TE SOUT AFRCA VOLUME 26.10 OCTOBER 2013 SURACE TMES … · Insurance Times & Investments ® ISSN...

INFORMING BROKERS AND FINANCIAL ADVISERS SINCE 1988

VOLUME 26.10 OCTOBER 2013THE SOUTH AFRICAN

INSURANCE TIMES & INVESTMENTS

Regulations limiting recruits to the insurance industry - page 3

Insurance contracts revised ac-counting standards - page 6

Crime: domestic dishonesty on the rise - page 8

Judgments for debt and how to respond - page 8

Comparing covers offered un-der dread disease - page 10

When is an umbrella fund ap-propriate for retirement plan-ning? - page 11

Global competitiveness report reveals South Africa’s weak-nesses - page 18

BRICS trade performance - page 20

Investments: sifting the JSE for value is not easy - page 21 Financial Planning for Women

MONEY MINDER • CONSUMER CORNER • INVESTMENT SPOTLIGHT

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Insurance Times & Investments - October 2013

Editorial & advertising:Nigel BenettonTelephone: ............(021) 671-2240Fax: ................ 0880-216-712-240Cellphone: ............(082) 547-7982Email to:[email protected]

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Copyright © 2013 Nigel BenettonInsurance Times & Investments ®

ISSN 1019-505X (Print) ISSN 1995-1256 (Online)

Volume 26.10 1st October 2013

In the NewsIn the News

Also at: www.insurance-times.net

Informing Brokers and Financial Advisers since 1988

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SHORT TERM INSURANCE

Strong positionSantam’s interim to 30th June 2013

Santam haS a 9% increase in gross written premiums for the six months ended 30th June 2013 de-

spite difficult market conditions, and a net underwriting margin of 1.3%.

The crop insurance business, which was adversely impacted by hail damage to summer crops in the Eastern region of South Africa, and drought insur-ance claims in the Central and Western regions, resulted in a net underwriting loss of R112 million (2012: profit of R34 million) and reduced the net underwrit-ing margin by 1.8%, compared to 2012.

Floods in Limpopo also had an ad-verse impact on the company’s under-writing performance.

In addition, the company experi-enced an increase in the number of claims submitted, and the cost per claim in the motor and property classes large-ly because of the rise in car repair costs and the increase in theft-related claims. This was aggravated by the significant weakening of the Rand over the last

year.By contrast, the group delivered

positive investment returns in a volatile investment market which contributed to net income after tax of R422 million for the period. This was mainly driven by lower exposure to the South Afri-can bond market, which experienced a significant downturn during the report-ing period, and the positive fair value movement of R58 million in the Sanlam Emerging Markets (SEM) preference share linked to the Shriram General Insurance business in India. Santam is currently exploring further investment opportunities with SEM.

Headline earnings decreased by 12%, while the return on capital was 14.9%, negatively impacted by the dif-ficult underwriting conditions. The sol-vency margin of 40% is within the tar-geted range of 35% to 45%.

“Despite very competitive condi-tions across all our business units, man-agement has a firm grasp on strategic growth imperatives and has the neces-sary steps in place to improve margins, if we have a respite from weather and catastrophe events,” says Ian Kirk, San-tam CEO.

“The first quarter of the year was difficult and our business was further impacted as we made sure our clients were able to recover from the signifi-cant flood and fire claims submitted late in 2012,” he adds. “During the second quarter, conditions improved and we have begun to see the benefits of the an-nounced segmented premium increases which will continue to impact positively on the business during the year as poli-cies reach their anniversary.”

Santam, which pays out more mon-ey in claims than any other insurer, remains focused on meeting its obliga-tions to policyholders and working with intermediaries to ensure they are not underinsured, it says.

The premium adjustments an-


nounced during the period under review will protect its strong financial founda-tion, and continue to place the com-pany in a position to put clients back in the position they were before their losses occurred.

In terms of the various group opera-tions, says Kirk, the reinsurance busi-ness performed well internationally, but experienced new business strain in building reserves.

Specialist businesses delivered mixed results compared to 2012, with accident, health and engineering class-es reporting improved margins, while transportation reporting lower under-writing results compared to an excep-tional performance during the corre-sponding period in 2012. The liability and corporate property classes reported reduced results, but still above targeted risk adjusted returns.

MiWay grew gross premiums by 26% while achieving profitable trading results with a gross loss ratio of below 60%. Net earnings from associated companies of R34 million decreased from R42 million in 2012 mainly due to the key contributor, Credit Guarantee Insurance Corporation of Africa Ltd, reporting somewhat lower earnings compared to 2012.

“Looking ahead, we remain in a low growth economy with interest rates at 40-year lows. Our economy is influ-enced by an unstable currency outlook. In addition, there is increased risk on

AGRICULTURAL INSURANCE

Mutual & Federal buys Agricola

mutual & Federal recently announced its acquisition of Agricola, a specialised crop

underwriting manager in South Afri-ca. The deal takes effect from 1st Au-gust 2013 and follows a two year as-sociation in which M&F underwrote some of Agricola’s business.

Philip du Preez, Head of Mutual & Federal Agri, says, “This transaction is an opportunity for us to expand our product offering and infrastructure involving crop insurance. The com-bined business will be known as ‘Mu-tual & Federal Agri’ and will create a viable and sizeable alternative for crop insurance in a highly competitive market.”

Agricola entered the crop market in 2004 and has since grown to be ranked third in this niche market. A part of its success can be attributed to experienced personnel that evidently has an average 20 years’ experience in the crop insurance business.

The % acquisition means the busi-ness will be integrated into Mutual & Federal Agri and afford the combined entity the opportunity to expand the crop business using the structures and resources of the parent company, to-gether with the financial certainty that comes with belonging to the greater Old Mutual group. On the other hand, Mutual & Federal’s crop insurance ex-posure will be widened and ensure that, unlike before, the short term insurer’s crop offering will have national repre-sentation.

“The reinsurance market has sup-ported our combined ventures in the past and will continue to underwrite the reinsurance needs of the combined business”, he says. “This will enable the firm to offer clients the depth of our combined expertise and the peace of mind that comes with being insured by a financially stable business such as Mu-tual & Federal Agri and the larger Old Mutual plc group.”

the ground and insurers face rigorous regulatory pressures,” says Kirk. “It is important that we manage our business tightly to ensure we meet the challenges before us, through effective underwrit-ing and investment management, and ensuring our continued diversification.”

According to Kirk, insurance clients remain subject to financial strain and are demanding value for their hard-earned premiums. “Santam pays more money in claims than any other insurer and we remain committed to being there when our clients need us most and to working with them to help manage their risks, as their risk profiles in turn influences the premiums they pay.”

MEDICAL SCHEMES

No-frills focus Average increase for Fed-health of 8.9% for 2014

Fedhealth announced September a weighted average contribution in-crease of 8.9% for 2014.

Peter Jordan, Principal Officer for Fedhealth, says the scheme has man-aged to retain a surplus of R152 million with over R1 billion in reserves. At the end of July reserves stood at 38% with a target of reducing these to between

28% - 32% to provide a buffer for new membership growth.

Its increase in rate comes at a time when many medical aid members are feeling the economic pinch and schemes are becoming increasingly stretched by high hospital and specialist costs. In-deed, contribution rates across the in-dustry are always increased every year above the ruling rate of inflation.

“We have tried to keep increases across all options as low as possible without any reduction in benefits. The focus remains to provide members with the assurance of predictable and afford-able increases into the future.”

Jordan said that while the scheme had grown only marginally over the last year with a total of 74 600 principal members, most of it had come from the corporate market in line with the com-pany’s strategy to remain competitive and ensure growth by steering more towards the corporate sector. Jordan says technology and service will remain key differentiators in the largely “va-nilla” market and making the transition process for corporates from a current scheme to Fedhealth as easy and hassle-free as possible will continue to be the scheme’s focus.

Jordan reports that Fedhealth has consolidated with more than 4 400 doctors currently belonging to the Fed-health GP Network. It adds that 75% of members are currently using these Network GPs; and 83% of claim costs emanate from the GP network. In 2012 Fedhealth first introduced the benefit that all GP visits would be paid without ever touching the member’s savings. This continued for the 2013 year and will continue into 2014 as well.

The specialist network has also pro-


gressed well with 58% of members utilising the services of the 3 400 spe-cialists in the network. Again, over 75% of claim costs are from network special-ists showing the success of the strategy. “Using a Fedhealth Network Specialist means no co-payments for members in-hospital and price certainty out-of-hospital.”

The company launched its digital strategy this year. Jordan believes there will be an increasing move by consum-er-savvy members to demand more hon-est interactions and meaningful engage-ments with their schemes. It will involve more member education and a genuine commitment from schemes to generate conversations with members.

“Medical aids have a responsibility towards their members and transparen-cy will be a key differentiator in future.”

INSURANCE INDUSTRY

Career awayRegulation limiting recruits

While the Financial services sector in South Africa rec-ognises the need for stricter

regulation to ensure compliance and

quality standards, the increasing pace of change is having a negative impact on the promotion of career opportunities and entrepreneurship within the insur-ance industry.

This is according to Steven Isaacs, Gauteng Regional Manager at Lion of Africa Insurance, who says that skills and knowledge is declining in the in-surance industry and ever-increasing regulation is having a negative impact on promoting entrepreneurial appetite and the establishment of new broker-age firms.

“Despite the many benefits that can be derived from implementing regula-tion, we need to avoid the danger of be-ing overregulated to such an extent that it negatively affects the growth and sus-tainability of the industry,” adds Isaacs.

“We are likely to see more consoli-dations with insurers and smaller bro-kers. This will directly impact on future job creation, and the banking sector will solely be responsible for creating jobs within the financial services sector.”

He explains that tough economic conditions coupled with ever increasing regulation are making the insurance in-dustry less appealing to entrepreneurs and young people that are looking for career opportunities.

Isaacs says that young people, who want to pursue careers within the finan-cial services industry, first have to com-plete a tertiary qualification, followed by a compulsory level 1 regulatory ex-amination on the Financial Advisory and Intermediary Services (FAIS) Act, within two years of appointment or ap-proval.

“What is more concerning is that we are dealing with this issue at a critical time when the insurance industry is still grappling with constraints due to the slow pace of transformation.

“Furthermore, there seems to be no coherent plan to transfer knowledge to

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ADMINISTRATION

Exposing a draftInsurance contracts revised accounting standard

a reviSed expoSure Draft on an accounting standard on insur-ance contracts, issued by the

International Accounting Standards Board (IASB), is set to add to an al-ready heavy administrative and compli-ance burden for the insurance industry, warns PwC.

The proposed International Finan-cial Reporting Standard (IFRS) for in-surance contracts, which is likely to be effective from 2018, will change the way in which financial reporting and accounting is carried out by companies that issue insurance contracts.

“For long-term insurers, the new proposals add complexity and will cre-ate additional demands on data and systems”, says Dewald van den Berg, PwC Director, Financial Services Prac-tice. “The extent of the complexity and the demands on systems will vary from company to company, depending on the type of products it offers. Insurers will need to determine the extent to which existing models can be leveraged. The impact on short-term insurers may be less pronounced.

“Over the next few years, the pro-posed new accounting standard will fundamentally change the way insur-ance companies measure and account for insurance contracts. Management will need to assess the implications of the new proposals on their existing in-surance contracts,” he says.

The proposals will alter existing profit recognition patterns, affecting how insurance companies report fi-nancial performance and how they are judged by financial markets. In IFRS 4 Phase II, any day-one profit is deferred through a contractual service margin. This compares to current accounting practice in which some insurers recog-nise gains on day one. All day-one losses are, however, recognised as incurred.

The revised ED complicates the measurement of insurance contracts by requiring that all changes in future cash flows be recognised against the contractual service margin. However, the contractual service margin cannot be negative; hence if insurance con-tracts are onerous, a loss is recognised in profit or loss. There is no equivalent

of cash flows from insurance contracts. The proposed standard will apply to all insurance contracts as defined, includ-ing contracts issued by non-insurers, such as loans with waivers upon death. “However, unlike the current IFRS 4, fixed-fee service contracts, like car breakdown services, will not fall within the scope of the proposed standard,” says Van den Berg.

Investors and analysts that use in-surance financial statements will have to contend with some complex pro-posals in the revised ED, he adds. For example, they are likely to see sig-nificant changes in presentation in the statement of comprehensive income, but compared to the first ED issued in 2010, the IASB has made a number of revisions to reduce income statement volatility created by the original model. “The proposals are intended to align the presentation of revenue with other in-dustries to ensure that general users of financial statements understand them.”

While this is not a joint project, the IASB and the US accounting standard setter, the Financial Accounting Stan-dards Board (FASB), have been work-ing together on insurance accounting. The IASB has attempted to achieve con-vergence with the FASB, but this is now unlikely due to differing views in some areas of the proposed standard.

Consultation on the revised expo-sure draft has been limited to five key areas: the treatment of unearned profit in contracts; the treatment of contracts that specify a link to the returns on un-derlying items; the presentation of in-surance contract revenue in the income statement; the use of other comprehen-sive income to cover interest rate chang-es; and, transition to the new standard. The revised ED represents what may be the final opportunity for the insurance industry to influence the future insur-ance accounting standard.

Van den Berg adds that investors will have to contend with a number of changes affecting South African insur-ers. “In the next few years they will not only need to understand the new solven-cy regime (SAM), but also the complex-ity in reporting that the new accounting standard brings and how this is differ-ent to SAM. However, the new insur-ance standard will enhance the quality and consistency of accounting within the global insurance industry.”

Van den Berg adds, “Insurers are urged to comment on the ED to ensure their views on the new proposals are considered.” The comment period will be for 120 days to October 2013. It is expected that the final insurance stan-dard will only be finalised towards the end of 2014, with the effective date not likely to be before 1st January 2018.

reached retirement age, but are still ac-tive in the industry due to a shortage of skills and experience,” says Isaacs.

concept to the residual margin in the Solvency Assessment and Management (SAM). Insurers will need to consider implementing a new system/model to determine the contractual service mar-gins that exist in the insurance products they sell.

Furthermore, insurance companies will need to improve their skills in order to comply with and implement the new proposals. Nicholas Ganz, who leads PwC’s Capital Markets and Account-ing Consulting Services business in Africa, believes that the new standard may therefore be a challenge for many companies operating in these African countries.

“When advising our clients on their acquisitions or start-ups in other Afri-can countries, consideration needs to be given as to how this will affect report-ing. When insurers design new products for these markets, consideration should be given to the accounting implications under the proposed standard, includ-ing system requirements and resource needs. This will avoid surprises on per-formance reporting.”

The key objective of the revised ED is to report useful information to users of the financial statements about the nature, amount, timing and uncertainty

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CRIME

Household horrorsDomestic Dishonesty on the rise

“my Spare caSh is missing – it must be the maid!” That’s an all too common war cry in households across South

Africa.And, indeed, according to Alan Car-

ey, Operations Director of Justicia Investigations, the sad reality is that crimes committed by domestic workers are on the rise and employers need to know how to deal with this construc-tively.

According to Statistics South Af-rica, over one million people work as domestic servants in South Africa. As with most crimes in this country, though, there are no available statistics to indicate how serious the situation is. Cases investigated by Justicia during the first half of 2013 have increased by 70% on the number handled during the first half of the previous year. In July alone, Justicia investigated 10 incidents in the greater Durban area alone, for example.

Crimes investigated by Justicia cover a wide range - from stealing money or jewelry to staged break-ins, and to more sophisticated crimes such as passing on of information to syndicates, taken from bank statements and financial documents. “Although much theft with-in homes involves opportunistic, petty crime, criminals do use vulnerable peo-ple earning low wages to get informa-tion,” he warns.

Carey puts the increase in what he formally terms “domestic dishonesty” down to a combination of the pressures of a tight economy – rising food prices and taxi and bus fares – as well as old fashioned, greed. Theft of items such as jewelry are often discovered well after they have occurred, making it difficult to recover items.

“A domestic crime is painful and stressful because it has happened so close to home. Small things lead to big-ger crimes and, once a trust relation-ship has been violated, it is gone. Un-fortunately, people don’t act when they should because they are often afraid that the culprits will come back,” he says. However, he stresses that if cor-rect procedures that protect the rights of both employer and employee are fol-lowed and homeowners are aware of

and use the expertise available to them, this seldom happens.

A broad guideline is that employers of domestic workers should take the same approach as they would in the workplace. An expensive professional labour expert is not always needed, but employers should follow standard dis-ciplinary procedures, document a disci-plinary hearing and, should the crime be proved, get the perpetrator to sign an admission of guilt before dismissal.

Most importantly of all, he says, em-ployers should do a full evaluation and pre-employment check on new em-ployees, especially those in a position of trust or caring for children or the elderly.

“How well do you know the people that are working for you? Few employ-ers even know the addresses of their own domestic workers! Rather than simply going by a referral from a friend or family member, you need to inter-view applicants, find out where they have worked before and then contact those people. Like we do with our own staff, you can even do a pre-employ-ment polygraph.”

He says that polygraphs are often seen as a last resort but are actually an invaluable screening tool. He says that tests conducted by Justicia’s polygraph

division have uncovered applicants with criminal records and identified known and wanted felons. Polygraphs are easy to organise and cost around R600, which is far less than the value of what could be stolen.

Carey adds that using an indepen-dent third party helps during sensitive investigations. “When you suspect a person in your own home, you are usu-ally right 90% of the time. When we listen to a person, we take out the emo-tion, look at the circumstances and ex-tract the details. We take the problem away from the employer.”

He adds that every investigation needs to be handled individually. “There’s a different solution for every problem. If a suspect is particularly volatile, we often go the covert cam-era route. One of our clients, who had a large CD collection, noticed that this was shrinking. We put a camera in the room and saw the gardener putting the CDs in an empty bucket while acting as if he was cleaning windows.”

In another instance, says Carey, a polygraph did the trick after a Durban resident who employed two maids sus-pected that money was missing. When one told her she had seen her colleague pocketing money from a cash box, she went this route to avoid counter accusa-tions. Ahead of the actual test, the cul-prit admitted to stealing medicines and money.

Carey says Justicia believes in “a soft approach” with polygraphs, stating that these are for insurance purposes and including the home owner. In one in-stance, a domestic worker who passed such a test had been accused of stealing by an aged employer, disclosed that her aged employer had Alzheimer’s and fre-quently misplaced things. The missing item was soon found. However, he also advised that one could prevent unpleas-ant situations by locking away valuables and not leaving money lying around.

LAW

Facing your creditorJudgments for debt

iF you don’t defend a summons is-sued against you for payment of money or a claim for damages, the

person suing you (the plaintiff) will ask the court to grant a judgment against


you (the defendant). If granted it re-mains valid for 30 years, and will affect your credit worthiness, essentially for all time. You will be blacklisted in the records of the credit bureaus.

In the Magistrates’ Court

You can apply to have the judgment set aside (rescinded) if the person that sued you (the judgment creditor) consents to the rescission, or you can show that you had a good defence and did not sit back and do nothing when the creditor sued you.

In the High Court

Consent by the judgment creditor to the rescission is not enough, and you will have to satisfy the court that at the time the judgment was taken against you, you had a valid defence and did not sit back and do nothing when the credi-tor sued you.To rescind a judgment in the High Court, you need to show that you were not in “wilful default” and that “good cause” exists (that you had a good de-fence) at the time the Plaintiff sued you.

Wilful Default

Before a person can be said to be in wil-ful default, he must have known that an action was being brought against him, but deliberately refrained from enter-ing an Appearance to Defend, although he was free to do so, because he really could not care less about the conse-quences of not dealing with the matter.

Accordingly, if the summons did not come to your attention and the first you learnt about the Judgment was when the Sheriff arrived at your house to make an attachment, you could not be said to have been in wilful default. At present, the rules of our Courts do not require personal service, so that a summons is deemed to have been served, even if it is served on someone else on your behalf or is merely affixed to the front gate of your house. In these circumstances, it is possible and often likely that the summons will not be brought to your attention.

Another example would be where you dealt with the summons timeously by handing it to your attorney, but he inadvertently and not negligently mis-placed the file in his office and it was through no fault of your own that Judg-ment was entered against you.

Good cause (bona fide defence)

Once you have satisfied the Court that you were not in wilful default in allow-ing the Judgment to be entered against

you, you must demonstrate that a sub-stantial defence exists. It would be suf-ficient to show that you have a prima facie defence that is likely to succeed at trial.

Rule 42 of the High Court Rules, sets out the grounds for the variation and rescission of an order. Good cause exists where:1 an order or judgment was wrongly sought or granted in the absence of any affected party;1 there is an ambiguity, a patent error or omission to the extent of such ambi-guity;1 an order or judgment was granted as a result of a mistake common to the parties.

If the judgment creditor does consent to the rescission, the court will take the following into account:1 reasonableness in the behaviour of the applicant (the person bringing the application to set aside the judgments);1 that the application is made in good faith; and that,1 the applicant has a bona fide sub-stantial legal defence (based on the mer-its of the case).

PERSONAL LINES

Keeping trackRegularly review of cover and insured values

many people See the third quar-ter of a year as an opportunity to review financial policies and

contracts in preparation for the New Year. However, in order to ensure that one is always in a positive financial situ-ation, it is important to review or adjust financial policies according to any ma-jor life event and not only on an annual basis.

Lizette Erasmus, Head of Portfolio Management at IntegriSure, says that regularly reviewing and re-assessing one’s financial policies can lead to sig-nificant financial savings. This is espe-cially important regarding insurance policies.

“Insurance contracts, like any other financial agreements, have terms and conditions that change according to certain criteria, which can significantly change their monthly premiums or the total pay-out in the event that they make a claim,” she says. “People must also be very careful when changing from one service provider to another as certain terms and conditions may vary. For example, the term ‘comprehensive

cover’ does not always mean the same thing to all insurance companies.”

It’s generally accepted that various aspects of cover are included in a com-prehensive option. She says this gener-ally includes damage to one’s vehicle or damage one causes to a third party. There are, of course, certain exclusions to this – such as the validity of the driv-er’s licence, the involvement of alcohol, or roadworthiness of the vehicle. How-ever, many people will be very surprised to find that some insurers in the indus-try have changed their cover in terms of the comprehensive policy. So in some cases, while one may assume a given risk is included in the policy, it has to be applied and paid for as an additional option.

“Some insurers exclude hail damage unless the policy holder specifically re-quests it. It’s not unheard of that a cli-ent moves from one insurer to another and assumes the cover will be the same, when in fact there are additional exclu-sions,” she says.

“Policy terminology is also an impor-tant area to clarify. One should not as-sume that all insurance policies and all terminology are the same. Consumers should look up the definitions accord-ing to each insurer to ensure they are fully informed as to what they are actu-ally covered for,” she says.

It is equally important to keep one’s insurer informed of any life changes that occur throughout the year to en-sure the maximum pay out in the event of a claim. She says many people for-get to inform their insurer when they purchase new electronic goods. She says this is particularly common over the fes-tive season when people buy things like cameras and iPads as gifts.

“While new items may be automati-cally covered under ‘unspecified all risk’,


it is wise to check that this is actually the case as certain items such as cell phones may need to be specified. This is especially relevant when it comes to upgrading certain electronic goods such as cell phones,” says Erasmus.

Other factors worth considering in-clude inflation, and the depreciation of certain assets, both of which are on-going, so reviewing the situation only annually is not necessarily a good

idea. Rather ensure your policy is up to date on a more regular basis so in the event of a claim there will be no argu-ment over whether you are sufficiently insured.

For example, buildings are rebuilt according to current costs. As such, the amount that a building was insured for a few years ago, or even a year ago, may not be enough to cover the cost of re-building in today’s terms.

Another example concerns the de-preciating nature of vehicle values. On one hand, she advises people to remain cognisant of the fact that as the value of their car depreciates, they may be in a position where they are over-insured.

“On the other hand, it’s important to notify one’s insurer if any additional work is done to a vehicle, such as the addition of a tow bar, so that the insur-ance can be amended accordingly.

DREAD DISEASE

Between the sheetsHow to compare the covers offered

dread diSeaSe cover is arguably the most complex of financial products. It causes confusion

among clients, and even financial ad-visors, when it comes to choosing the best cover and making a claim. But there is a way to break down these com-plex products methodically in order to compare apples with apples, as Sanlam’s senior medical advisor, Dr Eric Starke, explains.

“Many dread disease benefits are marketed based on the long list of medi-cal conditions they cover. To the unin-formed client or financial advisor this will naturally sound like a wonderful product and they’ll deem it better than one that covers fewer conditions. But this can be deceiving because all prod-ucts have complexities concerning what stage a condition should be at before cover is paid out, and what percentage of total cover is allocated for each con-dition.

“The key is to grasp fully the four key pillars on which every dread disease product is built – claim event, defini-tion, design and incidence. It is essen-tial, when analysing a product, to work methodically through all four pillars to make a like-for-like comparison.”

Here Dr Starke breaks down the pil-lars to help equip clients and advisors to analyse and compare dread disease covers.

Pillar 1. The claim event

This is the simple one – and the one most people stop at when analysing dread disease cover. It refers broadly to the medical conditions which are cov-

ered under the product such as a heart attack, cancer, stroke or Alzheimer’s, for example. Some products cover a very long list of conditions, looking im-pressive while others have a shorter list, which looks like a less comprehensive product. But looks can be deceiving and that is why it is critical to move on to pillars 2 to 4 to get the full picture.

Pillar 2. The definition

This is where it gets more complicated because dread disease products do not offer cover for every stage or severity level of every condition. To keep the product affordable, each claim event has a detailed description as to exactly how the medical condition must present

before it is paid. Some definitions can be so strict that a claim will only be paid in the very late stages of the disease. It is important that clients and financial advisors familiarise themselves with the description of each claim event. More emphasis should be placed on the defi-nition of each claim event really to de-termine the appropriateness of the ben-efit.

It will likely not be easy for a layper-son to fully grasp these medical techni-calities. Financial advisors should con-sult the medical advisors at the product providers or tap into other medical ex-perts to help them understand the de-tail around the definition of each claim event listed.

Pillar 3. The design

Then, digging a little deeper, it is impor-tant to review the design – which is the layout and pay out structure - of the product, i.e. what percentage of total cover will be paid out for a certain medi-cal condition. For instance, one product may pay out only 50% of the policy for a defined heart attack while another will pay out 100%. Or the one product will pay out 25% for a stage one cancer while another product will pay 100% for


the same stage. One product may cov-er a claim event for a 5%-15% benefit while another product does not cover this claim event at all. To gauge whether or not these percentages are likely to be adequate, the next pillar needs to be closely analysed, the incidence.

Pillar 4. The incidence

In my view, this is the most important pillar to examine. How likely is it that you or your client will actually get a cer-tain condition? Approximately 85% of dread disease claims in 2012 were for just four medical conditions: heart at-tack, cancer, stroke and coronary artery bypass surgery. A product with a long list of claim events is not necessarily a better product if the majority of claim events have a statistical low incidence. Google is a very useful tool for tracking down the incidence attached to a condi-tion.

RETIREMENT PLANNING — 1

Group savingsWhen is an umbrella fund appropriate?

the move From stand-alone pen-sion and provident funds to more cost effective umbrella funds has

been a major trend in the retirement in-dustry over the last few years.

“Where previously a company with a 100 members and above would have a free-standing fund, today companies find it more cost effective to opt for an umbrella fund,” says Joe Karabus, Senior Business Development Manager of Momentum’s Employee Benefits Corporate, who adds that on average a fund saves around 20% by moving into an umbrella structure.

“Statutory costs, such as, auditing fees, FSB levies and fidelity cover, are now shared across all members in the Umbrella, rather than just the members of the free standing fund,” he explains.

Apart from cost savings, new legis-lation, which increases the responsibil-ity of trustees, is also driving the move towards umbrella funds. “There is now a huge onus on trustees to comply with a plethora of new legislation. In the case of many stand-alone funds, the trust-ees are employees and members of the fund and their primary responsibility is to their day job. They do not necessar-ily have the necessary skills and training which could be offered by a profession-al, independent trustee.”

The downside of moving across to an umbrella fund is that members are

Starke says there are other complex-ities attached to dread disease benefits, such as the existence of tiered and non-tiered products, but the four pillar ap-proach can be applied equally to all such products. “Every life covered has a very individual set of circumstances so the most appropriate product will be very different in each case. A good under-standing of how to review each product will help immeasurably with the product selection process.”

He said that it is worth keeping in mind the original intent behind estab-lishing this type of cover. “It was never meant to play the role of a medical aid or provide cover for occupational dis-ability. Dread disease cover was concep-tualised by Professor Marius Barnard with the intention of ensuring people who were diagnosed with severe illness-es, and that will have a major impact on their financial situation, are able to claim for financial assistance.” Ò

now dealing with a larger fund and there is less opportunity for personal interac-tion. In the case of many free standing funds, the communi-cation with the provider is at a personal level while on an um-brella fund level, this largely relies on technology.

“One cannot expect personal individual atten-tion with lower administration fees and this is what some mem-bers struggle with when mov-ing to umbrella funds. In order for such a fund to service members effectively on a large scale it needs to work close-ly with the Financial Advisers to the various Participating Employers and to provide an effective internet-based communication mechanism for the members,” says Karabus. He adds that under an umbrella fund, the role of the Financial Adviser is critical in communi-

cating with the members, which is why FundsAtWork will only offer its funds through an accredited Financial Adviser to ensure that members receive good advice as well as direct communication. “We also require the employer to set up an Advisory Body made up equally of employees and the employer and all communication is to be managed by the Advisory Body”.

Karabus warns, however, that not all umbrella funds are cost effective: a great deal depends on the systems that are in place as it is these that are the critical elements in driving down costs. “At Momentum we have spent time and money on ensuring that we are able to provide members with an automated, integrated system. This includes allocat-ing savings amounts to the various as-set managers as well as an automated and integrated accounting package to record all transactions. A poor, ineffi-cient system can erode many of the cost benefits of consolidation.”

Karabus also does not advise an um-brella fund for a company with less than five members as the costs do not make it viable. “It would be more effective to invest directly into a retirement annu-ity. Given the recent changes to the tax legislation this would have no negative impact on the employer or member.”

However, for the majority of employers, he says an umbrella fund remains a viable option. They can be ex-tremely flexible and ca-ter for individual mem-ber needs, not only through investment choice, but also in pro-viding appropriate risk benefits.

If, for example, an employer has selected group life cover at four times salary for the av-erage member, some-one with a greater need for cover can increase it through the fund. This is often far more cost effective than tak-ing out an additional individual policy. Con-versely, an older mem-ber closer to retirement

may have less need for cover and can then buy down.

“FundsAtWork can meet individual needs under an institutional arrange-ment through providing flexibility in the fund at no additional cost,” says Karabus “This all comes down to good financial advice – your retirement fund needs are met, only through your needs being matched with an appropriate solu-


tion, through appropriate advice being given. Our ultimate aim is for individ-ual members to have financial wellness throughout their savings life cycle.”

LIFE ASSURANCE

Diagnose the riskDisability and severe illness

South aFricanS are living longer, according to the Statistician Gen-eral mid-year population report re-

leased in May. Indeed, life expectancy in the country has improved dramati-cally in the past eight years - going from 53 to 60 years. This is attributed to the fact that illnesses that previously carried a death sentence can now be treated, thanks to medical advances. “If this is a trend that will probably continue, the million dollar question is: are you finan-cially prepared?” asks Jaco Gouws, risk product manager at Old Mutual.

A recent statistics guide released by Old Mutual showed that R2.8 billion in claims was paid to the group’s retail cus-tomers in 2012. This was made up of:1 Death claims - 78%1 Illness and physical impairment claims – 12%1 Disability claims – 10%1 Retrenchment claims – less than 1%

“These statistics show us that people are not expecting to live through life’s un-foreseen circumstances,” says Gouws. “We are all aware of modern medicine and that there are more treatments available to humans, yet we all mostly plan for death. We tend to overlook the high likelihood that we will experience temporary or permanent disability, a se-vere illness such as cancer; or a retrench-ment before we actually pass away.”

According to research by True South Accountants and Actuaries in March this year, 60% of South Africans are un-derinsured for permanent disability and a staggering 93% are underinsured for temporary disability. Will your medical aid be able to help you fund the nec-essary treatments should you become temporarily or even permanently dis-abled? What if you suffer from a stroke or heart attack; or are diagnosed with cancer or Alzheimer’s disease, for ex-ample? Are you financially prepared?

“Life happens!” says Gouws.” And when it does, it could have serious fi-nancial implications for our families. Disability and severe illness solutions are an important part of a financial plan as they will help you pay for the costs your medical aid can’t cover, allow you to take some much needed time off

work to recover, pay for a caregiver or settle a medical debt.”

To understand the importance of en-suring you have adequate cover for life occurrences, consider this simple calcu-lation:

At age 20, you start earning R10 000 per month. If you only consider a 6% inflation and no other factors, such as bonuses or promotions, by the time you are 65 you would have earned just under R28 million. Add a further 2% and that number almost doubles to just over R50 million. When you consider how quick we are to insure cell phones and motor cars, why are we not insuring our most important asset – our own earning ca-pacity?

It is important to speak to a finan-cial adviser to determine what your needs are; to provide recommendations that will match the life stage you are in; and to get you closer to your financial goals.

BANKING

Paying promptlySmall business boost

the national Small Business Chamber (NSBC) recently set up the Prompt Payment Code™,

which serves as a pledge for organisa-tions across South Africa to commit to paying small businesses promptly. The SME sector contributes between 52% of the gross domestic product (GDP) and provides about 61% of employment in South Africa.

Nedbank says it is the first signa-tory. “As a bank for small businesses, we continue to engage with our clients to listen to their needs and challenges. From our ongoing research, cash flow is always singled out as the main concern affecting many small businesses,” com-ments Ingrid Johnson, Group Managing Executive of Nedbank Retail and Busi-ness Banking.

The code promotes payment to small businesses for goods and services rendered within 30 days from receipt of a valid and correct invoice.

“We see SMEs going out of business every day, in many cases due to cash flow problems as a result of late or non-payment. So the Prompt Payment Code will be vital to improve the cash flow of every business, and especially to smaller businesses. We encourage everyone from consumers to government and big business to adopt the code as best practice,” says Mike Anderson, NSBC founder and CEO.

The bank’s procurement strategy

supports small to medium enterprises with the provision of contract opportu-nities and enabling policies, as evidenced by the R2,8 billion spend on goods and services procured from 3 120 SMEs in 2012.

In keeping with its commitment, Nedbank says it strives to settle all valid and compliant invoices from an approved and registered vendor within seven days of receipt from businesses with an annual turnover of less than R5m, and within 30 days of receipt of the invoice for businesses with an an-nual turnover above R5m.

Signing up for the Prompt Payment Code™ is open to any organisation that makes payments to suppliers, specifi-cally SMEs. This includes private, public and government organisations. To view those who have committed their organ-isations to the Prompt Payment Code™ or to apply to be a signatory please visit: www.promptpaymentcode.org.za.

“Our ability to achieve sustainable economic growth is highly dependent on the success of our country’s small businesses. Starting a business is an avenue of independent wealth creation that is open to a broad and diverse part of the population – but to succeed these entrepreneurs need all the support we can give them,” says Johnson.

For the consumer, this could simply mean shopping at a local small busi-ness, or promoting it to friends and colleagues. To this end the nation is re-quested to utilise social media platforms using #VoteSmallBusiness to spread the word. For larger business, supporting small business could be a matter of re-viewing procurement practices, mini-mising red tape and ensuring prompt payment to their small business suppli-ers.

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Cover feature Financial Planning for Women

FINANCIAL PLANNING

Partner protectionLiving with your partner? Know your rights!

With high divorce rates world-wide and the increasing cost of living, couples often find

themselves living together for a while before jumping into marriage, if at all. This means sharing expenses and buy-ing furniture together, but when these relationships no longer work out, who gets to keep the house?

“Live-in couples, their immediate families and their wills have on many occasions been a recipe for much grief,” says Soré Cloete, senior legal manager at Old Mutual. “In South Africa, com-mon-law marriages are not recognised. This means that you are unfortunately not automatically regarded as your part-ner’s spouse, even though you may have been living together for a number of years.

“This also means that unless you are specifically recorded as an heir or ben-eficiary, you won’t be able to inherit from your partner either.”

There have been court cases where a live-in couple have been recognised as a partnership, but each party had to prove what they had separately brought into the relationship in order to claim their rights.

Put it in writing

“Generally, it’s a good idea for couples to draft a written agreement in which the rights and obligations of each party in the live-in relationship are clearly set out. In this way you will know exactly where you stand with each other,” says Cloete.

“It works like a contract and should preferably be drawn up by a legal ex-pert. Such an agreement will then be en-forceable, also in respect of your wills.”

Live-in relationships can also be reg-istered under the Civil Union Act. A registered relationship is officially called a civil union. The rights of each couple will depend on the type of civil union which is registered.

As with a normal marriage, the cou-ple need to decide whether they want to sign an ante-nuptial contract to be out of community of property, with or without the accrual system, or whether

it’s going to be in community of proper-ty. The purpose of an ante-nuptial con-tract is to provide financial protection for both partners.

If you register the relationship as in community of property, you will share all assets and be entitled to half of your partner’s assets, and vice versa. You will also both be responsible for any debt incurred by either of you. If you register the relationship as out of com-munity of property, you will need to de-cide whether the accrual system should be applicable or not. If not, all your as-sets remain your individual property – those that are brought into the union, as well as those acquired after signing the contract. With the accrual system,, both of you keep ownership of your pre-contract assets, but upon death or divorce, the difference in the growth of the accumulated assets will be divided equally between the partners. The ac-crual system will apply by default unless you specifically exclude it in the ante-nuptial contract.

To end a registered civil union, you have to request a court to terminate it and they will handle it just like a divorce.

“Couples who live together can look

forward to clearer financial rights in fu-ture. The proposed Domestic Partner-ship Bill, once introduced into law, will regulate the legal status of people who are in a domestic partnership, but have not yet tied the knot.” says Cloete. “And this law will apply to opposite-sex and same-sex couples.”

The Bill provides rights and obliga-tions to domestic partners who are not concerned with registering any form of partnership. It has identified all the important and relevant aspects of an unregistered domestic partnership such as dividing a property, maintenance and intestate matters (where a person dies without a will). It is not clear when this will become law.

“You are at a stage in your life when responsibilities and decisions are shared with a partner, so you need to carefully consider your finances,” concludes Clo-ete. “If you are unsure about your rights, it is important to speak to a financial adviser, who will be able to assist you in planning your finances wisely.”

HEALTHCARE

Getting the right ben-efitsWomen’s needs through the ages

“With Women making most of the healthcare decisions in their fami-lies, it’s important for them to un-

derstand which healthcare plan is most appropriate,” says Liberty Medical Scheme Executive Principal Officer, Andrew Edwards.

“Women often carry the burden of healthcare in their families and are more likely to take care of sick children or el-derly parents,” he says. “Understanding what benefits their medical schemes of-fer can help empower women to make better healthcare decisions for their loved ones.”

Women in their twenties

Many women in their early twenties have just started their first job includ-ing contributing to their own medical scheme cover. Choosing a hospital plan can protect you against major health-care events such as car accidents, and is often popular.


“But if you choose a hospital plan, make sure you have enough savings to fund your day-to-day ex-penses, such as visits to the GP and having preventative tests to detect conditions such as diabetes or high cholesterol,” says Edwards. “Man-aging your healthcare risks from a young age can help you prevent costly medical episodes later in life.”

Checks for women to consider include: Pap smears to detect cer-vical cancer early; annual visits to the dermatologist to prevent ma-lignant melanoma, one of the most common forms of cancer in young women; and, regular breast exami-nations to detect breast cancer. A twice-yearly visit to the oral hygien-ist and an annual visit to the den-tist to catch any related problems before they require expensive treat-ment should also be added to your ‘to-do list’.

“Young women are often swayed by the lifestyle benefits many medical schemes offer, but should rather be focused on laying the foundation for a healthy life later on by practicing pre-ventative healthcare,” says Edwards.

This may also be the time that a woman starts to plan for a family, so it’s important to remember that most schemes have a waiting period of 10 months before they cover any pregnan-cy-related claims. This means that you can’t fall pregnant and then join a medi-cal scheme or upgrade your package and hope to be covered.

“If you’re thinking about starting a family, try to plan in advance and con-sider the benefits of upgrading to a plan that covers both the pregnancy and birth in a hospital, or you’ll have to cov-er the costs of the following kinds of care: pre-natal scans and any complica-tions during pregnancy or for your baby after it’s born,” says Edwards.

Women in their thirties

Fertility begins to decline slightly in your early thirties and some women find they require fertility testing and treat-ment to conceive. Check your scheme’s benefits, as some plans cover a portion of different fertility treatments.

Edwards also suggests regular glu-cose tests if you’re at high risk of de-veloping diabetes – especially if you’re overweight, don’t exercise regularly, or have a family history of the disease.

Another preventative measure you can take is to check your thyroid-stim-ulating hormone (TSH) levels beginning at age thirty-five, and again every five years – and more often if you have sig-nificant weight changes or unexplained fatigue.

RETIREMENT PLANNING — 2

Ladies firstWomen: living longer means saving more

Women in their forties

From the age of forty, women should go for yearly mammograms to pick up any signs of breast cancer. Heart dis-ease is also a factor to consider at this age as well as psychological conditions,

such as depression, which may be trig-gered by the beginning of menopause.

“These are all covered on compre-hensive medical plans,” says Edwards.

Women who are fifty and over

Heart disease, cancer, and osteoporosis are all major concerns for women over fifty, but the most prevalent risks are breast and colon cancers.

“Most women go through meno-pause around this age and may require hormone replacement therapy and oth-er treatments,” adds Edwards.

From age fifty, women need a colo-noscopy every ten years, an annual mammogram, regular glucose testing and bone density screenings, as well as a Pap smear every three years.

Liberty Medical Scheme offers a range of plans that cover hospitalisation as well as preventative care, including most of the tests and screenings sug-gested above.

“The key to ensuring that you stay healthy is choosing a medical scheme benefit package that suits your lifestyle and age and will covers you when and for what you need it most,” says Ed-wards.

many South aFricanS face the risk of not having enough money at retirement. Howev-

er, women face an added challenge be-cause they generally earn less than men in equal positions, and they live longer.

It is common knowledge that on av-erage women earn less than men. A PwC remuneration report of all JSE-listed companies found woman earned an average of 28% less. So how does this influence women’s retirement savings?

As Tracy Jensen, 10X Investments product architect, says, “So just makes more sense that women plan carefully for their retirement and stick to a bud-get. Instead of increasing lifestyle costs when you receive a salary increase, you should rather try keep your lifestyle at the same level and contribute more to your retirement fund if sufficient con-tributions are not already being made. This is easier said than done, but it is critical to be disciplined. Another op-tion is to study part time in order to move into a higher earning role.”

Living longer means saving more. The latest annuitant mortality data re-

leased by the Actuarial Society of South Africa reveals that the average life ex-pectance of a 65 year old South African, who has an annuity, is age 85.9 for fe-males and 81.5 for males. “Since women on average live longer than men,” she points out, “they need to have a bigger pot at retirement to fund the same lev-el of income in retirement. Therefore, women need to save more towards their retirement than men do.”

Although women tend to lose out here, she says they generally pay a low-er life assurance premium than men and sometimes lower car insurance premi-ums too. As a result, one way for wom-en to increase their retirement savings is to invest the money they have saved on their life assurance, and possibly car in-surance premium, into their retirement fund.

Personal finances are like a shop-ping trip. “If you go shopping with-out a plan, you are almost guaranteed to spend too much, buy the items you want but don’t need and come out with none of the items you actually went there for in the first place.” The same is


true when it comes to your finances: if you go in without a plan (i.e. a budget) you are almost guaranteed to go over budget and have nothing left for the items you really need, like retirement savings.

“Retirement and your finances go hand in hand,” says Jensen, “because you can’t save for retirement if you don’t know what your end goal is.”

So the first thing you need to do is set your goal, which is the amount of income you need in retirement. “Let’s assume you need a retirement income of about 60% of your salary. Now that you know your goal, what do you need to save each month to reach that goal? In the example, you would need to save 15% of your gross salary (including your retirement contributions) for 40 years. If you start saving later, you need to save more than this.

There are many easy-to-use online calculators available to assist you with this.”

Secondly, you need to create a bud-get and work towards the retirement savings target you just calculated. You may not be able to save 15% right away, but it is important to work out an ac-tion plan on how you can get to that level. For example, cut out that latte on the way to work every morning, and this alone will save around R500 a month that you could contribute to your retirement fund.

Finally, include other savings in your budget. This will help you avoid draw-ing on your retirement savings in the event of an emergency. The golden rule is: do not touch your retirement savings until you retire.

OFFSHORE INVESTMENTS

Looking for valueRecognising the benefits

South aFrican Financial markets have provided local investors with strong returns over several years,

often with a lesser degree of volatility than in offshore markets, both devel-oped and emerging. “However,” says Jo-Anne Bailey, Sales Director & Country Manager for Africa at Franklin Temple-ton Investments, “we are now seeing a growing realisation amongst South Af-rican investors of the benefits of invest-ing offshore, prompting greater inter-est in offshore opportunities.”

Major reasons for investors being increasingly attracted to offshore mar-kets include the need for greater diver-sification away from the relatively small South African market, exposure to a

much larger investment universe i.e. a wider selection of asset classes and sec-tors, the potential to benefit from at-tractive valuations and faster growth, and access to state-of-the-art research provided by global investment teams.

Recognising the benefits

There is a much broader range of in-vestment opportunities available glob-ally than in a local market, and invest-ing offshore can provide exposure to certain asset classes, sectors and com-panies which are not available to locally-focused investors, e.g. stocks such as Nestlé and BMW.

In addition, there is a growing per-ception amongst South African inves-tors that there is better value offshore than locally, especially after several years of strong performance in the do-mestic market. Asset valuations, par-ticularly in equities, are seen as more at-tractive in the US and parts of Europe, Asia and South America, than in South Africa.

“While China is still seen as one of the world’s major growth engines,” says Bailey, “considerable investment focus is now being placed on India and parts of South America as the next major growth stories.” Other emerging and frontier markets around the world also continue to enjoy rapid growth, notably in regions such as the Middle East, Af-rica and South East Asia.

Although South African institutions and individuals are increasingly diver-sifying their assets through investing offshore, she notes that there is still a degree of hesitancy due to historically strong performance in local financial markets, the need to match local liabili-ties with local assets, and bouts of rand

recovery after sharp weakening of the currency. Many private investors have painful memories of investing offshore when the rand slumped to an all-time low of R13.85 to the US dollar at the end of 2001, only to recover strongly back to around R6 to the US dollar over the next few years.“While many insti-tutions, including pension funds, have been slow in fully utilising their 25% offshore asset allocations allowed by the South African Reserve Bank, they have recently increased their exposure as they recognise the need to spread their investment risk and reduce their exposure to one market,” says Bailey. “They are also allowed to invest an ad-ditional 5% in African assets outside of South Africa, which has led to the es-tablishment of several Africa-focused funds in South Africa.”

Allocation and diversification

An important factor for both institu-tional and private investors to consider is the sovereign and political risk that exists if one is invested too heavily in one country. It is essential for investors to maintain a well-diversified portfolio which is in line with their overall invest-ment objectives, risk appetite and in-vestment horizon.

Tactical asset allocation is also im-portant. Investing offshore must always be based on careful consideration of the investor’s circumstances before a de-cision can be made on how much and where to invest.

Private investors in South Africa have a generous offshore asset entitle-ment with each individual taxpayer able to invest up to R5 million offshore an-nually, R4 millions of which requires tax clearance. “These investment allowances are being used more and more by high net worth individuals to diversify their investment portfolios,” she says.

Investors should be aware of invest-ment timelines and retail investors should discuss their investment hori-zons with their financial advisers in or-der to have the best chance of achiev-ing their goals. It’s important to hold a long-term view to navigate periods of market volatility and maintain the disci-pline to be invested in a bear market to take advantage of market dips.

“What the markets have taught us in the last four years is that we cannot afford to have all our investments in a single asset class and/or region. Inves-tors should have exposure to a globally diversified portfolio backed by strong and credible fund managers.” South Af-rican investors are increasingly looking offshore in order to achieve a well-diver-sified portfolio and we believe this trend will continue to grow.”

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THE Economy

Innovate or get poorerGlobal competitiveness report 2013

excellent innovation and strong institutional environments are in-creasingly influencing economies’

competitiveness, according to accord-ing to a Report by the World Economic Forum. It places Switzerland at the top of the ranking for the fifth year run-ning. Singapore and Finland remain in second and third positions respectively. Germany moves up two places (4th) and the United States reverses a four-year

downward trend, climbing two places to fifth. Hong Kong SAR (7th) and Ja-pan (9th) also close the gap on the most competitive economies, while Sweden (6th), the Netherlands (8th) and the United Kingdom (10th) fall.

The United States continues to be a world leader in bringing innovative products and services to market. Its rise in the ranking is down to a perceived improvement in the country’s financial

market as well as greater confidence in its public institutions. However, serious concerns persist over its macroeconom-ic stability, which ranks 117 out of 148 economies.

In Europe, efforts to tackle public debt and avoid a break-up of the euro have taken the focus off addressing deeper competitiveness issues. South-ern European economies such as Spain (35th), Italy (49th), Portugal (51st) and notably Greece (91st) all need to contin-ue addressing weaknesses in the func-tioning and efficiency of their markets, boost innovation and improve access to finance in order to help bridge the re-gion’s competitiveness divide.

Some of the world’s largest emerg-ing market economies must also engage business, government and civil society to implement long-overdue reforms. Of the five BRICS, the People’s Republic of China (29th) continues to lead the group, followed by South Africa (53rd), Brazil (56th) India (60th) and Russia (64th). Among the BRICS, only Rus-sia improves its ranking, climbing three places, while Brazil drops eight places.

Among the Asian economies, Indo-nesia jumps to 38th, making it the most improved of the G20 economies since 2006, while Korea (25th) falls by six places. Behind Singapore, Hong Kong SAR, Japan and Taiwan (China) (12th) all remain in the top 20. Developing Asian nations display very mixed per-formances and trends: Malaysia places 24th while countries such as Nepal (117th), Pakistan (133rd) and Timor-Leste (138th) are near the bottom of the ranking. Bhutan (109th), Lao PDR (81st) and Myanmar (139th) join the in-dex for the first time.

In the Middle East and North Af-rica, Qatar (13th) tops the region’s rankings, with the United Arab Emir-ates (19th) entering the top 20 for the first time. Saudi Arabia (20th) falls two places but remains among the top 20. Israel ranks 27th. Egypt (118th) drops a further 11 places on last year’s index. Bahrain (43rd), Jordan (68th) and Mo-rocco (77th) also decline. Elsewhere in the region, Algeria moves up to 100th place and Tunisia re-enters the index at 83rd.

In sub-Saharan Africa, Mauritius (45th) overtakes South Africa (53rd) as the region’s most competitive economy. With only eight countries in the region featuring in the top 100, profound ef-forts across the board are clearly need-ed to improve Africa’s competitiveness.


Among low-income economies, Kenya makes the biggest improvement, rising by ten places to 96th position. Nigeria (120th) continues to be ranked low, highlighting the need for it to diversify its economy.

Despite robust economic growth in previous years, Latin America continues to suffer from low rates of productivity and the results show overall stagnation in competitiveness performance. Chile (34th) continues to lead the regional rankings ahead of Panama (40th), Cos-ta Rica (54th) and Mexico (55th), which all remain relatively stable.

“Innovation becomes even more critical in terms of an economy’s ability to foster future prosperity,” said Klaus Schwab, Founder and Executive Chair-man of the World Economic Forum. “I predict that the traditional distinction between countries being ‘developed’ or ‘less developed’ will gradually disappear and we will instead refer to them much more in terms of being ‘innovation rich’ vs. ‘innovation poor’ countries. It is therefore vital that leaders from busi-ness, government and civil society work collaboratively to create education sys-tems and enable environments which foster innovation.”

Xavier Sala-i-Martin, Professor of Economics at Columbia University, USA, said: “The report highlights a shift in the narrative of the global economy from one year ago, when fire-fighting still characterised much of global and regional economic policy. This has now given way to an increasing urgency for leaders to make wide-ranging structural reforms to their economies.”

Note on the Report methodology

The Global Competitiveness Report’s competitiveness ranking is based on the GCI, which was introduced by the World Economic Forum in 2004. De-fining competitiveness as the set of institutions, policies and factors that determine the level of productivity of a country, GCI scores are calculated by drawing together country-level data covering 12 categories – the pillars of competitiveness – that together make up a comprehensive picture of a coun-try’s competitiveness. The 12 pillars are: institutions, infrastructure, macroeco-

nomic environment, health and primary education, higher education and train-ing, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication and innovation.

SOUTH AFRICA

Government burdenThe World Economic Forum competitive index

the South aFrican Government is responsible for the country’s weak position in the latest World

Economic Forum (WEF) Global Com-petitiveness Index (2013/2014 report). Healthcare, educa-tion and an inflex-ible labour market were the culprits in pulling the country down to rank 53rd in the list.

Warning signs

“Building a skilled labour force and creating sufficient employment pre-sent considerable challenges,” says the WEF. The quality of the educational system is very poor (146th), with low primary and tertiary enrolment rates.

Low scores for the diversion of pub-lic funds (99th), the perceived wasteful-ness of government spending (79th), and a more general lack of public trust in politicians (98th) remain worrisome, and security continues to be a major area of concern for doing business (at 109th). Here’s more:1 Labour market efficiency is poor (116th);1 Hiring and firing practices are ex-tremely rigid (147th);1 Companies cannot set wages flex-ibly (144th); and,1 Significant tensions in labour-em-ployer relations exist (148th).

For example, BMW this month lost the opportunity to bid for the production of a new car model for the global market, which would have created a significant number of new jobs. This is because of the ongoing strike in the automo-tive component manufacturing sector. BMW had already lost the production of 13 000 cars this year — almost 12.5% of its total annual production because

of strikes. The industry has warned before about this, that strikes in the motor industry would damage South Africa’s status as a reliable supplier to international export markets and could negatively affect future export con-tracts being awarded to South African automotive manufacturers.

“Labour stability is one of the most important considerations in the deci-sions by multinational corporations to allocate vehicles for production in South Africa,” said a spokesman.

The health of the workforce is ranked 133rd out of 148 economies—the result of high rates of communica-ble diseases and poor health indicators more generally.

South Africa’s mathematics and sci-ence schooling was ranked last of 148 countries, and was only ahead of Yemen

and Libya in an assessment of the total education system.

A skills shortage has contributed to a dearth in investment, undermining South Africa’s efforts to reduce its one-in-four unemployment rate.

As the WEF warned, “Raising edu-cational standards and making the labour market more efficient will be critical in view of the country’s high unemployment rate of over 20 percent, with the rate of youth unemployment estimated at close to 50 percent.”

And the country’s strong ties to ad-vanced economies, notably the euro area, make it more vulnerable to their economic slowdown and likely have contributed to the deterioration of fiscal indicators: its performance in the mac-roeconomic environment has dropped sharply (from 69th to 95th).

Interesting, what pulled South Af-rica up to rank 53rd overall, overtaking Brazil, incidentally, to take second place among the BRICS bloc, were areas more involving the private sector. For example, the country came first for:1 Strength of auditing and reporting standards;1 Efficacy of corporate boards

Government isn’t helping


1 Protection of minority sharehold-ers’ interests;1 Regulation of securities exchanges; and,1 Legal rights index.

The country was placed third on its fi-nancial markets development and did well on the quality of its institutions, including intellectual property protec-tion, property rights and the efficiency of the legal framework in challenging and settling disputes.

“Ranking first for regulation of se-curities exchanges indicates that the Johannesburg Stock Exchange (JSE) is a secure and credible environment to raise capital and in which to invest,” says Director of Issuer Regulation John Burke. “Investors, regardless of size, can have a high level of comfort when using the exchange. This ranking is also testament the JSE and Financial Services Board (FSB)’s sound working relationship.” The country’s securities market regulators are the JSE and its regulator, the Financial Services Board.

He notes it is the first time that South Africa has achieved a first place

ranking for protection of minority shareholders’ interests. “This, together with several other elements of the re-port, points to the country’s exchange as a sound environment in which to in-vest.

“South Africa has access to deep pools of capital both from our well-developed local investment community and high participation of foreign inves-tors. This makes the exchange an ideal destination to raise capital for develop-ment in the region,” adds Burke.

Released annually in September, the report rates countries according to 12 pillars or sets of criteria. This includes competitiveness in terms of quality of infrastructure and institutions, effi-ciency, market sophistication as well as capacity for innovation amongst others. Regulation of securities exchanges falls under the eighth pillar for financial mar-ket development.

ECONOMY

Range of opportunitiesBRICS trade performance, focusing on South Africa

two Asian countries is highly concen-trated and dominated by a few mineral commodities, principally iron ores and concentrates, as well as coal products.

Trade with Brazil falls short of the deemed potential with the challenge be-ing partly related to the relatively simi-lar composition of the two countries’ export baskets. Nonetheless, exports destined for Brazil are relatively diver-sified, and include minerals, chemicals and manufactured products. Trade with Russia is quite negligible, and exports are dominated by trucks and motor ve-hicles for the transportation of goods.

“BRICS membership does present a wide array of opportunities in terms of global positioning,” notes the IDC: “developmental collaboration; market access; inward and outward invest-ment; financial capital flows; technol-ogy transfer and technical cooperation; skills development; and, tourism flows.”

Various challenges currently prevent this potential from being fully realised, with hurdles standing in the way of trade development including bureaucratic procedures, regulations and standards, import protection, as well as public sec-tor procurement criteria, among oth-ers. However, some of these challenges could be effectively overcome through robust intent and commensurate en-deavours by all BRICS members.

The full report is available at:http://www.idc.co.za/media-room/

South Africa does well on measures of the quality of its institutions (41st), including intellectual property protec-tion (18th), property rights (20th), and in the efficiency of the legal frame work in challenging and settling dis-putes (13th and 12th, respectively). The high accountability of its private institu-tions (2nd) further supports the institu-tional framework. Furthermore, South Africa’s financial market development remains impressive at 3rd place. The country also has an efficient market for goods and services (28th), and it does reasonably well in more complex areas such as business sophistication (35th) and innovation (39th).

China remained the most competi-tive of the five member countries of BRICS, in 29th position on the global competitiveness index. Brazil fell eight places to 56, India was 60th and Russia 64th.

the induStrial development Cor-poration (IDC) recently issued a report on South Africa and its

BRICS partners.It says the BRICS forum was formed

in 2011 with the aim of encouraging commercial, political and cultural coop-eration amongst its member countries, namely: Brazil, Russia, India, China and South Africa. Through greater coopera-tion, the group seeks to influence and/or reform global governance and eco-nomic relations.

The IDC says combined exports of the BRICS to the rest of the world reached US$3.2 trillion in 2012, from $494 billion in 2001. Its overall imports amounted to $2.8 trillion last year, compared to $417 billion in 2001. The BRICS share of world exports grew from a mere 8% in 2001 to 17% by

2012 and the composition of its collective export basket has also changed significantly over time. China is clearly the largest trad-ing member of the BRICS with a 62.5% share of the BRICS ag-gregate trade (exports plus im-ports). South Africa’s trade with other BRICS countries has also expanded substantially since the beginning of the 21st century, especially in the case of China and, to a lesser extent, India. Nevertheless, South Africa’s ex-port baskets destined for these


INVESTMENT STRATEGY — 1

The great disconnectSifting the JSE for value is not easy

the JSe rallied 34% over the last year and a half, and the market continues to hit new highs this

year. “This is at severe odds with the state of both the global and South Afri-can economy,” says Geoff Blount, CEO of Cannon Asset Managers. “In fact, it appears that there is a ‘disconnect’ be-tween the real world and the investment world and this leads one to wonder what is going on? This disconnect should be sounding alarm bells to investors, and we believe it is, but perhaps not in the way you might think.”

Essentially, the SA equity market is being driven by a narrow set of stocks that were already expensive, and are getting more expensive. “We can see

this clearly if we look at the contribu-tors to the ALSI re-turn for 2013. The first graph shows the marginal con-tribution of the 20 stocks that most im-pacted on last year’s performance. For example, it shows that SABMiller and Richemont alone contributed almost 7% of the 26.8% re-turn. If you owned all the other shares in the market, but

not these two, you would have earned a return of 20%.

It also shows that these 20 stocks contributed 22.4% of last year’s total market performance, and a stagger-ing 15.4% came from large cap indus-trials (highlighted in red). If you didn’t own these 13 industrial stocks, but you owned the rest of the market, you would have only earned an 11.4% return last year, which, while lower, makes more sense given the economic backdrop.

Most of the stocks that did well last year are, no doubt, extremely high qual-ity firms but – and here’s the issue – they are very expensive, high quality firms. Take a look the Cyclically Adjusted Price Earnings (CAPE) ratios of some of these popular stocks, shown in Table 1. Across different time frames and in various markets around the world, his-tory has demonstrated consistently that anything above a CAPE ratio of 16x is expensive, and we believe anything above 19x is very expensive.

“While most of these stocks are de-cidedly expensive, it’s easy to find rea-sons to own them,” explains Blount. This is not unlike the situation in 2007 when investors and the market, enthused by the pre-Soccer World Cup construction frenzy, justified the outlandish mul-tiples of construction stocks. In fact, those multiples and these are strikingly similar (see Table 2). But back in 2008,

Graph 2: Top 20 stocks’ marginal contri-bution to ALSI performance in 2013

Graph 1: Top 20 stocks’ marginal con-tribution to ALSI performance in 2012

Table 1: Valuations on the JSE using Cyclically Adjusted Price Earnings ratios


when the realisation finally sunk in that the overpriced construction stocks sim-ply could not grow earnings ad infini-tum and would disappoint investors, the shares were severely punished, slump-ing by 40% for the year. This scenario is very repeatable today, but investors are pretending otherwise.

And things haven’t changed much in 2013. The second graph shows the top 20 stocks’ contributions to this year’s market rise of 6.8% year-to-date to end-July 2013. “By our calculations, only the stocks shown in green are trading at a discount to fair value.”

“So we see that most stocks, which began 2013 on high ratings< have just become even more expensive, and pushed the market further, repeating the pattern of the last few years,” ob-serves Blount. “This can be measured by the valuation differences between the cheaper and more expensive shares in the market: the valuation dispersions.”

The third graph shows the disper-sion of valuations between stocks in South Africa. The black line represents the lowest CAPE ratio of the 20% most expensively priced stocks on the JSE or the most expensive fifth of the market (Quintile 5). The green line represents the highest CAPE ratio of the 20% most attractively priced stocks on the JSE or the cheapest fifth of the market (Quintile 1). The remainder of the mar-ket – 60% of shares – lies between the two lines, in terms of valuation.

Table 2: CAPE ratios for construction stocks in 2007 versus today

Graph 3: CAPE Valuation Dispersions on the JSE

“What it shows is that in absolute terms, Quintile 5 is looking very very expensive. But over the last few years, these stocks have been getting in-creasingly expensive relative to the rest of the market. This rel-ative valuation gap

between the two lines has risen nearly 50% since 2008, resulting in the longest outperformance for growth style invest-ing we have seen in SA (compared to value style), as the valuations of expen-sive stocks continue to get much more expensive relative to low CAPE ratio stocks.”

At this point one might expect that we advocate the avoidance of equities, but you’d be interested to know that this is not the case.

The market’s long-run average CAPE ratio is 16X, and the current rat-ing is 15.6X, which says at the overall level, the market is about fair value and the asset class (South African equities) as a whole can be owned. But the im-plication is that relative to fair value the range of valuations is becoming even more stretched and investors should be alarmed at which equities they own, if indeed they own the overpriced growth shares. “This is the tyranny of averages: this aggregate is comprised of very ex-pensive stocks, as well as stocks that are very attractively priced.”

Blount adds, “We believe that the multiples on these expensive stocks are not sustainable – they need to maintain very high levels of earnings growth to justify such valuations. With company earnings disappointments will come the risk of investor sell offs and thus invest-ment risk.

“One interesting aside to the above is that whilst the price action of these

stocks has pushed the JSE to new highs, they have also masked some of the tre-mendous value opportunities that are available in other areas of the market at the moment.”

INVESTING

Many factorsVariability of unit trust returns

there are many factors you should consider to help you select a unit trust that will suit your personal

needs and circumstances. Start by clari-fying your goals and your time horizon for achieving them, then be honest with yourself about how much investment risk you can tolerate.

Investment returns can fluctuate, of-ten dramatically, but as long as you re-main invested for long enough to enjoy the benefits of a potential bounce back, drops in value are only on paper. Dis-investing after your investment has lost value locks in your loss and is the reason why so many investors experience low-er returns than the funds in which they are invested. You need to consider care-fully to what extent you will be able to stomach unpredictable ups and downs.

One of several measures you can use to determine how much fluctuation you can expect from a fund is the variabil-ity of returns over time. Variability es-sentially refers to the extent to which returns diverge from the average return over a period. Funds that invest more


conservatively tend to have less varia-tion in returns over any given time pe-riod. On the other hand, funds that aim to maximise return, usually those with higher equity exposure, will experience more variable returns, which may be especially dramatic in the short term. ‘Variation from average’ is the annual-ised standard deviation of monthly re-turns over the period covered, as shown in the table.

Looking at the range of returns funds have earned in the past will give you an indication of the best and worst case scenarios that you may face dur-ing your investment period. This is es-pecially important if you may need to withdraw from your investment in the short term.

Short-term variability can be dra-matic. The table illustrates how vari-ability differs between different types of funds, showing the best, worst and average one-year returns for the Allan Gray Equity Fund, the Allan Gray Bal-anced Fund and the Allan Gray Money Market Fund over the last 10 years.

The table shows that over short time periods the Equity Fund has generated returns far superior to those delivered by the Balanced or Money Market Funds. However, it has also delivered significant drops in value. This should not surprise Equity Fund investors as its fact sheet clearly states that it is best suited for investors with a long-term investment horizon who are com-fortable with short-term stock market fluctuation and are prepared to take on the risk of capital loss. Meanwhile, the Balanced Fund aims to create long-term wealth more steadily, by taking on less risk of market fluctuation and capital loss than an equity fund. This is also reflected in the table, which shows that the Balanced Fund’s worst one-year re-turn in the last 10 years, although also a drop in investment value, was less alarming than that of the Equity Fund. The Balanced Fund’s variability of 12% is still much higher than that of the Money Market Fund, which aims to preserve capital and maintain liquidity, with very low risk of loss and the lowest variability of the Allan Gray funds over any period.

Variability of long-term return de-pends on the type of fund. For example, Allan Gray Equity Fund investors who were invested over the five years ending June 2008 enjoyed the highest return, at 31% per year, while those invested for the five years ending May 2012 received

just 6% per year. This means that depending on when investors

invested and withdrew, their return ex-perience would have been very differ-ent. Given this variability, investors in the Equity Fund face a wider range of possible outcomes than those in more conservative funds.

This illustration is useful to under-stand variability, but should not be used to predict future performance. The av-erage returns shown are unlikely to be repeated over the next five-year period. Ultimately you need to make sure that your fund’s objective, long-term return potential and the level of fluctuation you can expect marry up with the level of risk, and variation in returns, you are comfortable taking on. Aside from these factors, it is also crucial to select a reputable manager with a strong track record and make sure their philosophy and process resonate with you. If you need help making a decision about which funds are the most suitable for you, you may wish to consult an inde-pendent financial adviser. By Tracy Hirst, Private Clients, Allan Gray, writ-ing in a recent GrayIssue Newsletter (13th September 2013 – No 147).

INVESTMENTS

Guided platformSelection strategy

“Too much choice can produce a par-alysing uncertainty.” This is one of the findings of professors Hazel

Rose Markus and Barry Schwartz, in a study on the meaning and significance of choice published in the Journal of Consumer Research: Does Choice Mean

Freedom and Well Being? (Feb.2010).So if a plethora of seemingly simple

selections – from choosing a breakfast cereal to a cell phone operator; a brand of toothpaste to the make and model of a car – can leave you riddled with in-decision, what does this mean for your investment decisions?

Nico Coetzee, Executive: Business Development at PPS Investments, says with over 900 unit trusts currently on offer in South Africa, each with their own mandate and investment objec-tives, it’s understandable that you may at times feel overwhelmed. “Even the performance of those unit trusts grouped together in categories set by the Association for Savings and Invest-ments South Africa (ASISA) has the po-tential to vary significantly. When mak-ing your investment decisions, where do you even begin?”

Whereas open-architecture plat-forms try to give investors access to every available unit trust, guided-archi-tecture platforms deliberately limit the number of unit trusts made available and only allow certain asset manag-ers exposure on the platform. “Such a platform may therefore help in making more appropriate choices when con-structing portfolios by eliminating unit trusts that are too finely mandated or perhaps feature unusually high inher-ent risks in their strategies,” he says. “In contrast, an open-architecture plat-form is likely to have a preponderance of volatile sector-specific unit trusts and may even include asset managers with poor track records. When choosing the underlying unit trusts for your invest-ments, having investment professionals narrow your list down for you may be a good place to start.”

Guided platforms further place em-phasis on asset allocation unit trusts, which offer exposure to a number of different asset classes, such as equity, property and cash. Coetzee says this means that in addition to the assistance you’ll receive when compiling your unit trust shortlist, you’ll also be able to del-egate important asset allocation deci-sions to your selected asset managers.

As an added advantage, the asset managers included on guided platforms are usually more willing to negotiate on fees, as they know that their unit trusts have a better chance of being included in investors’ portfolios due to the exclu-sivity of unit trusts available. This usu-ally takes place in the form of a rebate, which the platform can use to reduce investors’ asset management fees.

“So, if too many choices prove to be too much of a good thing, a guided plat-form may be a suitable consideration for you and your financial intermediary, while potentially offering reduced fees.”

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