Investment Newsletter (and related info)
July 2008
Declaring war on investment costs
Making adequate provision for retirement is no easy task. There are many obstacles for even the most astute investor to overcome. It is common knowledge, for example, that time is the most precious asset in any retirement planner’s toolkit. Because the earlier you begin saving the more time your investments have to benefit from compound interest and compound annual returns.
If ‘time’ is the retirement planners ally; then cost is certainly their worst enemy. You’re all familiar with the range of fees levied on retirement and investment products. There are administration fees, asset management fees, one-off initial fees, monthly commissions and any range of creative add-ons dreamt up by product providers over time. But times are changing and there’s a growing industry-wide acceptance that fees need to be curtailed to the overall benefit of the country’s retirement and savings landscape.
Do annual management fees really cause that much damage?
Rob Rusconi of Tres Consulting recently provided a table to indicate the impact of annual asset management fees on long-term savings. Assuming regular monthly contributions escalating by 7% per annum and an annual return on assets of 10% the impact can be quite significant. Over thirty years a 1% asset management charge will lead to a reduction of 14.1% in long-term savings, with a 2% charge ‘costing’ the investor 28.3%.
The total percentage ‘sacrificed’ varies over time depends on the timing, size and frequency of inward investments and the actual gains achieved on the invested funds. What is even more alarming is that most retirement savers pay multiple asset management fees. They may, for instance, pay their financial planners an annual fee (based on invested funds) and incur the management fees in various products the financial advisers invest them in.
Possibly the cheapest entry to the stock market – ever
At the invite of Satrix, Rob Rusconi conducted a detailed study of the Satrix range of Exchange Traded Funds to see how they stacked up against conventional unit trusts where costs were concerned. His analysis showed that the product had a TER of just 0.37%. At first glance the 0.37% annual charge on the Satrix ETF is fantastic and a credit to the product provider. But investors should remember what Rusconi said at the start of his presentation. He advised the audience that his assessment of the product was based on the product only, and ignored the costs of access to the product. If your money could mysteriously appear in a Satrix account you’d be over the moon. Courtesy of FAnews Online
Apply online: Satrix Investments
Preference Shares: Know the Risks
Preference Shares are a stable source of tax-free income for investors and
continue to attract substantial investment in the South African market. However,
it is increasingly clear that that many investors do not understand the risks
inherent in Preference Shares and do not appreciate the differences between
the various types of Preference Shares. This article seeks to explain Preference
Shares, the Preference Share market and their tax status.
What are Preference Shares?
Preference Shares are shares issued by a company which rank as a claim
against the Issuer in preference to ordinary shares but behind any other claims,
such as unsecured debt. Creditors therefore have a prior claim (before
Preference Shareholders) against the capital of the Issuer.
This subordinated status is normally mitigated in the case of Redeemable
Preference Shares, as an investment in this type of Preference Shares is
normally combined with a guarantee or put option of all claims against a highly
rated bank and institution.
Types of Preference Shares
Preference Shares can be divided into two major categories:
• Equity Instruments – these are Preference Shares that have equity
characteristics and include Preference Shares that are convertible into equity,
are non-redeemable and have non-cumulative dividend distributions. An
example is Perpetual Non-Cumulative Preference Shares. Most JSE listed
Preference Shares fall in this category.
• Financial Instruments – these are Preference Shares that have debt
characteristics and include Preference Shares where the capital is redeemable
and dividends are linked to an interest rate. An example is Redeemable
Cumulative Preference Shares.
Conclusion
A clear distinction should be drawn between Perpetual Preference Shares and Redeemable Preference Shares.
• Perpetual Preference Shares are equity investments (listed on the JSE), providing a dividend return linked mainly to Prime. Capital and dividends are not guaranteed. As history has proven, a significant market risk is assumed by investors in these instruments.
• Redeemable Preference Shares combined with a Put Option or a Guarantee are unlisted debt equivalent investments that provide an investment with capital certainty and a Prime-linked dividend payment, guaranteed by high-quality banks and institutions. No market risk exists for investors in these instruments. Courtesy of Glacier Research
Read more about preference shares and how to apply
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Interest rates finally begin to bite
After 10 successive interest rate hikes which saw the prime interest rate moving from 10.5% in June 2006 to 15.5% today, the consumer is finally showing signs of cracking. And while this doesn't’ sound like the kind of thing the country’s central bank should want to achieve – that’s exactly what an inflation targeting monetary policy results in. When consumer growth gets out of hand – fueling inflationary pressures – the repeated hiking of interest rates is supposed to dampen demand.
Right now inflation is doing as good a job as the Reserve Bank at cutting disposable income. Petrol is a perfect example. As oil continues its march beyond $140 per barrel local consumers have had to endure six consecutive petrol price hikes. A litre of 93 Octane fuel (in Gauteng), which would have cost you 733c in January, now changes hands at 1050c. That’s an increase of 317c per litre (+43%) which amounts to an extra R190 every time you fill your 60 litre fuel tank!
Mortgage book still growing – but
South Africa’s total mortgage book stood at R898.3bn at the end of May 2008 – a growth of 20.6% year-on-year. And although this number seems to contradict our opening comments economists point out that this growth is significantly down on the 30.9% year-on-year growth peak recorded in October 2006. They say that the falling trend in new mortgage advances is far more telling. FNB economist John Loos told Business Report that new mortgages and re-advances are down 16.7% for Q1 2008. And this dearth of new ‘home loan’ money is being felt in the market for residential real estate.
Standard Bank released its June 2008 “Residential property gauge” to reveal that the median house price contracted 11.3% year-on-year, falling to R550 000 from its previous R620 000 level. The latest decline brings the five month moving average to 7.8% – somewhat less than the current CPIX of 10.9%. What this means, according to Standard Bank’s measure, is that real house prices are falling. The report summarises this trend neatly: “The broad trend within the South African residential property market is in line with the evolving and intensifying headwinds currently confronting the South African consumer.”
Latest South African Reserve Bank numbers show that the average South African’s debt servicing ratio stands at 11.78%. What this means is that debt repayments expressed as a percentage of disposable income is very close to the 12% ‘danger’ level. The last time this ratio reached 12% was in 1998 when prime went over 25%. And the time before that (1986) required similar interest rate interventions! To understand why this ratio is creeping up we need only consider the monthly cost of servicing a R500 000 mortgage. In June 2006 you were paying R4 992 per month, today you’re digging deep to find R6 769… that’s a whopping 36% jump!
A possible increase in ‘distress’ borrowing
Many problems emerge as consumer disposable income drops. The first major issue is the affordability factor. Households suddenly find that they cannot support the lifestyle they’ve become accustomed to. Adjustments have to be made. For the lucky households it means less entertaining, partying and luxury goods. For those who are under more severe pressure it might require serious restructuring of debt while those who refuse to moderate their spending behaviour often resort to ‘distress’ borrowing!
Courtesy of FAnews Online
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