Transcript Document
WELCOME TO TRAINING ON BASIC INVESTMENT CONCEPTS
Presented by Jim Ash CFP® Managing Director Fingroup (Swaziland) (Pty) Ltd
The Global View
ORIGIN OF RETIREMENT FUNDS
The economic working time of any person is limited; i.e. a worker’s earning capacity ceases when he is physically or mentally no longer able to work. When that stage is reached, it is essential for the employee to obtain another source of income so that she/he can continue to support her/himself and family. If no provision is made in the form of money that is saved, such a person will be destitute. Then the idea originated that money should be saved regularly during an employee’s working lifetime to make provision for an income during that period when the employee is not able to earn an income, which led to the establishment of Retirement Funds
WHAT IS A RETIREMENT FUND ?
A Retirement Fund is defined in the Retirement Fund Act to mean “any plan, fund, or program or business established for purpose of providing annuities or lump sum benefits for its members on their retirement or dependents of such members on the death of such members”. The definition of Retirement Fund in terms of the Act includes a pension fund, provident fund, and retirement annuity.
MANAGEMENT BOARD
The Retirement Fund Act requires that every fund shall have a controlling body called the management board, whose main object is to control the business of the retirement fund. Section 8(1).
TRUSTEES
The term Trustee is defined in the Retirement Fund Act to mean a member of the board This is due to the nature of the functions they perform and the fiduciary duties imposed on them by law.
Although individual trustees, may be appointed by the sponsoring employer or elected by the members as the case may be, it is their individual and collective duty to ensure that the interest of members is protected at all times. Section 10 of the Retirement Fund Act
RETIREMENT FUND ASSETS
Section 18 of the Retirement Fund Act defines the manner in which retirement fund assets may be kept as follows : Registered in its own name and the fund shall retain custody of all of its assets Assets may be kept in the name of the retirement fund by one or more of the following institutions registered in the country approved by the Registrar in terms of the regulations A Stock broker An Investment Manager
An Insurer or
A Banking institution
TRUSTEE RESPONSIBILITIES REGARDING INVESTMENTS
Although the Retirement Fund Act allows the Trustees to delegate the management of the assets to certain institutions, the Board cannot relieve themselves from the following responsibilities: Ensure the investment manager operates within the Funds investment policy and has adequate controls to ensure the security of the assets Ensure the assets and contributions of the fund are invested in terms of the rules of the Fund Monitoring of Investment Performance and the appropriateness of investments Ensure the assets of the Fund are invested in a matter to achieve an adequate return Ensure that the responsibilities of the investment managers are clearly defined Ensure that clearly defined investment guidelines and performance guidelines are in place
OTHER PLAYERS
The RFA does not expect the board to carry out all the responsibilities of managing the Fund Employer Administrator
Insurance Companies
Investment Managers Consultants Valuator Auditor Regulator Tax authorities
TRUSTEE RESPONSIBILITIES REGARDING INVESTMENTS cont.
It is important to understand that the Administrator is merely a conduit for the receipt of funds and delays have been known to occur in getting the contributions of the fund to the various fund managers.
This was discovered with a large administrator in South Africa (the process is called Bulking) (how to make profits without the clients knowing) It is also the Trustees responsibility to ensure that the companies do not take advantage in order to increase their profits.
It is also important to understand where the contributions of the fund are dispersed.
Normally 100% of the employees funds are fully invested but this is not so with the employers contribution. Costs of risk cover and administration are normally deducted from the employers contributions and it is important to note these costs to ensure that there is a level of investment from the employer also.
The Asset Manager is responsible for growing the funds in terms of the mandate expected of them.
HOW THE FUND WORKS FUNDING METHOD
There are currently two methods to provide for retirement, namely defined contribution (DC) and defined benefit (DB)
BASIC INVESTMENT CONCEPTS INVESTMENT RETURN
Money can be invested in many different ways, for example, savings account, unit trusts, property and endowment policies. No matter where you choose to invest your money, the main aim is for your money to grow. Your investment return is how much your money has grown or reduced, and this affects the overall value of your investment over time. Some investment vehicles may give you a higher return in the long term than others.
For Example: You invest E100 (your capital amount), and after a year that money has grown to E110. Your investment return is E10 or 10%.
The money a retirement fund member and employer contribute towards the retirement savings is invested in much the same way, with the aim being to grow your money so that you have enough at retirement.
BASIC INVESTMENT CONCEPTS INFLATION
Inflation is what makes your money worth less over time, in other words, you can buy less now with that money than you could in the past. The buying power of your money has therefore decreased. For example, just think how much E1 could buy you twenty years ago. If you want your money to grow, you have to make sure that the investment return you receive on your money is higher than the rate of inflation.
For Example: For 20 years, Thabo saves R100 a month in a savings account with an average investment return of 8%. But, the average inflation rate during this period was 10%. Thabo’s money has therefore lost value at a rate of 2% a year. If Thabo had saved his R100 in an investment vehicle with an average interest rate of 15% over the same period, his money would have grown faster than the inflation rate. He would have achieved a real return of 5% per year on his investment.
Many people believe that their money will grow adequately in an investment vehicle such as an ordinary bank account. Unfortunately, the emalangeni value of this money may be the same (it will even earn some interest), but inflation will reduce the real value of the money in today's terms.
THE HALF LIFE OF MONEY
BASIC INVESTMENT CONCEPTS TYPES OF FINANCIAL MARKETS
Exchange – A formal marketplace in which shares, options and futures on shares, bonds, commodities, and indexes are traded.
Capital Markets – Any markets used to raise capital, e.g. listed equities (FTSE/JSE) through share issuances, fixed-interest (bond) and unlisted securities markets.
Emerging Markets – The financial markets of developing or emerging economies.
BASIC INVESTMENT CONCEPTS VOLATILITY – FLUCTUATIONS IN THE MARKET
Investments are exposed to market risk and their value tends to fluctuate, depending on certain economic and market conditions. An investment associated with a high level of market risk is regarded as less secure and more volatile, while an investment with a low level of market risk is considered to be more secure and less volatile. Volatility refers to the daily fluctuation in the value of an investment, and different investments have different levels of volatility. For example, a fixed deposit account is least volatile because you know exactly how much you have deposited, how much interest you will earn and how much you will receive at the end of the fixed period. In contrast, shares are extremely volatile because share prices can rise and fall dramatically in one day.
BASIC INVESTMENT CONCEPTS VOLATILITY
Although the value of an investment may fluctuate from day to day, this does not necessarily mean that it is high risk and will not achieve good returns in the long term. For example, shares are quite a volatile investment, but in the long term they will probably achieve a better return than other fixed interest investments, e.g. fixed deposit.
BASIC INVESTMENT CONCEPTS RISK VERSUS REWARD
No matter where you invest your money, it will always be exposed to some level of risk, which refers to the possibility of a poor return. Fortunately, risk is something that can be taken into account in investment planning because, although risk cannot be removed completely, the amount of risk an investor is prepared to be exposed to can be decided upon.
So, what are the risks that may be faced? Volatility Of Investment Erosive Effects of Inflation in the Long Term.
Exchange Rate Fluctuations Changing Economic Fundamentals
BASIC INVESTMENT CONCEPTS RISK VERSUS REWARD
You will generally find that the greater the risk investors are prepared to take, the greater the possible rewards or investment return over the long term. The level of exposure to risk is a decision that the Trustees need to make. Some want absolute security, while others are prepared to take a bigger risk if it means they can achieve more growth. Generally, a scheme with a younger membership can afford to take a greater risk than a scheme whose members are close to retirement, as a younger scheme has more time to recover from short-term Defined contribution fund, this means the members carry the risk of the investments. Since risk cannot be avoided entirely, it is important that the exposure to risk is managed so that the investments can provide the membership with the required income at retirement.
• WARNING THAT A MASIVE STOCK MARKET CRASH IS IMMENENT
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October 3, 2012
• By Michael Snyder • In the financial world, the month of October is synonymous with stock market crashes. So will a massive stock market crash happen this year? You never know. The truth is that our financial system is even more vulnerable than it was back in 2008, and financial experts such as Doug Short, Peter Schiff, Robert Wiedemer and Harry Dent are all warning that the next crash is rapidly approaching. We are living in the greatest debt bubble in the history of the world and Wall Street has been transformed into a giant casino that is based on a massive web of debt, risk and leverage. When that web breaks we are going to see a stock market crash that is going to make 2008 look like a Sunday picnic. Yes, the Federal Reserve has tried to prevent any problems from erupting in the financial markets by initiating another round of quantitative easing, but 40 billion dollars a month will not be nearly enough to stop the massive collapse that is coming. This will be explained in detail toward the end of the article. Hopefully we will get through October (and the rest of this year) without seeing a stock market collapse, but without a doubt one is coming at some point. Those on the wrong end of the coming crash are going to be absolutely wiped out. A lot of people focus on the month of October because of the history of stock market crashes in this month. This history was detailed in a recent USA Today article....
BASIC INVESTMENT CONCEPTS THE INVESTMENT HORIZON
The decision on how to invest any type of saving will depend on how soon the money will be required. This is known as the investment horizon.
Short investment horizon: The shorter the investment horizon, the more secure or conservative the approach. If all assets of a scheme whose members are close to retirement put all its assets into a volatile investment such as shares, where the return may fluctuate from year to year, there may not be time for the investment to recover before the benefits become due if the shares drop in value in the short term. Such Retirement Fund schemes should consider investing their savings in more stable portfolios. Long investment horizon: The longer the investment horizon, the more risk a retirement fund can tolerate. By investing too cautiously over the long term, the investments may not perform as well as they could have in a higher risk investment. For example, a savings account may be a secure option (low volatility) but the effect of inflation may decrease the value of the investment over the years. If you are 20 years from retirement, you can afford to take the ups with the downs of the market.
Generally, Retirement Funds take a longer investment horizon due to the long term nature of the liabilities .
BASIC INVESTMENT CONCEPTS RISK PROFILE
Identifying the risk profile helps in deciding the appropriate portfolio in which to invest the assets of a retirement Fund. Conservative: More certainty and consistency of returns, even if that means a lower return is achieved in the long run Moderate: Understanding that long-term investments must be invested in shares and the investor is willing to take a slightly higher level of risk to achieve the desired return Aggressive: Seek out specific investment opportunities that might provide exceptional returns but at a much higher level of risk
BASIC INVESTMENT CONCEPTS ASSET CLASS
Broadly speaking, an asset class is a category of financial assets that share certain characteristics, and that are tradable; Traditionally, the main asset classes are equities (shares), bonds, cash (money market) and property; Asset classes are often also split into local and international or offshore.
A combination of asset classes makes up an investment portfolio, each with its own level of risk.
BASIC INVESTMENT CONCEPTS
•ASSET CLASS
Cash
• Cash investments, e.g. a fixed deposit account with a bank, are a low-risk investment where you earn a fixed interest rate. They do not offer a very high return on your investment.
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Fixed-interest investments
• These are usually longer-term loans (or bonds) issued by the government or • companies such as SPTC to raise capital. They agree to repay the initial capital to investors at the end of an agreed period as well as make regular interest payments. This is a fairly secure investment earning slightly higher returns than cash.
Property
• Investors who put money into property such as office blocks, shopping centres and industrial parks, receive rental income and can also expect the value of the properties to grow over time. This is a medium-risk investment, depending on factors such as location, supply and demand, commercial or residential property, etc.
BASIC INVESTMENT CONCEPTS ASSET CLASS
Shares
When you buy a share in a company, you become a part-owner of that company. When the company makes a profit, this is shared with shareholders in the form of a dividend. If the value of the shares increases, shares can be sold at a higher price. Shares tend to be a high-risk investment as prices may fluctuate considerably .
BASIC INVESTMENT CONCEPTS ASSET ALLOCATION
Properties Equities Cash Off shore Assets Fixed interest
BASIC INVESTMENT CONCEPTS RELATIVE PERFORMANCE OF ASSET CLASS
BASIC INVESTMENT CONCEPTS DIVERSIFICATION
Ideally, investments should be spread between high-risk, medium-risk and low-risk investment vehicles so that you can reduce the overall risk of your portfolio. This is known as diversification (i.e. not putting all your eggs into one basket). Therefore, if one portfolio performs badly, it will affect only a small portion of your total portfolio and will not make such a big impact on your total savings. To protect fund members from investing their savings inappropriately, the Retirement Fund Act has strict limitations that specify how much may be invested in any one asset class. For example, a fund may not invest more than 75% of its money in shares, and not more than 15% in one particular share. A good Fund investment portfolio contains a spread of assets and is already in line with these investment limitations.
BASIC INVESTMENT CONCEPTS RETIREMENT FUND INVESTMENTS
Market-Linked:
The performance of these portfolios is directly linked to the performance of the underlying investments, e.g. the shares in which you are invested. For example, if the assets (shares) increase in value, so does the value of the investment. Conversely, if the assets (shares) do not perform well, this is also reflected in the value of your investment.
Smoothed Bonus:
This type of portfolio cushions the impact of the market and offers a greater degree of security. The investment returns earned by this kind of portfolio are smoothed, in other words, in good years part of the total investment return is kept in reserve and the reserves are used to supplement returns in bad years. There is usually some form of guarantee, such as the original capital invested in the portfolio plus a bonus which is declared each year. The reduced volatility offered by a smoothed bonus portfolio may result in a slightly lower performance in the long term.
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BASIC INVESTMENT CONCEPTS
•MARKET LINKED VERSUS SMOOTH BONUS Market linked portfolios tend to outperform over time •
BASIC INVESTMENT CONCEPTS INVESTMENT PORTFOLIO
Description Of The Fund: The Metropolitan Swaziland Global Managed Fund and is a fully discretionary portfolio. The fund has a balanced mandate and investments are diversified across all asset classes, including foreign assets. The fund is structured to comply with Retirement Fund Act.
Fund Objective: The fund aims to achieve consistent capital growth over the medium to long term, with low downside risk and low volatility. Investment Strategy: The fund is actively managed according to the Metropolitan Asset Managers house view. The investment strategy emphasises bottom-up research but using top-down, macro factors to reinforce decisions. The style results in lower portfolio turnover and is best suited to long-term investors.
Risk Profile:
• Moderate
BASIC INVESTMENT CONCEPTS ASSET ALLOCATION
BASIC INVESTMENT CONCEPTS PERFORMANCE
RECAP OF MAJOR POINTS
ASSET CLASSES
For classification purposes, all Assets are divided into different categories known as Asset Classes Different Asset Classes have different investment characteristics such as risk/return trade-off, liquidity, charges Main Asset Classes are Equities (Shares), Bonds, Property and Cash. Foreign investments often treated as separate asset class although underlying the foreign investment will be the four main Asset Classes above
EQUITIES
Also known as Shares Give the holder of the equity part ownership of the company Can be listed (on a stock exchange) or unlisted Dividends, which are a distribution of the company’s profits to its shareholders, are typically paid once or twice annually. Usually expressed as the amount paid per issued share A capital profit or loss can be made on sale of the Shares relative to the purchase price
BONDS
A form of debt that provides regular coupon payments (interest) and a return of capital on the Maturity Date Maturity Date: Date on which a bond repays the Principal borrowed amount to the lender, i.e. typically bonds have a defined term Typically issued by government, para-statal or companies
PROPERTY
In investment context, usually refers to ownership of physical or tangible land and/or buildings – bricks and mortar Possible to have direct ownership of physical property or indirect ownership via listed property company or property unit trust Rental income is main form of income Typically has high running costs and may have some liquidity constraints
CASH
Also known as Money Market Instruments Short-term debt instruments such as commercial paper, banker’s acceptances and Treasury bills that mature in less than one year Returns are similar to those from cash in the bank
FOREIGN
Investments in Assets outside of the Common Monetary Area (CMA)
TYPES OF FINANCIAL MARKETS
Exchange – A formal marketplace in which shares, options and futures on shares, bonds, commodities, and indexes are traded.
Capital Markets – Any markets used to raise capital, e.g. listed equities (FTSE/JSE) through share issuances and fixed-interest (bonds).
Emerging Markets – The financial markets of developing or emerging economies.
FINANCIAL MARKET CONDITIONS
Market Cycle – The cycles the financial markets go through due to the impact of cyclical macro-economic factors and resultant human behavior.
Bull Market – Equity market prices expected to increase during a bull market. Bullish refers to an optimistic outlook by investors.
Bear Market – Any market in which prices exhibit a declining trend for a prolonged period, usually falling by 20% or more. Bearish refers to a pessimistic outlook by investors. A market with few buyers and many sellers.
ECONOMIC TERMINOLOGY
Gross Domestic Product (GDP) – The sum of all goods and services produced by a country, expressed as an annual total. GDP growth indicates whether or not an economy is growing.
Typically quoted as Real GDP i.e. after allowing for the effect of inflation.
Fiscal Policy – The use of government spending to influence macroeconomic conditions.
Budget Deficit – When a country spends more money than it takes in. Opposite is referred to as a budget surplus. An accumulation of budget deficits leads to government debt, usually financed by governments borrowing money.
ECONOMIC TERMINOLOGY
Monetary Policy – The means by which government tries to influence macroeconomic conditions by increasing or decreasing money supply, primarily through interest-rate policy.
Devaluation – A decrease in the value of one currency relative to another.
Inflation – The rate at which the general level of prices of goods and services is rising, usually expressed as a percentage. Opposite is referred to as deflation or disinflation.
Macroeconomic conditions – Analysis of economic statistics such as GDP growth, inflation, budget deficit, etc.
SIZE OF EUROBOND BAILOUT
Minimise your risk you don’t want to loose your home
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