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Just a couple of percent…

in Asset classes, Investment, Regulatory environment, Saving, Tax Exempt Savings Accounts Leave a comment
Expenses eating your investments?

One of the controversial areas in investment is still fees. Regulatory bodies have been aggressively forcing asset managers to disclose fees in a manner that is easily understood by their investors, but concurrently there should be an education program so that those investors, especially the smaller unsophisticated investor, to understand what fees are being charged, and for what. Everyday I come across clients who either are completely obvious to the fees that they are being charged – or assume that the advisor or broker gets it all. The requirement for the disclosure of Total expense ratios (TER) was introduced in April and July 2007. (The Life assurance industry doesn’t call it TER, they call it ‘reduction in yield’)

On any quotes you now get, the fees have to be clearly and prominently displayed, and broken down into the 3 major categories: Platform ( admin) fees, Asset manager fees and Financial advisor fees. The really grey area is ‘performance fees’ – but more about that later. These are collectively measured under what is called TER – Total Expenses ratio, expressed as a percentage. Total costs divided by total assets. Unfortunately in South Africa this is not an ‘all in fee’ and some costs are still ‘hidden’.

Platform or admin fees are the fees paid to the ‘platform’ aka financial institution who is ‘housing’ your investment. This could be a LISP provider (Investec, Alan Grey, Momentum wealth etc), an insurance company (Liberty, Discovery etc) as well as banks and a variety of other Financial Service Providers.

Asset manager fees are paid to the managers of the collective investment or stock portfolio that you have chosen to invest in, for example Coronation Capital Plus, Investec Equity or Stanlib Property. Those asset managers buy the investments that are the core of the investment. A stockbroker is usually also your asset manager. Collective investments are large pools of shares which allow individual and small investors to get the advantage of diversified investments (in equity, property, offshore, bonds, cash) without having to buy the shares themselves. If you want to build your own diversified share portfolio, it will take hundreds of thousands. Most experienced stockbrokers, for example, will not take on a portfolio that is less than R1m. “Fund of Funds” have got a bad reputation for high fees, and are rarely referred to as such anymore, but believe me, they are still there, in full force. Instead of buying the underlying shares in these collective investments, they buy other collective investments and bundle them into one – and charge their own asset manager fees on top of that (of course). The problem is that if the ‘asset manager’ fees in the collective investment can’t be negotiated down, those fees start to spiral out of control.
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Your Home. Major Asset or Major Liability?

in Asset classes, Property, Retirement funding Leave a comment
Major asset or Major Liability. The choice is yours.

In the Budget the Minister of Finance announced a new tier of 11% (was 8%) on homes over R2.25m. This ‘wealth tax’ will bring is a paltry R100m (a third of Nkandla) but is politically popular. If you own a home, a presumably playing a mortgage on it, it is likely to be your biggest single asset, but is it an investment? Yes, if you’re smart.When you’re shopping around for a house, looking to move – ask yourself a couple of questions:

  • As tempting as it might be, try not to take out the maximum bond you, or you and your partner can afford. This doesn’t leave any wiggle room if interest rates rise, or if one of you loses their job, even for a few months.
  • Why are you wanting to move? Forget the stories you’re telling yourself and everyone else. What is the real reason? Are you bored? Need peer recognition? Nagging by your partner? If you’re moving house more than once every ten years, you’re wasting money. Lots of money. Say you buy (today’s equivalent) of a R2m home every 5 years for 25 years. In today’s money, that is R500k in transfer duty, R600k in agent’s commission, R100k in bond registration costs, R100k in moving costs. R1,300,000 ! In the interim you’ve probably pushed your ‘bond-free’ date out by at least 10 years – and this is assuming you haven’t ‘upgraded’ to a more expensive home or area. These massive costs are one reason why ‘fixer uppers’ are no longer a viable commercial proposition.
  • What if you upgraded your existing home rather than buying new? Retiling, an extra bathroom, covered patio, landscaped garden, granny flat, balcony, new driveway will add to the value of the property, but, more importantly will add to the enjoyment of it.
  • What is it going to cost you to move? There are a number of good online calculators that can give you that answer in seconds like HERE. This money has to be available as ‘cash’ – but will probably be taken out of whatever ‘profit’ you have made on your home. If you personally had to write those cheques, you might not be so cavalier about it.
  • How much are you going to get for your existing house? Not what you ask, what you get. The prices you see in the paper are often way above what they get THIS is a good resource to get those actual values. You can buy a property report for a similar property in your area for under R100. This immediately gives you the same information the estate agents in your area have. Visit houses for sale in your area for at least a couple of months before you make your move.
  • Work out exactly what ‘profit’ you’re going to make on your house, after you’ve deducted all those expenses. Agent’s commission, transfer duty, bond registration, conveyancing fees, occupational rent. What does that work out as profit (growth) per annum? (profit divided by buying price (as a percentage) divided by the number of years). If this profit isn’t over 10% per annum, you’re throwing money away. It isn’t an investment, it isn’t even a lifestyle asset, it is a lifestyle liability. All of that profit after costs should go into the deposit – don’t let any more value leak out of the asset.

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Not just one ingredient in a recipe – Investments

in Asset classes, Investment Leave a comment
Demystifying investments

Investing can be daunting for the average person, not helped by gurus using insider jargon like asset allocation or asset liability modelling, beta, TER, standard deviation, efficiency frontiers and dozens more. Of course you can learn all of these by watching business news every day and googling the terms – but unless this is your job or passion – it’s like watching paint dry. So, what do you need to know so you aren’t ripped off, and what can you leave to the investment nerds that advise you and structure those products?

Asset classes: Basically (and yes, you can get way more complicated if you want to) there are four. Stocks, Bonds, Cash and property. Stocks are found on the local and international stock exchanges. Bonds are similar to cash, and the return is similar. They are issued by government and corporates (they issue them to raise funds, just like you get a mortgage bond to raise funds for your house – it’s long term debt). Property can take various forms, but it is usually commercial rental property. Cash needs no explanation. off shore investments comes with one other big variable. The asset classes will be the same but you have to factor in exchange rate fluctuation. It adds a whole new layer of risk. If the offshore market drops and the exchange rate improves, you’ll have a double whammy.

Return on Investment: Bucks back! This can take various forms. Interest from cash, yield from bonds, capital growth and rental income from property, capital growth and dividends from stock.

Risk: Each of those asset classes behave differently. When you bake a cake the baking powder behaves differently to the egg, but work together to come up with the final yummy product. Cash and bonds don’t give a great return, usually around inflation rate – but they don’t bounce up and down. If you’ve got a delicate investment stomach – that is the way to go, but it isn’t going to grow much beyond inflation. Property is in the ‘new normal’. It used to give a fairly even return, without the ‘volatility’ you get from the stock market. The 2008 credit crunch and recession was caused by property shenanigans in the States, and since then we have entered the ‘new normal’. Property has shown itself to be just as volatile and unpredictable as the stock market, but also giving some decent returns. In 2014 the returns from property outstripped the stock market. The stock market can be very volatile. It can bounce up and down percentage points on a daily basis.
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