Understanding your allocation from PPS Investments

Transcription

1 Understanding your allocation from PPS Investments Investment Perspectives A good combination for your retirement Retirement reform: How could your investments be impacted? Issue 19

2 Understanding your allocation from PPS Investments The scene is set in a small village community, bustling with early morning activity. Women in bonnets and full, flowing skirts make their way across cobbled streets towards the village market. Here, we come across a beret-clad lad competing with a neighbouring stall to sell a varied assortment of bread loaves. The bread comes from a nearby bakery, where we see the baker, proud and passionate, pounding dough, dusting freshly-baked loaves and filling his breadbaskets to the brim. Satisfied with his morning s work, he steps outside to survey his stall. He is soon dismayed. Nick Battersby CHIEF EXECUTIVE Despite the baker s best efforts, the village residents without exception purchase their bread from the stall next door. Over the next few days, the baker takes action but even a revamped recipe, half-price sale and two for one promotion yield no results. Confounded, he bursts into the competitor bakery and demands to see its owner so that he may seek out some answers. And it is here that this bakery s winning formula is revealed: There is no single owner. Rather, the bakery is run as a collective effort and each villager involved in the business has a personal stake in its success. Many of you would have seen this television advertisement for PPS, released during Let s focus for a moment on its tagline: At PPS, our clients are members who share in our profits. Or, as relayed in the accompanying voiceover: The key to success lies in sharing it. Following the release of the most recent financial results for PPS Insurance, we at PPS Investments are pleased that for the first time we are able to explicitly reflect your share of our success. All PPS members who held investments with us during 2012 and have a PPS Profit-Share Account* will now see a new line item, Bonus allocations for PPS Investments products, reflected on your latest Statement of Benefits. Members with a Vested PPS Profit-Share Account* will see this allocation on your next quarterly investment statement. In both instances, you will tell that you have received R109 in your PPS Profit-Share Account or your Vested PPS Profit- Share Account for every R100,000 you have invested with us a meaningful amount relative to the fees incurred within your investments, and an additional source of return unique to investments held within a mutual Group. This is the first time that you will see exactly how much your investments with us contribute to your share of PPS s profits. It follows the re-evaluation of PPS s profit distribution process, and its subsequent decision to reward qualifying members based on their level of participation within the PPS Group. Simply put, the more PPS insurance policies and investments you hold, the greater your profit allocation. Contributions that PPS Insurance receives from PPS Investments are divided only among members who both qualify for profit share and are invested with us. The larger the combined value of your investments (including any savings in your Vested PPS Profit- Share Account), the greater your share of our contribution to the PPS Group. As a further advantage, the Vested PPS Profit-Share Account allows you to continue sharing in the profits of the PPS Group even after your professional retirement. When your PPS Profit- Share Account vests (normally after the age of 66), you will no longer qualify to share in the profits of the PPS Insurance business. However, by exercising the Vested PPS Profit- The larger the combined value of your investments, the greater your share of our contribution to the PPS Group. Share Account, you will be able to continue sharing in the contributions PPS Insurance receives from PPS Investments. We are pleased that the recent allocation to our investors and the fact that this allocation is now clearly itemised underscores the value proposition we remain committed to offering you: Premium investment products, competitively priced and transparently structured, that enable you to draw advantage from the ethos of mutuality we share as part of the PPS Group. Just as our villagers benefit from buying from their own bakery, you, as a PPS member, benefit from insuring and investing within your own professional society. *As part of a PPS Provider TM policy. The PPS Profit-Share Account was previously called the PPS Surplus Rebate Account (SRA) and the Vested PPS Profit-Share Account was previously called the PPS SRA Retention Option. Issue 19

3 Investment Perspectives The US Federal Reserve has given clear guidance that it will only start increasing interest rates when US unemployment falls below 6.5%; provided US inflation is not forecast to be higher than 2.5%. US inflation has remained well-behaved, despite US unemployment falling from 10% to 7.5% over the past two years. We re clearly getting closer to this trigger point (see chart below). David Crosoer EXECUTIVE: RESEARCH and Investments Developed markets outperformed emerging markets over the quarter on the back of improved economic conditions in the US and the announcement of a stimulus package in Japan. When measured in common currency, South African equities marginally underperformed emerging market equities. Property was again the stand-out local asset class in terms of performance, while inflation-linked bonds outperformed cash and nominal bonds over the quarter. Nominal bonds had a poor quarter and underperformed cash. The South African rand (ZAR) weakened by almost 10% against the US dollar over the quarter. Resource shares, despite a weaker currency, performed poorly on the back of a significant deterioration in reported earnings. Despite this the sector remains attractive on valuation grounds. In contrast, despite an awkward January (where consumer retailers in particular were sold off), industrial shares significantly outperformed resource counters on a relative basis. Although it s tempting to ascribe ZAR weakness to poor local fundamentals (a weak current account deficit, challenging inflation numbers and growth forecasts that have been revised downwards), the US dollar also strengthened against the Japanese yen, British pound and Euro (as well as most other emerging market currencies). US dollar strength was driven by improving US economic fundamentals, deliberate Japanese efforts to re-inflate their economy and ongoing concerns on the European periphery (this time in Cyprus). More technically, the market brought forward its expectation of when US short-term interest rates would rise relative to those of its trading partners. In contrast, the South African economy faces considerable headwinds in the short term. At its latest Monetary Policy Committee (MPC) meeting in March, the South African Reserve Bank (SARB) stated its expectation for the South African economy to grow by 2.7% in 2013 (up from 2.6%) but also acknowledged that the risk to this forecast is on the downside. In 2014, the SARB expects 3.7% growth. South African growth is vulnerable to an ongoing recession in Europe (even Germany didn t grow in the first quarter of 2013), weak domestic consumer confidence (the Bureau for Economic Research s Consumer Confidence Index for Q was at its lowest level in nine years) and ongoing industrial action in the mining and other unionised sectors. At the same time the SARB expects CPI inflation to average 6.3% in the third quarter of 2013, before returning into the targeted 3% - 6% band in the fourth quarter. In the previous two inflation cycles (see chart below), the SARB started to increase interest rates when inflation exceeded 5%. Typically, despite interest rate increases, inflation would peak significantly higher than 6%. This time around inflation rates have remained remarkably restrained, despite CPI inflation increasing above 5% in June 2011, and the SARB actually surprising the market with an additional interest rate cut. We have commented for a number of quarters about the potentially destabilising impact record low US interest rates could have on global asset prices. An improvement in US economic growth or renewed concerns about these distortions could bring forward market expectations about when the US Federal Reserve will start increasing interest rates. This will have profound consequences on the search for yield theme that is currently driving most financial markets, as it will reduce the need for global investors to look outside the US for assets with additional yield pick-up.

4 As multi-managers, we are reluctant to rely too heavily on politicians both locally and abroad to get the policy mix right in appropriately managing inflation expectations. We have therefore placed increased emphasis on our managers rather than the asset classes they invest in to deliver exceptional returns. In this inflation cycle the SARB has not felt it necessary to respond to rising inflation with increased interest rates, as neither the over-indebted consumer nor credit-constrained business has been in a position to respond aggressively to record low interest rates. In hindsight, the Reserve Bank may until now have been right to rely on excess capacity in the economy and deflationary forces brought about by both global and local debt deleveraging to keep inflation under control. However, it risks undermining its inflation-fighting credentials by not responding to increased inflation with increased interest rates, particularly since it reflected at its March MPC meeting that the risks to inflation were on the upside. It is worth recalling the battle central bankers had to fight (with aggressive increases in short-term interest rates) for monetary policy to become a credible tool for fighting inflation, after the debilitating stagflation of the 1970s. Once inflation expectations are entrenched, strong medicine (with its negative implication for asset class returns) is required to revise them downwards. What implications does this challenging macroeconomic environment have for our investment strategies, which aim to deliver inflation-beating returns to our clients? Firstly, the risk of a policy error (i.e. that the SARB leaves interest rates on hold for too long, or mistakenly cuts rates again) cannot be discounted and the prospect of a return to a 1970s scenario of stagflation (weak economic growth and high inflation) is not out of the question. As multi-managers, we are reluctant to rely too heavily on politicians both locally and abroad to get the policy mix right in appropriately managing inflation expectations. We have therefore placed increased emphasis on our managers rather than the asset classes they invest in to deliver exceptional returns. But even if policy makers get their interest rate policy correct and prevent inflation from getting out of control while still encouraging economic growth, the search for yield theme has resulted in fixed interest and certain select equities being priced to perfection. In such an environment it is difficult to see how investors can earn exceptional returns from these asset classes without employing an active management strategy (i.e. investors need to find managers that can significantly outperform their benchmarks). The trend of relying on managers rather than asset classes to generate returns has been an integral part of our investment process for over 18 months, and we have made a number of important changes to our manager line-up over this period that allow our managers to construct portfolios very different from their underlying benchmarks. While this change of emphasis may cost us short-term performance if the search for yield theme continues to drive the performance of expensive asset classes, we believe that this repositioning appropriately positions our portfolios for the difficult challenges facing global investors in the medium term. Issue 19

5 A good combination for your retirement Nico Coetzee EXECUTIVE: BUSINESS DEVELOPMENT What do the pairs Larry Page and Sergey Brin, flight-footed Fred Astaire and Ginger Rodgers and Sir Edmund Hilary and his Sherpa guide, Tenzing Norgay, have in common? Well, while both partners in each pair warrant individual recognition, it is the collaboration of the two that presents a formidable combination. In the first instance, the creation of Google, an internet search engine so ingrained in everyday use that the verb google and several other derivates now appear in the Oxford dictionary. In the second scenario, the formation of one of the most dazzling dance duos in history. Finally, a partnership that lead to the first summit of the mighty Mount Everest. As a qualifying PPS member, you have access to a complementary combination of your own when it comes to your retirement strategy. Exclusively available by virtue of your PPS membership, the combination of the PPS Living Annuity and the Vested PPS Profit-Share Account* presents a very favourable advantage in managing and maintaining your retirement savings. The combination of the PPS Living Annuity and the Vested PPS Profit-Share Account presents a very favourable advantage in managing - and maintaining - your retirement savings. The PPS Living Annuity is an investment-linked living annuity, which means that upon your retirement you are able to invest your accumulated retirement savings in your own selection of unit trusts. In this way, you are able to target further investment growth and can aim to preserve your savings for as long as possible. To provide for your everyday living expenses, you may choose to draw between 2.5% and 17.5% of your investment value annually (at monthly, quarterly, half-yearly or annual intervals). It is important to note that living annuities do not guarantee your income payments: The income you draw from your living annuity will be taken out of your investment capital for as long as there is sufficient capital to facilitate this. Any growth in your investment capital and the ability for you to continue drawing a retirement income are therefore directly dependent on the performance of the unit trusts that you have selected as underlying investments. There are two courses of action you could follow to ensure that the savings in your living annuity last you as long as possible. The first is to ensure that you have made appropriate unit trust selections which, depending on your personal risk profile, will aim to promote continued growth in your investment. For this reason, it is recommended that you obtain appropriate financial advice when deciding on your post retirement investments and the underlying unit trusts in which you may wish to invest. The second is to keep your income drawdown (the amount and frequency of payments made to you out of your living annuity) as low as you can. In this way, you will ensure that as large a portion of your capital as possible remains invested to generate further returns. It is here that the Vested PPS Profit-Share Account offers a distinct benefit. To keep your income drawdown to a minimum but still be able to provide for your living expenses, you will need to supplement the income from your living annuity with other sources of retirement funding. These may include proceeds from a rental property or revenue from an ongoing side project or business venture. However, if you have qualified to share in PPS s profits over the course of your PPS membership, the accumulated profits in your PPS Profit- Share Account present an additional source of supplementary retirement funding. Your PPS Profit-Share Account becomes accessible upon your retirement, from the age of 60 (subject to certain conditions). It is then possible to utilise your accumulated savings as part of your retirement strategy via the Vested PPS Profit-Share Account. You ll have complete control over how this additional retirement capital is invested, as you gain access to the full range of unit trusts available on the PPS Investments platform. You will also be able to set up withdrawals of any amount from your Vested PPS Profit-Share Account, at your desired frequency. The combination of the PPS Living Annuity and the Vested PPS Profit-Share Account present several advantages when it comes to managing your retirement portfolio: 1) Prolong your retirement savings By supplementing your retirement income, the Vested PPS Profit-Share Account allows you to keep the drawdown from your PPS Living Annuity to a minimum. This will assist in promoting the longevity of this capital.

6 The PPS Investments sliding scale reduces your ongoing administration fees based on the total amount you have invested on our platform. The savings in your Vested PPS Profit-Share Account will be considered along with your PPS Living Annuity and your savings in all other PPS Investments products to determine your fee level. 2) Continue to benefit from the mutuality of the PPS Group Your Vested PPS Profit-Share Account allows you to continue sharing in the contributions PPS Investments makes to PPS Insurance (which contribute to the Group s overall profits). You will share in these contributions (which will be added to your Vested PPS Profit-Share Account) for as long as your Vested PPS Profit-Share Account remains active and you have savings with PPS Investments. The larger the combined value of your investment portfolio (including savings in your Vested PPS Profit-Share Account, your PPS Living Annuity and all amounts invested in other investment products), the greater your share of PPS Investments contribution to the PPS Group. 3) Save on fees PPS Investments charges no initial administration fees. In addition, the PPS Investments sliding scale reduces your ongoing administration fees based on the total amount you have invested on our platform. The more you have invested (within set bands), the lower your ongoing administration fees. The savings in your Vested PPS Profit-Share Account will be considered along with your PPS Living Annuity and your savings in all other PPS Investments products to determine your fee level. By utilising the Vested PPS Profit-Share Account, you will therefore move higher up on our sliding scale and may qualify for lower overall fees. This clearly illustrates the benefit of consolidating all of your investment products on the PPS Investments platform. 4) Simpler management of your retirement portfolio By consolidating your investments with a single company, you can establish a single point of contact. This means that you only have to familiarise yourself with the website, timelines and communications of a single investment platform. You will also be able to access all of your investment particulars in a centralised location, as our Secure Online Services allows you to view your investment details, access your investment reports and perform certain transactions online. The combination of the PPS Living Annuity and the Vested PPS Profit-Share Account is a retirement solution totally unique to PPS Investments, and accessible solely by virtue of your PPS membership. By choosing to remain invested with your professional society after your retirement, you may continue to benefit from the advantageous partnership that has helped you reach this point more comfortably. For detailed product features of the PPS Living Annuity or the Vested PPS Profit-Share Account, please refer to the relevant Features and Benefits Guides on *As part of a PPS Provider TM policy. Previously known as the PPS Surplus Rebate Account (SRA) Retention Option. Issue 19

7 Retirement reform: How could your investments be impacted? Hugo Malherbe Product Specialist Which products would this apply to? Investors in the PPS Retirement Annuity and PPS Personal Pension will be impacted. What will the impact be? If you currently qualify for a tax deduction based on a percentage of your taxable income, a greater percentage of your annual RA contributions will be returned to you in future. You will also be to contribute a larger tax deductible annual amount (this excludes investors with an income of more than R2,333,333, as the current 15% of this amount equates to the proposed annual cap of R350,000). In its 2013/14 National Budget, National Treasury put forward a number of revised proposals for reform within the South African retirement industry, with the aim of ensuring that South Africans save adequately towards retirement. It is important to note that all recommended reforms are merely proposals. Confirmation on whether these reforms will be implemented and, if so, when they will be implemented is expected later this year. The proposals are currently open for public comment before draft legislation is put forward, after which further comment will also be sought. Should these proposals come to pass, we ve set out the possible implications for your current investments below. Proposal: Changes to the tax deductibility of your retirement annuity (RA) contributions A portion of the total annual contribution you make to your RA is tax deductible, which means that you may claim this amount back from the taxman when submitting your income tax return (without detracting from the value of your investment). Currently, RA contributions are tax deductible for the greater of: 15% of your non retirement funding taxable income (i.e. excluding income used to fund individual or company contributions to a pension or provident fund); R3,500 less pension fund contributions; or R1,750, with any excess being carried forward to the following year of assessment. What may change? It is proposed that your maximum allowed tax deduction be increased to 27.5% of your total remuneration or taxable income (whichever is the greatest). However, total contributions considered as part of this calculation will be capped at R350,000 per annum. Should you not contribute the full 27.5% in any given year, you will be able to utilise your unused allowance in future years. If you currently qualify for a tax deduction based on a percentage of your taxable income, a greater percentage of your annual RA contributions may be returned to you in future. Further clarity is required on how unused tax deductible amounts may be utilised in future. Investors may be permitted to make greater tax deductible contributions in coming years or may qualify for a larger tax-free payout upon retirement. Proposal: Changes to the withdrawals allowed from preservation funds Preservation funds currently allow for one withdrawal prior to retirement (provided that you have made no withdrawals out of your retirement capital before investing in the preservation fund). Upon retirement, preservation pension funds allow you to withdraw a maximum of one third of your investment capital as cash, while the remaining two thirds must be used to purchase retirement income from a registered insurer. Preservation provident funds pose no prescriptions relating to the purchase of retirement income. What may change? You may be able to make pre-retirement withdrawals from your preservation fund more freely in future. Post retirement, it is proposed that proceeds from a preservation provident fund be

8 treated in the same manner as proceeds from a preservation pension fund, and that the purchase of retirement income becomes compulsory. Which products would this apply to? Investors in the PPS Pension Preservation Fund and the PPS Provident Preservation Fund will be impacted. What will the impact be? Pre-retirement: If you still qualify for a once-off pre-retirement withdrawal (i.e. you have made no withdrawal from your preservation fund or from the pension/provident fund you were invested in before transferring to this preservation fund), you will be allowed to make unlimited and unrestricted withdrawals from the savings in your preservation fund as at the date of implementation of the new legislation until your retirement. If you no longer qualify for your pre-retirement withdrawal, you will be able to make one withdrawal every year until your retirement. Your annual withdrawal amount will be restricted to the greater of: Any unused withdrawal amount may be carried over to the following year. For example, if you transferred R1,000,000 into your preservation fund after leaving your retirement fund, you will be allowed to withdraw R100,000 from your preservation fund every year. If you do not make a withdrawal in the first year of your investment, you will be allowed to withdraw R200,000 in the second year, and so on. Post retirement: (PPS Provident Preservation Fund only) All investors over the age of 55 on the date of implementation, as well as investors under the age of 55 who have made no previous withdrawals from their provident or provident preservation funds, will be exempt from the proposed changes. You will still be able to withdraw your full investment in cash upon retirement should you wish to. Investors under the age of 55 who have made previous withdrawals from their provident or provident preservation funds will only be allowed to withdraw one third of their investments in cash upon retirement. The remaining two thirds would have to be invested in a living annuity or guaranteed annuity. 1. The value of the old age grant (currently R15,120) 2. 10% of your initial investment amount Issue 19

9 PPS Solutions - PPS Investment Account - PPS Endowment Plan - PPS Personal Pension - PPS Retirement Annuity - PPS Investments Corporate Personal Pension - PPS Preservation Funds - PPS Living Annuity - Vested PPS Profit-Share Account* - PPS Profit-Share Account Portfolio Choice* 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, 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