A tale of evolution PPS Multi-Managers: Benefits of a new fee structure 2012: The year in review New ASISA unit trust classifications.

Transcription

1 A tale of evolution PPS Multi-Managers: Benefits of a new fee structure 2012: The year in review New ASISA unit trust classifications Issue 18

2 A tale of evolution Nick Battersby CHIEF EXECUTIVE The second, on 1 October 2012, was the announcement by the Board of Trustees that all new investments into the Fund would be directed to the new generation section only. These announcements were widely commented on in the media and were well received by Fund members as well as financial intermediaries. Nonetheless, the PPS Retirement Annuity Client Service Centre has received a number of questions from Fund members in the old generation section requesting clarity on the implications that the latest announcement holds for them. I thought it may be useful to address some of these points here as well, as they may be on your minds too. The progression of time brings with it the progression of the world around us, and evolution happens everywhere. Simply consider the transition from the bulky Betamax videocassette to VHS, from there to DVD and finally from DVD to digital, where today we are able to access the latest film releases at the click of a button. However, while the benefits of an evolutionary process are easy enough to identify, it is more difficult to predict where such a process is heading while it unfolds. It is often only with hindsight that we recognise pivotal points in this progression. Over the past number of decades, our means of saving towards retirement has also evolved. Initially, investors only had access to a policy-based contract in an underwritten retirement annuity effectively an old generation savings solution. Subsequent product developments have meant that investors now have access to a new generation savings solution: A non-contractual, nonunderwritten retirement annuity based on a unit trust investment, which offers greater flexibility and cost effectiveness. This evolution has benefited both those investors who are investing in a retirement annuity for the first time, as well as those investors currently invested in an old generation product. Many of these investors and their financial advisors have in recent years been allocating new investment premiums to new generation offerings, while at the same time assessing the options available to them in positioning the assets they ve built up in old generation products. While some have been able to transfer all of their savings to a new generation product, in many cases the termination charges associated with such a transfer have proved too costly. (In these instances, it is often advisable for investors to leave their savings where they are and to reassess the option to transfer on an ongoing basis.) To keep pace with industry developments, the PPS Retirement Annuity ( the Fund ) has also evolved, and we can identify two pivotal points in its evolution. The first, during 2010, was the introduction of a new generation, non-contractual offering within the Fund to stand alongside the old generation offering. This allowed Fund members to access the benefit of a new generation savings solution without having to leave the Fund. Firstly, it is important to emphasise that the redirection of new investments to the Fund s new generation section should in no way be seen as a call to action from the Board of Trustees for you to move existing assets out of the Fund s old generation section. It was simply the next logical step in modernising the Fund for both current and future members. Your investment and all the provisions of your policy contract remains in place exactly as before. Secondly, if you wish to increase the amount you re saving towards your retirement, you are still able to do so within the Fund. A good financial plan will include an annual review of the savings rate required for you to successfully achieve Over the past number of decades, our means of saving towards retirement has also evolved. your retirement goals. Should you wish to boost your savings rate, your additional contributions will be accepted into the new generation section of the Fund and you will now have two accounts: One reflecting your historical assets and one reflecting your new assets. Both these investments will be in the PPS Retirement Annuity and both will fall under the careful governance of its Board of Trustees, which oversees both sections of the Fund. The same principle will apply to investors who wish to make an ad hoc contribution before the end of the tax year on 28 February 2013 to maximise the tax benefit your retirement annuity presents. You are still able to make your contribution into the PPS Retirement Annuity, which will now be directed to the new generation section of the Fund. Finally, your current financial advisor will still be able to provide advice on the assets you have invested in the old generation section of the Fund. He or she can still suggest changes to your underlying portfolio and evaluate your investment in terms of the holistic financial plan prepared for you. However, as new investments will only be accepted into

3 Your investment and all the provisions of your policy contract remains in place exactly as before. the new generation section of the Fund, your advisor will need to become accredited to represent that product to you as well. If there are any Fund members who require further clarity on the Trustees decision, we are happy to extend their invitation for your attendance at a PPS Retirement Annuity Roadshow event. Roadshow events will take place in Cape Town, Johannesburg, Pretoria, Bloemfontein, Durban and Port Elizabeth between 24 th January and 5 th February 2013, with both the Fund s Principal Officer and another representative from the Board of Trustees in attendance. Should there be Fund members who wish to attend a Roadshow event but who did not receive an invitation, you are welcome to contact the PPS Retirement Annuity Client Service Centre on (0861 PPS RAF), Mondays to Fridays between 08:00 and 17:00, or at info@ppsra.co.za. Issue 18

4 PPS Multi- Managers: Benefits of a new fee structure We ve got some good news to share. As would have been communicated to all impacted investors, PPS Multi-Managers, to the benefit of those of you who have selected its unit trusts as part of your underlying investment portfolios, will be implementing a change in the fee structure applicable to these unit trusts as of 16 April On this date, the asset management fees associated with the PPS Multi-Managers unit trusts will be reduced and the partnership savings (or rebates) allocated to these unit trusts (which are deducted from ongoing administration fees) will also be lowered. For those of you invested in one or more of these multi-managed unit trusts, this will either result in a reduction in the overall level of fees applicable to your investment, or it will leave your fees unchanged (until you reach the threshold where the fee reduction takes place). It therefore serves to offer you an increasingly competitive fee structure as your investments grow with us. The decision to revise the fees applicable to the PPS Multi- Managers unit trusts was made for several reasons: 1. Keeping fees competitive A reduction in asset management fees charged by PPS Multi- Managers to actively manage your investment will ensure that the fees for these unit trusts continue to compare favourably to others in the industry. 2. Enhanced overall level of disclosure* Nico Coetzee EXECUTIVE: BUSINESS DEVELOPMENT We believe that it s important for our investors to understand the value that PPS Investments adds as your product provider. When investing via our platform, we offer you access to the various different investment vehicles we have constructed. We also administer your investment by buying and selling units in the unit trusts you have selected in your portfolio, providing you with regular investment statements and generating your annual tax certificates. We further offer you access to a dedicated Client Service Centre to see to your day-to-day queries and have developed a secure online portal from which you are able to transact and retrieve information 24/7, 365 days a year. To provide these services, PPS Investments charges an ongoing administration fee. All investors benefit from a zero initial administration fee. Ongoing administration fees range from 0.40% to 0.70% (based on the size of your total investments) and are further reduced by partnership savings, which are discounts that PPS Investments negotiates with all the asset managers we feature on our platform. As the partnership saving currently applicable to all PPS Multi-Managers unit trusts is 0.70% and is therefore equal to the maximum ongoing administration fee which may be charged investors in these unit trusts historically paid a zero effective ongoing administration fee for their investments. Industry developments worldwide including the Retail Distribution Review currently being undertaken by the Financial Services Authority in the United Kingdom, as well as the Treating Customers Fairly initiative by our own Financial Services Board have placed increased prominence on fair, suitable and detailed disclosure. Similarly, the principle of transparency has since our launch been one of the core values at PPS Investments: We have always believed that it s important for our investors to understand exactly how much they re paying for their investments with us, and precisely what they re paying for. By reducing the partnership saving applicable to the PPS Multi-Managers unit trusts (without resulting in an increase to overall fees), investors in these unit trust will now see an ongoing administration fee reflected on their investment statements. We believe that this will give these investors a clearer picture of the fees they re paying for the services they re receiving. 3. Lower fees over time* In addition to partnership savings, PPS Investments ongoing administration fees are reduced according to a sliding scale based on the total amount you have invested with us across all the products you have chosen to invest in a benefit investors may not usually be afforded. The sliding scale we apply to ongoing administration fees is reflected below: Investment amount Sliding scale Up to the first R500, % R500,001 R1,500, % R1,500,001 R2,500, % Above R2,500, % As the current partnership saving of 0.70% on all PPS Multi- Managers unit trusts results in a static administration fee of 0%, our sliding scale cannot be applied to investors in these unit trusts. This means that we are currently unable to reward investors who have large or growing portfolios with progressively lower fees. By offering a reduced partnership saving, investors in PPS Multi-Managers unit trusts will in future slot into our sliding scale and will benefit from increasingly lower fees as their investments grow. 4. Simplification These changes will serve to standardise our fee structure across all the unit trusts offered on our platform.

5 The revised fee structure of the PPS-branded unit trusts managed by PPS Multi-Managers (applicable as of 16 April 2013) is set out below*: New fee structure as of 16 April 2013: Asset Partnership Unit trust management fee saving PPS Flexible Income Fund 1.00% 0.45% PPS Equity Fund 1.50% 0.45% PPS Conservative Fund of Funds 1.25% 0.45% PPS Moderate Fund of Funds 1.45% 0.45% PPS Balanced Fund of Funds 1.50% 0.45% PPS Managed Flexible Fund of Funds 1.50% 0.45% Fees for the PPS Enhanced Yield Fund will remain unchanged. The effective saving in overall fees that investors in these unit trusts will soon be able to access is highlighted below: Investors in PPS Multi-Managers unit trusts will benefit from increasingly lower fees as their investments grow. Effective saving in overall annual administration and asset management fees as of 16 April 2013: In Investment Size PPS Multi-Manager unit trust R12,000 R100,000 R1,000,000 R3,000,000 R5,000,000 PPS Flexible Income Fund 0,00% 0,00% -0,10% -0,20% -0,24% PPS Equity Fund 0,00% 0,00% -0,10% -0,20% -0,24% PPS Conservative Fund of Funds 0,00% 0,00% -0,10% -0,20% -0,24% PPS Moderate Fund of Funds -0,05% -0,05% -0,15% -0,25% -0,29% PPS Balanced Fund of Funds 0,00% 0,00% -0,10% -0,20% -0,24% PPS Managed Flexible Fund of Funds 0,00% 0,00% -0,10% -0,20% -0,24% There are many benefits to a multi-managed investment approach: You receive greater diversification across both asset classes and asset managers, your multi-manager is able to target more consistent performance at reduced levels of volatility and you minimise the risk of not achieving your investment objectives, as the combination of several different asset managers removes the reliance on any single manager to target these objectives on its own. By offering investors invested in PPS Multi-Managers unit trusts an increasingly competitive fee structure as your investments with us grow, we look forward to making this investment proposition even more favourable. *All fees quoted exclude VAT. VAT will be levied at the standard rate, where applicable Issue 18

6 2012: The year in review David Crosoer EXECUTIVE: RESEARCH and Investments How will we remember 2012 from an investment perspective? The South African Reserve Bank (the Reserve Bank ) surprised investors with an accommodative monetary policy (and an unexpected interest rate cut), defensive and interest-sensitive shares outperformed cyclical resource shares by a considerable margin, and the global economy continued to disappoint in terms of the strength of its recovery. The year started with investors preoccupied with the Eurozone crisis, the strength of the US economy and a potential Chinese hard-landing. Locally, the market was concerned about South African inflation and the prospect of monetary tightening by the Reserve Bank in the second half of These concerns stayed with us for much of the year. But instead of an interest rate increase, South Africans had a rate cut in July, and the market is now expecting the Reserve Bank to cut rates again in It is now clear that depressed global financial conditions are having a significant impact on the direction of South African interest rates. Over the latest quarter, both local and global equity markets continued to register strong gains. The SWIX Index (which represents the performance of the South African equity market) returned 10.06% over the quarter (and 29.09% over the year), and the MSCI AC World Index (which gives an indication of the performance of international markets) returned 4.03% over the quarter (and 20.87% over the year) all when measured in rands. There were once again significant differences in performance across the various sectors of the equity market: Healthcare (up 15% for the quarter and close to 60% for the year) and consumer services (up 11% for the quarter and almost 50% for the year) once again significantly outperformed basic materials (up just 8% for the quarter and 5% for the year) as well as oil and gas (up 0.6% for the quarter, but down 1.4% for the year). These strong returns were observed despite a clearly deteriorating global and local economy. In October, in its World Economic Outlook (WEO) report, the International Monetary Fund (IMF) revised downwards its expectation for global economic growth for both 2012 (down by 0.2% to 3.3%) and 2013 (down by 0.3% to 3.6%). South African economic fundamentals also deteriorated over the year, reflecting its vulnerability to a weak European recovery, poor export growth and increasingly antagonistic local labour. According to Stats SA, the South African economy grew at an annualised rate of just 2.3% year-on-year in the third quarter of At its Monetary Policy Committee meeting in November, the Reserve Bank revised its expectation of 2012 economic growth for South Africa downwards to 2.5% (from 2.6% previously) and for 2013 to 2.9% (from 3.6%). We ve observed at length in previous commentaries that the recovery in equity markets does not reflect improved economic conditions (hence the especially poor performance of resource shares, whose fortunes are especially linked to an economic recovery), but rather accommodative monetary policy worldwide that has driven a search for yield. The US Federal Reserve has committed itself to keeping interest rates low for at least the next two years, while the tone at the November Monetary Policy Committee (MPC) meeting from the Reserve Bank was for future interest rate cuts if necessary. Local nominal bonds also benefited from the change in interest rate expectations, and returned 2.59% for the quarter and 15.99% for the year. The inclusion of South African bonds in It is now clear that depressed global financial conditions are having a significant impact on the direction of South African interest rates. the Citigroup World Government Bond Index at the beginning of October resulted in additional foreign inflows into our bond market. Again, this performance was despite a deterioration in economic fundamentals. The South African trade balance (the difference between exports and imports) worsened over the year, placing pressure on the currency and our ability to finance our deficit. Equally ominously, South African inflation started ticking upwards and reached 5.6% year-on-year in November Ratings agency Moody s followed Standard & Poor s in October and downgraded South African debt. The breakeven inflation rate (i.e. the market s expectation of inflation over the next five years) edged up from 5.5% to 6% over the quarter. Valuations of the equities (with the noticeable expectation of resource shares) and property now look somewhat stretched, and investors have driven down bond yields to levels not seen in the previous twenty five years. Our quantitative models suggest that there is now significant upside risk to bond yields from these levels. Our funds-of-funds maintained a full allocation to local equity markets throughout most of the year, but we began reducing

7 We have increased our exposure to managers we believe will be able to protect capital should markets de-rate. this to a more neutral allocation in the fourth quarter, given our particular concern that the risks to interest rates are increasingly on the upside, despite the weak global environment. In addition, our analysts are of the view that macro risks and valuation levels can no longer warrant an overweight position with local equities managers. We believe that an increasing interest rate environment will place considerable pressure on the performance of industrial shares in particular. The level of outperformance of industrial shares relative to resource shares is of a magnitude that has not been seen since 2004 the last time the Reserve Bank went througt an aggressive interest rate cutting cycle. This trend could reverse should the Reserve Bank begin increasing interest rates. We have consequently increased our exposure to managers we believe will be able to protect capital should markets de-rate, and have looked to fully utilise our offshore exposure where possible. Here we have made use of more defensively orientated managers and have held cash. Locally, our specialised equity managers in aggregate favoured resource shares on valuation grounds over more pricier defensive equities promises to deliver as many surprises in terms of investment market performance as As always, our approach is to construct well-diversified portfolios across asset classes and managers with the aim of delivering more consistent returns at reduced risk. While we have introduced a more defensive stance to our portfolios we remain exposed to equity markets which, despite downside risks, continue to be the most attractive asset class to generate inflation-beating returns. Finally, we have made use of the opportunity of ASISA revising all the unit trust sectors to place our unit trusts in the most appropriate ASISA sectors. We believe that the revised sectors will give investors a better understanding of how our unit trusts are managed. None of these changes will have a material impact on how the unit trusts are managed. These changes are effective January 1 st and are discussed elsewhere. Issue 18

8 New ASISA unit trust classifications ASISA s revised classification structure applies the Where and what? principle. The Association for Savings and Investments South Africa (ASISA) has announced a new classification system for South African unit trusts, which came into effect on 1 January With the purpose of promoting a better understanding of the various unit trusts on offer and facilitating a more meaningful comparison between similar unit trusts, ASISA s revised classification structure applies the Where and what? principle. This means that all unit trusts are classified according to their geographic exposure (South African, Worldwide, Global and Regional) as well as to the asset classes they are able to invest in (Equity, Real Estate, Multi Asset and Interest Bearing). A third tier of classification indicates each unit trust s primary investment focus. The PPS-branded unit trusts managed by PPS Multi-Mangers have been reclassified accordingly, and now fall into the categories shown in the table below. Importantly, these reclassifications will have no impact on the make-up or performance of the unit trusts in question. For details on the reclassification of the single managed unit trusts available on the PPS Investments platform, please view the relevant Fund Fact Sheets for January 2013, available on Unit trust Current ASISA category New ASISA category PPS Enhanced Yield Fund Domestic - Fixed Interest - Income South African - Interest Bearing - Short Term PPS Flexible Income Fund Domestic - Fixed Interest - Varied Specialist South African - Multi Asset - Income PPS Equity Fund Domestic Equity - General South African Equity - General PPS Conservative Fund of Funds Domestic - Asset Allocation - Prudential Variable Equity South African - Multi Asset - Low Equity PPS Moderate Fund of Funds Domestic - Asset Allocation - Prudential Variable Equity South African - Multi Asset - Medium Equity PPS Balanced Fund of Funds Domestic - Asset Allocation - Prudential Variable Equity South African - Multi Asset - High Equity PPS Managed Flexible Fund of Funds Domestic - Asset Allocation - Flexible South African - Multi Asset - Flexible Issue 18

9 PPS Products - PPS Investment Account - PPS Endowment Plan - PPS Personal Pension - PPS Retirement Annuity - PPS Investments Corporate Personal Pension - PPS Preservation Funds - PPS Living Annuity - PPS SRA Retention Option* - PPS Pre-Retirement SRA* Multi-managed funds - PPS Enhanced Yield Fund - PPS Flexible Income Fund - PPS Balanced Fund of Funds - PPS Conservative Fund of Funds - PPS Moderate Fund of Funds - PPS Managed Flexible Fund of Funds - PPS Equity Fund Single-managed funds - Our fund managers include Allan Gray, Coronation Fund Managers, Element Investment Managers, Investec Asset Management, Kagiso Asset Management, Nedgroup Investments, Prudential Portfolio Managers and Sanlam Investment Management. * Benefit under the PPS Provider TM Policy

10 DISCLAIMER: The information, opinions and any communication from PPS Investments, whether written, oral or implied are expressed in good faith and not intended as investment advice, neither does it constitute an offer or solicitation in any manner. Furthermore, all information provided is of a general nature with no regard to the specific investment objectives, financial situation or particular needs of any person. It is recommended that investors first obtain appropriate legal, tax, investment or other professional advice prior to acting upon such information. PPS Endowment Plan, PPS Living Annuity and PPS Provider TM are long-term insurance policies issued by PPS Insurance. PPS Investments (39270), PPS Multi-Managers (28733) and PPS Insurance (1044) are licensed Financial Services Providers. For detailed information on the PPS unit trust range, please refer to the latest Fund Fact Sheets on or call us on (0860 INV PPS) and we will send them to you. Tel: (0860 INV PPS) Fax: clientservices@ppsinvestments.co.za