According to our Finance Minister, Pravin Gordhan, only about 10% of South Africans enjoy a “decent retirement”. “Decent” is a relative standard: essentially it describes the ability to maintain your accustomed standard of living in retirement. To do so, you should secure an annual income that replaces at least 60% of your final salary, guaranteed to grow with inflation through-out retirement. To achieve this goal, you should strive to invest 15% of your income over your entire working life (around 40 years) in a way that will likely deliver a long term real (after inflation) return of at least 3.5% per annum, net of fees. Just like running Comrades, it is not an easy task, but it is far from an impossible one. Yet few South Africans reach this savings goal, largely through a combination of ignorance, neglect and poor discipline. How does this show up in your savings strategy? Here we discuss your Top 10 retirement saving mistakes.
September 10th, 2012 by 10X InvestmentsNo Comments
Employers offer retirement funds on a voluntary basis. Some do so out of a genuine concern for their employees’ welfare. Others just tick the box and give little thought to the outcome. Is such a fund ‘better than nothing’? Only to the extent that it forces employees to save; the tax advantages that underlie a formal retirement fund are quickly lost if the fund design does not also follow good practice. Employees carry the risk of an underfunded retirement; if employers step up to facilitate a retirement fund, they must assume a stewardship role, to lower this risk as much as possible. This means standing up against the retirement industry’s self-serving practices.
National Treasury’s discussion paper “Strengthening retirement savings” proposed harmonised disclosure requirements across different products. But investors not only need consistent disclosure, they need much improved disclosure. One of the objectives of the FAIS Act is to ensure that investors make informed decisions. It also requires that financial intermediaries disclose all conflicts of interest. Yet the very existence and tolerance of commission-based advice creates a conflict of interest, as the two parties compete in a zero-sum game for the same investment return. The mere disclosure of fees – if it happens – does not resolve this conflict because commission-incentivised brokers will not voluntarily provide the context that would allow investors to really make informed decisions about costs and product choices. Only strict regulations will achieve that.
10X has shied away from alternate asset classes, such as hedge and private equity funds. Among our key concerns: high fees, poor transparency, complexity and trading restrictions. Admittedly, some of these concerns had an anecdotal basis, but not anymore. Simon Lack’s exposé of the hedge fund industry (The Hedge Fund Mirage) supports our ‘prejudice’ with insider insight and hard numbers. His conclusion: yes, hedge funds have created a huge amount of wealth, but almost all of this has gone to managers rather than investors. Which raises the question whether upping the local prudential limit on hedge funds, as permitted by revised Regulation 28, is really all that prudent.
Is there a difference between a fair outcome and a fairness outcome in the pension fund industry? The question arises as the FSB’s “Treat Customers Fairly (TCF)” initiative, set for 2014, mandates fairness outcomes in the financial sector. But will those deliver the fair outcomes that investors anticipate? The investing reality in South Africa This […]
The bulk of retirement investors are disengaged from the savings process. Their apathy and ignorance is shamelessly exploited by the industry’s marketing and distribution machine, which creates illusions of future wealth and suggests the possible rather than the probable. To this end, the industry perpetuates six investment myths that serve the interests of the industry but not the investor. Most realise far too late they have been duped, with severe consequences to their pension. The sooner they become aware of these myths – and the positive alternatives available in the market – the better.
December 6th, 2011 by 10X InvestmentsNo Comments
Historical performance charts – typically showing dramatic outperformance over the benchmark – are often a source of envy and regret. The competitors’ envy is understandable, but the investors’ regret sometimes unnecessary, as they would have been just as well off investing in the benchmark. The reason is that relative performance charts are based on the time-weighted return, before the impact of fees. Investors however receive the money-weighted return, after fees. The money-weighted return is typically lower than the time-weighted return (as the fund grows over time, so opportunities and outperformance moderates), and more often than not, the bulk of the outperformance is pocketed by the fund manager in fees. The upshot: assuming active management risk and paying high fees pays off on rare occasions, but for the average investor it is a losing strategy.
This is the second part of our study exploring the return prospects of the key local asset classes – SA Equity, Bonds and Cash – both individually, and combined within a balanced portfolio. In 10X literature, we often refer to the 5% real return that our retirement investors should expect to earn from a balanced portfolio over the long term. Given the above average returns in recent years, and the market turmoil over the past three, is that still a reasonable expectation? Our study – considering mean reversion principles and the factors driving financial markets over the last decade – suggests that retirement investors should anticipate lower, possible even below-average returns ahead. In Part 2 we examine the outlook for SA Bonds and Cash, and the likely impact on balanced portfolio returns.
In 10X literature, we often refer to the 5% real return that our retirement investors should expect to earn from a balanced portfolio over the long term. Yet investors have done much better in recent years. Given the above average returns in recent years, and the market turmoil over the past three, is that still a reasonable expectation? Our study – considering mean reversion principles and the factors driving financial markets over the last decade – suggests that retirement investors should anticipate lower, possible even below-average returns ahead. This will make it even more important to follow a consistent and adequate savings strategy, and to keep a watchful eye on fees, to prevent the retirement industry pocketing an even larger share of returns. In Part 1 of this two-part study we explore the outlook for SA Equity.
The Occupy Wall Street movement has been criticized for its lack of agenda and failure to articulate clear grievances. Simply protesting against inequality is not enough – that has been around since the Middle Ages. What is required is an understanding that investment banks are simply another player in a zero sum game, namely the global bun fight over finite investment returns. And that the rules are unfairly skewed in its favour, resulting in an inordinate transfer of wealth from the many to the few. That is what we should protest against, this grand scale pilfering of our retirement savings.