to deliver solid real returns over the next few years requires three things:• We need a supportive global environment.
After all, slightly more than half of the JSE is exposed to the global economy, and several large companies on the JSE are listed in major markets and have their prices
Source: Refi nitiv Datastream
30
80
130
180
230
280
Aug
-14
Oct
-14
Dec
-14
Feb-
15
Apr
-15
Jun-1
5
Aug
-15
Oct
-15
Dec
-15
Feb-
16
Apr
-16
Jun-1
6
Aug
-16
Oct
-16
Dec
-16
Feb-
17
Apr
-17
Jun-1
7
Aug
-17
Oct
-17
Dec
-17
Feb-
18
Apr
-18
Jun-1
8
Aug
-18
Oct
-18
Dec
-18
Feb-
19
Apr
-19
Jun-1
9
Aug
-19
General miners SA banks and retailers NaspersGlobal consumer heavyweights
CHART 2: THE FOUR MAIN GROUPINGS ON THE JSE OVER 5 YEARS.
determined in those markets. Even the share prices of locally focused companies cannot avoid shifts in global sentiment.
• The starting valuation needs to be attractive (shares should be cheap relative to longer-term history). Right now, a lot of bad news has already been priced in and valuations are cheaper than in many years.
• The domestic economy needs faster growth for locally focused companies to expand their margins. Importantly, we don’t need a boom. An improvement from the current sub-1% growth rate to 2% should be suffi cient for these companies to generate solid profi t growth.
CONNECTING THE DOTSWith hindsight it is easy to say that one should have avoided local equities and stayed in cash. But in reality no one can predict the future, and we don’t try to do that. Based on the valuation of the asset class and the economic environment, we have been underweight to SA equities (i.e. held less than we would normally hold), but we have never had a 0% holding in any of our multi-asset class funds. And it is very unlikely that we will ever hold 0%, since such a bold call requires perfect foresight, which no one has. Rather, we aim to maintain appropriately diversifi ed funds, tilted to the asset classes that offer the most value. To meaningfully beat infl ation, one needs to take equity risk. With regulatory limits to offshore exposure, a substantial portion of this has been in the local market.
PWM CONNECT: 2019 | 6
ECONOMIC & MARKET OVERVIEW
For investors, there is an unavoidable trade-off between risk and reward: if you want returns, you need to take risk. This means that there will be periods when equities underperform cash. Over the entire available history of local markets, equities have beaten cash eight out of ten fi ve-year periods. This risk/return discussion is one that should happen between clients and fi nancial planners. We cannot accommodate the risk appetite of each individual client in the funds. Rather, we will always manage each fund according to what is needed to meet its stated long-term target. There are no guarantees, but that is what we need to aim for.
Investors are rightly disappointed with returns over the past fi ve years. So what difference does it make to explain the poor performance? South Africans are despondent about politics, the weak economy, and now low local returns. Today many connect the dots between the three, and assume that equities cannot pick up unless the former two improve. But the lesson of more than a century of South African fi nancial history is that the connection isn’t always that strong. Local markets have always been cyclical, and often delivered despite political turmoil and uncertainty. Local equities will have their moment in the sun again. Unfortunately, no-one can say when exactly that will happen.
PWM CONNECT: 2019 | 7
ESTATE PLANNING
THE PERILS OF DYING WITHOUT A VALID WILLCRAIG HEMPHILLFINANCIAL PLANNER, PWM DURBAN
Afew years ago, the sudden death of one of my friends in tragic circumstances left his family in disarray. As a young
father of a young family, he had made sure that there was risk cover in place to provide for his children's education, and assist them through most of their “growing up” years. Unfortunately though, as he was still relatively young, his thoughts had never extended to the need to have a properly executed will in place.
Recently, the sister of one of my clients passed away and I was asked to give advice on the process of winding up her estate. My fi rst question was whether there was a will in place and I was quickly assured that the deceased had drafted and executed her own will. Upon receiving the will, my heart sank because certain critical clauses were left out, and more importantly, one of the pages of the will was not signed by her. As anticipated, the Master of the High Court rejected the will on the basis that it did not comply with the requirements of the Wills Act.
In both instances, the estates had to be dealt with as intestate estates. An intestate estate is one where there is no valid will in place and the assets are distributed according to a complicated procedure governed by the Intestate Succession Act, which often results in unintended consequences.
Without a will you forfeit the right to choose your preferred executor, and who inherits your assets. If your estate is large, you can end up paying far more estate taxes and executor’s fees than is necessary. Under South African law, minor children can inherit from an estate, but the benefi t may only be transferred to them on reaching age of majority. If the estate is subject to the Intestate Succession Act then the assets are held in trust by the Guardian’s Fund until the child reaches majority (age 18).
The Guardian’s Fund falls under the Master of the High Court, who administers the assets on behalf of minor children until they reach majority. The funds are diffi cult to access and are invested at low rates of interest, which has a devastating effect on the longevity of the capital over time. Offi cials who administer the Guardian’s Fund have to deal with numerous claims and are not aligned with the interests of benefi ciaries in the same way as trustees of a trust are.
Apart from these, there is one further issue. Once they reach majority, benefi ciaries can claim and receive their inheritance. Most 18-year-olds still have 3-5 years of tertiary study left to be funded by the inheritance. There is enough research about lottery winners to tell us that giving a large sum of money to someone at any age (never mind an 18-year-old!) is something that has to be handled very carefully.
If the size of the inheritance is large, or if the 18-year-old is not yet mature enough to handle the infl ux of a capital amount, or if they are not being adequately advised, the money can quickly disappear, and with it the future intended for the child.
Setting up a trust in your will is an effi cient and effective way of solving all of these issues. In the case of large estates, the trust provide proper management of your assets for more than one generation, perhaps even providing assistance in the way of charitable giving (e.g. bursaries) for many generations to come.
PWM CONNECT: 2019 | 8
ESTATE PLANNING
The consequences of not having a will drafted by a professional can be far-reaching. It is critical that you make sure that you not only have a will, but that the will is both well drafted, taking into account your personal circumstances and wishes, and properly executed (signed).
In the fi rst case I mentioned in this article, my friend made some provision in case of his death, but never followed through with a will because he felt he was too young. You are never too young to have a properly drafted will in place.
In the second case, the lady felt she had the expertise to draft her own will, in the process not only leaving out critical clauses but also not signing the will correctly. She didn’t have a fi duciary specialist advising her or checking what she had done, and as a result her family had to deal with the consequences.
In order to be valid, a will must comply with certain strict requirements. So unless you are well versed in these requirements, it is essential that you should have a specialist to assist you. Even if you have a simple state of affairs, there are a host of sub-parts to a will that can be added to ensure that your family receives the maximum benefi t via the smoothest possible transition. This applies to the structuring of your estate prior to death as well, so that your will and existing estate work hand in hand to ensure maximum benefi t for your heirs.
In the end, your will may be the most important document you ever sign. It’s also the only sure way to transfer your hard-earned assets to the right recipients, in the way that best advantages them, so it really pays to get specialist advice. At PWM our fi nancial planners have a wealth of experience and expertise in structuring estates and ensuring that your will contains the right formalities to be valid. We also have fi duciary experts available to give advice on more complex arrangements, so don’t hesitate to contact us to ensure that you have a valid will, and that it is kept up to date.
PWM CONNECT: 2019 | 9
OFFSHORE TRUSTS
NEIL RIEKERTLIGHTHOUSE TRUST AND CORPORATE
OFFSHORE TRUSTS– TRUSTEES AND A CAUTIONARY “POEM”
An offshore trust can be a very effective way to manage and protect
investments and family wealth. Such trusts are often established in a
low or zero tax jurisdiction such as Mauritius, Jersey, Guernsey or the
Isle of Man. A properly established and compliant offshore trust may
not be subject to income tax, donations tax, capital gains tax or death
(estate) duties. The term compliance has many faces to it. However, for
an offshore trust it's not a choice, it's rather an essential requirement.
In recent years, all reputable offshore jurisdictions have entered into
reporting and exchange of information arrangements with South Africa
(and indeed most of the world) making offshore trusts and structures far
more transparent than in previous times.
An offshore trust is established by a settlor (or donor as they are known
in South Africa) handing an initial asset, very often cash, to the trustee
situated and domiciled in the chosen country, for the benefi t of the
nominated benefi ciaries. Such professional trustees are usually registered
corporate trustees (meaning a company rather than a private individual)
managed by an in-country specialised fi duciary services provider. The
corporate trustee manages and controls the assets of the trust and is
typically required to be registered under the specifi c country’s fi nancial
services regulator. This provides a level of oversight and assurance to a
donor that the professional trustee is accountable and subject to strict rules
and regulations. They should also hold professional indemnity insurance
cover and the directors of a corporate trustee should be suitably qualifi ed
and experienced. In banking, tax and reporting terminology, the settlor is
also known as the benefi cial owner, or simply the “BO”. The identity of
the BO of any offshore trust should be known to the trustee, compliance
offi cers and the bank with whom the trust holds an account.
Offshore trusts are commonly discretionary trusts, meaning that the trustee holds the ultimate discretion as to the distribution of benefi ts under the trust to the nominated benefi ciaries, subject of course to the provisions of the relevant trust deed and the wishes of the original settlor. Of critical importance is that the place of effective management and control (“POEM”) of the offshore trust remains at all times in the offshore jurisdiction in which the trustee is domiciled. Secondly, the trustee should in fact manage and control the trust. This would mean that trustee meetings, decisions, fi nancial records and resolutions are made, held and maintained by the trustee in the trust’s home country. A failed offshore trust may exist where a settlor situated in South Africa still blindly commands the affairs of an offshore trust to the exclusion of the appointed trustee, resulting in a shift in POEM to South Africa and the trust then being taxed in South Africa.
The importance of not only following the correct procedures when establishing a new offshore trust, but also the choice of trustee, cannot be understated. A face-to-face meeting with the directors or controlling persons of a proposed trustee in the offshore jurisdiction is well deserving and may also provide a good island holiday at the same time! For more information please contact your PWM fi nancial planner or visit our website at www.lhtc.co.za
Johnson & Johnson (J&J), the world’s largest healthcare company, reported
second quarter results that beat market expectations on both revenue
and earnings. Sales declined on a year-on-year basis due to a stronger
US dollar. However, earnings were up strongly following a once-off
contribution from the sale of the Advanced Sterilization Products business
from within the Medical Devices segment.
After adjusting for currency and once-off effects, sales grew 3.7%, led
by international markets, while EPS (earnings per share) was up 22.9%.
Over the past 12 months, J&J completed their acquisition of Zarbee’s
Inc, a leader in the US naturally based healthcare market. Zarbee’s
Naturals, as their products are marketed, was founded by a paediatrician
who was inspired to create safe, wholesome and effective alternatives
to OTC (over-the-counter) medicines.
The acquisition bolsters J&J’s consumer product portfolio and enhances
their ability to capitalise on consumers’ increasing preference for more
natural OTC products.
BEAT MARKET EXPECTATIONS
MARKETS & INDICATORS
COMPANY NEWS
PWM CONNECT: 2019 | 11
KEEP YOUR CHIN UP
LIFESTYLE
The average person spends over four hours a day scrolling and texting on their cellphone, which has resulted in an
unfortunate modern-day condition known as: Text Neck Syndrome.
Symptoms of "text neck" include headaches as well as back, neck and shoulder pain – caused by muscle imbalances due to having a forward head posture, which happens when the chin is dropped.
According to Physiopedia, in addition to these common symptoms, there can also be more serious long-term damage as a result of this condition, such as:• Early onset of arthritis• Spinal degeneration• Disc compression• Muscle weakness• Loss of lung capacity
HOW TO AVOID TEXT NECK?While it’s unrealistic to banish cellphone and tablet use altogether, especially when it’s become such an intrinsic part of our lives, taking a preventative approach and becoming more mindful of postural correction can help.
Spine-health offers the following suggestions and adjustments to prevent text-neck pain.• When using your phone, raise it up closer
to the eye level so the head does not need to be tilted forward.
• Don’t rely on your phone as a crutch for boredom and limit social media as much as possible. Instead of checking your phone when you’re out and about, breathe.
• Adopt a good posture for the whole body and take regular movement breaks.
• Arch and stretch. Arch the neck and upper back backward periodically to ease muscle pain. Doing even 10 minutes of yoga a day can make a big difference and helps to increase body awareness.
• When waiting in a queue, stand up straight. Good posture, with the chin tucked in and shoulders pulled back, keeps the body aligned in a neutral position.
• Exercise regularly. A strong, fl exible back and neck are more able to handle extra stress. Some research indicates that teenagers who are active in low-impact team sports or endurance sports are less likely to have neck pain.
WHEN TO SEE A DOCTORIf neck pain keeps recurring and is accompanied by a severe headache, fever, nausea, unintended weight loss, dizziness, pain or tingling that radiates down into the arm or hand, it is important to seek medical attention in order to get the right treatment.
While there’s no single method guaranteed to alleviate your tech-induced pains, at the end of the day, it doesn’t hurt to stretch and exercise to keep your muscles active and fl exible.
PWM CONNECT: 2019 | 12
Old Mutual Private Wealth Management is a division of the Old Mutual Life Assurance Company (South Africa) Limited (OMLACSA). OMLACSA is also a juristic representative of Acsis Licence Group (Pty) Ltd. Both companies are authorised Financial Services Providers.
Disclaimer:These articles are for information purposes only and do not constitute fi nancial advice in any way or form. It is important to consult a fi nancial planner to receive fi nancial advice before acting on any information contained herein. PWM, the Old Mutual Group and its directors, offi cers and employees shall not be responsible and disclaim all liability for any loss, damage (whether direct, indirect, special or consequential) and/or expense of any nature whatsoever, which may be suffered as a result of, or which may be attributable, directly or indirectly, to the use of, or reliance upon any information contained in these articles.
Port Elizabeth: 041 394 1700Bedfordview: 011 455 8600
CONTACT PRIVATE WEALTH MANAGEMENT
GISELLE – JOBURG THEATRE Giselle is the story of a love so powerful it reaches from beyond the grave. The ballet’s exquisite dancing lays bare a tale of passion, betrayal and forgiveness with one of the greatest of all ballerina roles at its centre. The ballet is performed by Joburg Ballet in association with the Johannesburg Philharmonic Orchestra.
Dates: 4 to 13 October 2019 (various times) Venue: Joburg Theatre, 163 Civic Blvd, Braamfontein, Johannesburg
CAPE TOWN INTERNATIONAL BOAT SHOW The show brings together manufacturers and buyers of luxury boats, accessories and marine equipment to gather, share and explore the many facets of the boating and related industries. Guests can expect a display of the world’s fi nest yachts, catamarans and exotic boats, family fun and water sport activities.
Dates: 18 to 20 October 2019Venue: V&A Waterfront, CBD, Cape TownFor more information visit: www.boatshow.co.za
MOZART PIANO TRIOS WITH TRIO DE MUSIQUETrio de Musique, in celebration of compositions by Mozart, performs as part of La Motte Wine Estate’s classical music programme.
Date: 19 October 2019
Time: 7 pmVenue: La Motte Wine Estate, R45, Franschhoek
