Starting to invest as early as possible, and as much as possible, is one of the best decisions you can make to optimise your wealth creation. This month five experts – all women, of course – will cover topics right from starting with a simple, sound investment approach to tapping into a multi-billion-dollar investment industry.
Navigating the world of investments
‘The individual most accountable for your future financial welfare is the one you see in the mirror today’ – Kimberley Wardlaw
There is no doubt that we are living in challenging times as a result of the economic impact of the COVID-19 outbreak – the most used word in many news articles, presentations and conversations is ‘unprecedented’. Even in these uncertain times, we still have to think about and plan our futures to ensure not becoming one of the 95% of South Africans who will have too little capital saved to support them through retirement.
Put simply, the two most important investment objectives are savings for a rainy day (an emergency fund) and long-term savings for retirement. Emergency savings became more evident as a need during the COVID-19 outbreak last year in March/April when many people found themselves having to take a reduced salary or even losing their employment. The recommended emergency savings fund amount is six months’ net salary. The sooner you start saving, the sooner you can harness the power of compounding returns from your investments. Using an income replacement ratio (IRR) calculation, the estimated amounts that you should save is at least 15% of your income if you have 40 years left to retirement and have saved no capital, 18% when you have 35 years left to retirement, and 22% if you have 30 years left. If you have only 20 years left to retirement and have saved zero capital, you should save as much as 36% of your income.
Another way of looking at retirement saving is to work out how much you should have saved towards retirement at certain points in your life: working for 10 years (age 35) = 2x annual salary; working for 15 years (age 40) = 3x annual salary; working for 25 years (age 50) = 6x annual salary; working for 30 years (age 55) = 7x annual salary; working for 40 years (age 65) = 12x annual salary.
Not only are we living and working in a global world which can present exciting new opportunities, so too a multitude of investment options are available to you. Added to this, we are busy people − building our careers, running our homes and raising our children, with limited time to pay attention to our own financial well-being. Access to information, through the power of the Internet, sometimes makes it difficult to distinguish the noise from the facts.
Our ultimate goal when investing is to beat inflation. Inflation erodes wealth and the purchasing power of our money. The official inflation rates do not realistically represent our actual increase in living expenses; take for example the increasing cost of medical aid premiums, which are generally about 4% above the official inflation rate.
How do you get there?
Define your goals
The first step is defining what you want to achieve with the money you will be saving:
- Shorter-term goals are generally invested in a cash fund or low-risk, conservative portfolios with the objective of reduced volatility in the portfolio and little to no negative impact on short-term withdrawals from the portfolio.
- Longer-term goals are generally invested with a high allocation to equities. Most investment markets exhibit price volatility, which is unpredictable over shorter periods and negative returns are possible. Your objective is to hold for the long term, through the ups and downs. Ideally, you do not want to be forced to draw down from a portfolio in periods when the equity market is down.
Understand your tolerance to risk
This refers to how likely you are to react when the value of your investments falls – will you hold through the market volatility, or will you sell and run for a cash investment? During the market crashes in March/April 2020, even sophisticated investors made the poor decisions of selling out of their equity portfolios and moving to cash. You may discover that you have a very low risk tolerance, but your investment goal is for the long term which means that during market volatility, you need to stick to your long-term goal.
Asset allocation drives performance
A wide body of research and evidence shows that the bulk of investment returns can be attributed to decisions about asset allocation. In this regard, asset classes, locally and globally, include listed equities in developed and emerging markets, cash, government bonds and property, as well as high-yield and emerging market bonds, including corporate bonds and alternative strategies, such as hedge funds and physical assets. And then, of course, there’s crypto, which is not regulated and high risk! Through the effective combination of different asset classes in a portfolio, you can successfully reduce risk without compromising returns. A portfolio that consists of a range of asset classes that behave differently from one another is an important component of any investment strategy. Invested in these different sources of return is the basis for a robust investment portfolio that should preserve and grow wealth consistently.
The return you get is directly related to what you are invested in, as returns are driven by the performance from the relevant underlying asset class. For example, if you are invested purely in a money market fund, your return over the last 12 months would be around 4,5%. Due to the market crash in March/April 2020, the one-year return for certain asset classes are reporting much higher than the norm and are highly unlikely to continue over one-year periods going forward. Past returns are not a guarantee for future returns, and it is very important to take this into consideration when structuring your investment strategy. An example of this, but not limited to, is: Global Equity’s (MSCI AC World Net US$) one-year return is 41,8% (in US$) but the annualised five-year return is 14,2% (in US$). The one-year returns are purely reflecting the recovery in the markets from the COVID-19 crash.
Choosing your partner
With improved technology, you can invest directly through one of the many online platforms which offer lower fees and no financial advice. Alternatively, you can choose to work with a financial planner who will walk the journey with you and advise you accordingly.
Choosing the investment vehicle
Not all investment vehicles are equal:
- Tax-free savings – no tax deduction on your contribution; the underlying portfolio is tax free and on withdrawal, the proceeds are tax free. The contribution is limited to a maximum of R36 000 in a tax year, with a lifetime contribution limit of R500 000. The investment is fully liquid at any time.
- Endowment – no tax deduction on your contribution, the underlying portfolio is taxed (currently interest income is taxed at 30% and capital gains are taxed at 12%), but on withdrawal, the proceeds are tax free. The investment has restricted liquidity in the first five years.
- Retirement funds (retirement annuity, pension fund, provident fund) – your contribution is tax deductible at your marginal rate of tax up to a maximum of 27,5% of your gross income, but with a maximum of R350 000 in the tax year; however, the underlying portfolio is tax free. On retirement, any cash lump sums taken from a retirement fund are taxed according to the retirement lump sum tax tables. Your retirement annuity can only be accessed from age 55 onwards and your pension or provident fund can only be accessed when you leave your employment.
- Choosing your underlying investment structure
Unit trust fund – there are many unit trust funds to choose from, locally and globally, which are managed by different fund managers. The fund manager makes the decisions about the asset allocations and the individual shares to buy in the fund, and for their expertise, a fee is charged within the fund.
- Exchange-traded fund (ETF) – ETFs have become very popular as they are a low-cost solution, but bear in mind that the ETF you are invested in follows the selected index and there is no active management on the individual share selections.
Direct share portfolio – You can invest in a selection of shares of your choice, or a share portfolio manager can select individual shares for you.
When investing globally, you need to be aware of any SITUS tax implications in your investment. Additionally, you should decide whether you wish to hold the investment in hard currency, which is invested through taking capital offshore using your foreign capital allowances. Or do you prefer to invest in global asset classes in a unit trust fund that is managed in South Africa?
Ongoing monitoring of portfolio
Now that you have an investment portfolio structured for your needs, the most crucial action going forward is reviewing your investments on a regular basis; where you started out may not be the most appropriate place to be going into the future – the world changes and your needs change, as do your personal circumstances such as getting married, having a child, losing your job, or starting a new job.
Make the time to plan and if you don’t want to navigate this alone, seek advice from a professional and certified financial planner. Remember, it is still your responsibility to curate a healthy financial future.
Author: Pam Ingram is an Advisory Partner at Citadel Investment Services and a Certified Financial Planner
Impact investing: A South African opportunity
Impact investing presents a timely opportunity for South Africa following the recent unrest in the country
The World Bank estimates that 55,5% of South Africans live below the national poverty line of $1,90 a day. This is further complicated by an unemployment rate of 32,6% (74,7% youth unemployment per the expanded definition) and worsened by the fact that South Africa remains one of the most unequal societies in the world. The continuing impact of COVID-19 on business and society has exacerbated these problems. These challenges are reflective of a system that needs to work better.
The sophistication of financial institutions in South Africa − the efficiency of the market reinforced by sound regulation, along with a progressive tax system − offers an opportunity to address the country’s triple challenges of poverty, inequality and unemployment.
Impact investing presents a unique opportunity to address key social imperatives by investing money with the deliberate intention to achieve both a financial return on capital and a positive social and environmental impact. It focuses on clusters of societal and environmental issues with a view to solving them sustainably.
Despite the COVID-19 pandemic, the global impact investment market is growing and is now estimated to be worth more than $1 trillion. The global impact investing community has a key role to play in thinking about post-COVID-19 innovations such as financing social interventions in healthcare, affordable housing, education and those that secure jobs. There is an urgent imperative to accelerate the deployment of such capital in the face of growing socio-economic injustice and massive environmental degradation.
The emergent impact investment market provides capital to address the world’s most pressing challenges and has included a multitude of stakeholders. Excitingly, the accounting profession has kept abreast. In March this year, the IFRS Foundation announced the creation of a new IFRS Sustainability Standard Board (SSB) following a consultation on sustainability reporting launched in September 2020. The formation is intended to ‘accelerate convergence in global sustainability reporting standards focused on enterprise value and to undertake technical preparation for a potential international sustainability reporting standards board under the governance of the IFRS Foundation’. The consultation is open for comments until July 2021.
Locally, the National Taskforce for Impact Investing South Africa (IISA) has played a pivotal role as a multi-stakeholder partnership to promote public-private coordination in growing domestic impact investment. The Bertha Centre for Social Innovation and Entrepreneurship at the University of Cape Town Graduate School of Business acts as the secretariat for the IISA Taskforce. Through IISA, South Africa became the first African member of the Global Social Impact Investing Steering Group (GSGII), which was established in 2013 as the successor to the G8 Social Impact Investment Taskforce. Most recently the Impact Investment Taskforce was launched to coordinate efforts in countries belonging to the G7, G20 (SA included) and those attending the COP26. The Impact Taskforce will harness private finance at scale to ensure a sustainable recovery from COVID-19.
South Africa has seen the emergence of a number of impact funds and impact fund managers, along with innovative solutions and the introduction of products such as social impact bonds, to address a myriad of local development challenges. Most banks and large insurers like Sanlam and Old Mutual have an impact investment offering. Riscura recently launched an impact Fund of Funds. At the Global GSG Impact Summit last year, Old Mutual was the only platinum sponsor and South Africa was the third most represented country. This is indicative of the significant interest and progress of impact investing in South Africa.
Impact investing provides capital to address the country’s pressing challenges in sectors such as sustainable agriculture, renewable energy and SME finance, along with affordable and accessible basic services including housing, healthcare, and education. One such innovation is Pelebox, a smart dispensing locker system that enables patients to collect their chronic medication in under 30 seconds instead of queuing for hours at public clinics. This social enterprise focuses on technology inclusion with the aim of improving the last mile for chronic medication access in Africa by 34-year-old engineer Neo Hutiri.
There has been an unprecedented rise and interest in the SA impact investment market. What was once a radical idea is now an acceptable investment lens to advance progress and make our society more equitable.
Author: Shiluba Mawela, Managing Partner, Tshiamo Impact Partners – an impact advisory and fund management firm
Impact investing a multi-billion-dollar industry
The lives and livelihoods of the poorest and most vulnerable in our societies have been hit the hardest during COVID-19. How can we unlock impact investing − a multi-billion-dollar industry − to make a positive contribution towards addressing these challenges?
Impacting investing has taken the world by storm. This US$500-billion industry has doubled in size for two years consecutively, and this trend is expected to continue.
Impact investing is defined as ‘investing with the intent to contribute to measurable positive social, economic and environmental impact, alongside financial returns’.1 This is different to socially responsible (SR) or environmental, social and governance (ESG) investing, which only applies screening criteria to investments, for example not investing in tobacco products. The key differentiator is an active intent to generate a positive impact.
Financial returns for impact investing can be in line with traditional investing, which differentiates it from philanthropy. It includes a wide spectrum of returns, from more patient to risk-adjusted market-related returns. Instruments cover the full continuum, including grants, debt and equity, and everything in between − also referred to as ‘blended capital’. Investments can be made into businesses ranging from very early to later, more established stages.
Impact investing is directed at solving the world’s main social and environmental challenges. The UN has defined the global SDGs for 2030, an ambitious blueprint for a world without poverty or inequality. The SDGs have become a guideline to initiate, drive and measure impact. There is, however, still a US$2,5-trillion annual funding gap to achieve these goals, which can be bridged through partnerships between public, private and donor funders.
While impact investing is still a nascent industry, it constitutes one of the most proactive approaches and opportunities to contribute to the implementation of the SDGs on home soil. Key focus areas to catalyse this industry are highlighted below:
- Unlocking impact capital To create long-term economic, social and environmental sustainability our country requires investing with an active intent to make a difference. Creating impact and generating market-related financial returns are no longer considered mutually exclusive concepts. This thinking requires a paradigm shift in capital providers, from large companies to banks to foreign investors to government and developmental institutions. In South Africa, we can unlock impact capital through existing structures such as enterprise and supplier development,2 Regulation 283 (investing in alternative assets) and Section 12J4 (investing in venture capital).
- Investing for impact This impact capital would necessitate a new generation of asset managers, with impact as part of their core values, working harmoniously alongside generating market-related financial returns. For these managers, impact would be integral to every stage of the investment process from origination to exit, as described in the IFC’s Operating Principles for Impact Management. This includes accurate measurement and disclosure of impact in line with global impact measurement standards such as GIIRS or IRIS.
- Creating a conducive ecosystem An effective ecosystem is essential for investments to flourish and generate solid financial returns. This requires strong support from stakeholders such as government, industry bodies, universities and service providers. Examples of initiatives that create a conducive ecosystem include patient capital at early stage, funding capacity-building, skills development, business support and building an enabling policy and legislative environment. A prime example of such an ecosystem is Silicon Valley, which is underpinned by government funding, solid research institutions, entrepreneurs who become venture investors, enabling policies and legislation, as well as strong business support.
Impact investing and COVID-19
South Africa has one of the highest inequality rates in the world in relation to income,5 and this situation has been exacerbated by COVID-19. Impact investing can be used as a tool to address this, alongside the other goals, to achieve the global sustainable development agenda in the aftermath of the pandemic. The pandemic has honed our focus on the need for public and private organisations to collaborate and adopt impact-oriented, innovative and unconventional approaches to alleviating suffering and achieving positive social impact.
Impact investing is here to stay. Everyone can participate in this movement to bring about positive social and environmental change that bequeaths to future generations a legacy of investors who are driven by values that are impact-centred and work towards a greater good.
1 International Finance Corporation (IFC).
2 BEE Codes.
3 Pension Fund Act.
4 Income Tax Act.
5 World Inequality Lab, World Inequality Report, 2018.
Author: Lize Lübbe, Principal at Phatisa, a sector-specific African private equity fund manager operating across sub-Saharan Africa
A sound investment approach
Starting to invest as early as possible, and as much as possible, is one of the best decisions you can make to optimise your wealth creation
Investing does not need to be an overly complex process or one that needs regular recalibration. If you are investing for the long term, you just need to consider the following key points when making an investment:
Simple is better
Do not invest outside what you understand. If you understand that cash generates interest income and equity pays out dividends while increasing in value for future capital gain, you know the most important principles. That will suffice. The discipline of making an investment has a greater reward than trying to time the market with complex financial instruments. If it is complicated – stay away!
Make sure it is a reliable institution
With so many asset managers, banks and ETF platforms to choose from, why try and be fancy? Go with someone who has been around long enough to prove their reliability. Do not be influenced by colourful marketing campaigns. Boring but reliable is better. And try to go with more than one institution (just as an extra safety precaution).
Keep fees as low as possible
Regardless of the institution or product you choose, you want to ensure that your costs remain as low as possible. There is little we can do to control what the market does. It goes up, it goes down, and sometimes it flatlines. But we can control how much we pay in fees. I cannot stress enough how much just an additional 0,1% in fees can significantly reduce your future returns. The power of compound interest works against you here.
Manage your risk
While each of us might have our own unique risk tolerance, the general principle is that the sooner you need the money, the less risk you should expose yourself to. Market crashes are scary. And if you need to withdraw your money within one year of such a crash (or during the crash) it would be very unfortunate.
Thus, such short-term needs should be in a lower-risk product (a cash equivalent). But for the longer-term investment, you have time on your side. The market will eventually adjust and over the long term, things always go up. You can afford to take on a little more risk (you just need to manage your nerves).
This also speaks to the concept of diversification (the only free lunch you will get). With investing, it is never a good idea to keep all your eggs in one basket. That refers to more than just your risk appetite, but also the type of product and the institution. Do not overdo it. Just ensure you have sufficient spread that if someone or something lets you down, you have a backup.
This is to encourage you to not invest too much in cash (unless you need all the money soon). For long-term wealth creation, you need to beat inflation. And it also re-emphasises the importance of keeping fees as low as possible. Always think about your returns in real numbers, in other words after fees and after inflation.
If you have considered the above, you are well on your way to making a sound investment. But that is when the real hard work begins – just leaving it alone! Do not check what is happening daily. At most, check monthly. Maybe, on an annual basis, you can check whether you are still well diversified, or whether anyone has started to increase their fees. But you want to avoid unnecessary movement in your investments as much as possible. Let time and the market do the work for you!
Author: Dr Gizelle Willows CA(SA) is an Associate Professor at the University of Cape Town and Managing Director of Nudging Financial Behaviour.
Women drive ESG investing
Environmental, social and governance (ESG) investing has become increasingly important, and women are driving the change
Women have long made financial decisions based on what is best for their families, and more and more are now considering the impact of their financial decisions on their communities and the environment. According to research from YouGov, women are more conscious about responsible investing than men, with over 80% of women indicating that ESG is an important factor in their investment portfolios. The research found that women are more concerned about investing in responsible companies with reputations for being environmentally conscious and socially aware.
Major imbalances persist when it comes to the gender pay gap and how much women are able to save and invest relative to men, but women have taken charge of their financial situations and are driving a positive shift to invest larger pools of money in a responsible manner.
The financial services industry has been dominated by men, but ESG expertise is led primarily by women. While hard data is limited, women currently lead ESG units at big global firms such as JPMorgan, Invesco, Bank of America and Fidelity Investments. Data show that women will have a huge impact on economic growth moving forward, both in the workplace at large and as retail investors.
A study by S&P Global Market Intelligence found that firms with female CFOs are more profitable and have produced superior stock price performance compared to the market average. The research also showed that firms with high gender diversity on their board of directors have been more profitable than firms with minimal gender diversity. Women were found to be the most underutilised source of growth, one that could send global market valuations soaring, and the study reported that US GDP growth led by more women in the labour force could add $5,87 trillion to global market capitalisation over the next decade. The drive for gender equality is part of ESG investing, and the research clearly shows that the drive towards the fair representation of women in leadership positions will have a very positive impact on growth and society.
The popularity of ESG investing has boomed in recent years, as fears over climate change have led investors to give closer consideration to the impact of their investments. 2020 and the global pandemic further highlighted the need to focus on ESG, demonstrating how low-probability, high-impact events can have a huge influence on our lives. Accordingly, interest has increased in preparing for other hard-to-forecast risks, such as the potential effects of climate change. Meredith Jones, a partner and global ESG practice lead at Aon, notes that ‘Risks can be very abrupt, like the COVID-19 pandemic, or they can be longer term, like the potential for climate change to disrupt business. Either way, the most resilient and sustainable businesses think about those risks and manage them before they cause revenue or reputational losses.’
According to Bloomberg, global ESG assets are on track to exceed $53 trillion by 2025, representing more than a third of the $14,.5 trillion in projected total assets under management. While ESG investing has been around for decades, largely driven by institutional global investors, now more than ever, individual investors – and women and millennial investors in particular – increasingly want to align their personal values with their investment strategies.
We do not have to give up good returns to be kind to the planet and our communities. Plenty of available data suggest that responsible investing is in fact a risk management tool, and analysing what a company does for its staff, communities, the environment and good corporate governance has proven to be an important part of financial analysis and can highlight risks in that company’s ecosystem. ESG risk is investment risk, as firms that do not adhere to ESG standards are less likely to be sustainable businesses. A high-scoring ESG company has a more engaged workforce, a more loyal and satisfied customer base, better relationships with stakeholders, greater transparency and a better ability to innovate – all contributing factors to a company’s success over the long term.
ESG investing is here to stay! Thousands of ESG-focused funds are now available for investment in South Africa and across the globe, as are some excellent low-cost options, such as ESG-focused ETFs (exchange-traded funds). By following ESG-focused investment strategies, we can do well and do good!
Author: Iva Madjarova, Head: Investment Consulting, Sygnia Asset Management