You may have heard of a return on an investment, but have you heard of an investment measure called the internal rate of return (IRR)?
The return on investment (ROI) – sometimes called the rate of return (ROR) – is the percentage by which an investment has increased or decreased over a certain period. By contrast, the IRR measures the actual return on an investor’s money in a portfolio.
The IRR calculation takes into account all fees, the investment term, and additional investments and withdrawals, and calculates the growth of the investment in a meaningful way. This enables investors to determine whether their portfolio is on track to achieve the return they need to maintain their standard of living.
The IRR calculation shows a portfolio’s return on an annualised (per year) basis.
If, for example, you had R100 on January 1 and R110 on December 31, and you made no deposits or withdrawals between those two dates, your IRR would be 10% for the period.
If, however, you made monthly deposits of R1 (or R12 in total) and your portfolio was worth R110 on December 31, you would have a negative IRR of –1.9%. After investing a total of R112, you would have less money (R110) than you invested.
If, on the other hand, you withdrew R1 every month and you had R110 at the end of the year, your IRR would be 23.2%. Your cash flow during the year would have been R12, and you would have ended the year with an additional R10 in the investment.
The IRR calculation is also referred to as the money-weighted return calculation. This is different from a traditional time-weighted return where we exclude any client-generated cash flow in and out of the portfolio and look only at the initial value (R100) and the final value (R110) and get a return of 10%, which ignores how much money had been added or withdrawn over the period.
Although these are very simple examples, they illustrate the importance of knowing a portfolio’s IRR. In reality, additional variables, such as fees, are taken into account, thereby providing a more realistic picture of your return.
Knowing your portfolio’s IRR is important, because it enables you to monitor whether you are progressing towards achieving your financial goals. It indicates the actual return, including cash flows in and out of your portfolio, over the period.
By comparing the IRR to your required rate of return – the rate that your portfolio needs to achieve in order to meet your lifestyle requirements, for example, inflation plus 2% – you will be able to assess your progress towards your goal.
Interestingly, two people may be invested in the same portfolio but have a different IRR, because their deposit and withdrawal patterns are different.
Let’s say, for example, that the market increases 10% over the year, but it first goes through a valley, falling 5% in the middle of the year. If Investor A added to her portfolio while the market was in the valley, whereas Investor B made a withdrawal, it means that Investor A bought at a discount, while Investor B realised a loss. In this example the portfolios’ overall performance was the same, but their individual IRRs will be different.
If, during a financial planning exercise, calculations show that you need an annual return of 3% above inflation to achieve your lifestyle objectives, the calculation assumes that, as long as the money is invested in your portfolio, it is earning 3% above inflation.
The IRR calculation is the most appropriate formula for checking whether you are actually earning what your financial plan says you need.
To get advise on investment options with a track record of good returns, please contact Kevin or Ray, email: email@example.com tel no: (011 658-1333)
Source: Business day live
Offshore investing should be part of any long-term financial plan, especially if you are keen to leave the country before or after retirement or want your children to study abroad.
Explaining offshore investments
Offshore investments are any investments housed in a country other than the investor’s country of residence. This could be in developed or emerging countries such as China, India, Brazil, Russia or Turkey. The key to offshore investing is to not only invest in a different country but also in different economies, markets and currencies, thereby diversifying your investment portfolio.
Factors to consider before investing offshore
The prospect of investing money outside of your country can be daunting, given the sheer size of the investment universe. As a new investor, you might feel uncomfortable with the idea of placing assets and investments in another country with foreign organisations. You also have to consider product and government rules, regulations and restrictions on purchasing offshore assets. With 50 different offshore centres, 126 different legal and tax systems, 27 000 different listed equities and an estimated 36 000 different unit trusts to choose from, where do you invest? The answer is simple. Stick with people and organisations you know and trust. Seek the advice of a locally- based, competent financial planner who has a sound track record of investing offshore. Whatever your reason for choosing to invest internationally, it is important to consider the following factors:
Your objective or motivation for investing offshore
• The time horizon or length of time for which you want to invest
• The risk tolerance of your investment
• If you want the funds to be invested offshore permanently
• All relevant foreign exchange control regulations
• Tax implications and banking charges associated with your offshore investment
Limits to offshore investing
South Africans in good standing with the Receiver are allowed to invest up to R10 million offshore each year (2015/2016 tax year), subject to tax clearance from the South African Reserve Bank. You are also allowed to invest R1 million annually, without tax clearance, by means of a single discretionary allowance. This allowance still needs to be registered with the Reserve Bank.
How to invest offshore
You can either invest into one of the foreign-denominated currencies, such as the dollar, euro or pound, or by an asset swap in rand-denominated locally available offshore unit trusts.
The advantages of offshore unit trusts are much lower limits and fewer administrative requirements. Liquidation of these funds will also happen in rands as they are not invested offshore permanently.
The simplest and most cost-effective way is to invest in foreign currency offshore unit trusts through an offshore platform which is operated locally by a registered and reputable provider. In addition, exchange-traded funds are also available. You can also invest in offshore share portfolios that are managed and reported on locally or in endowments. These funds will be expatriated permanently using your annual offshore allowance, or can be paid to you anywhere in the world, including South Africa.
You can also consider opening an offshore bank account or investing in gold or certificates of deposit. Other options include using your bank account for online share trading through a brokerage or investing in property and more exotic investments using offshore trusts. The latter are usually more risky, and may consist of financial instruments such as sovereign and corporate debt, high-yield investment schemes and other investments which are outside of your domestic reach.
Regulation of offshore investments
Only funds that are approved by the South African regulator, the Financial Services Board (FSB), can be marketed in this country. Investing in FSB-registered funds reduces your investment risk, as these funds are subject to oversight by the local regulator.
Advantages of investing offshore
The South African financial market comprises only one percent of the global market. If you only invest locally, you deny yourself the opportunity to invest in those companies that have an international footprint and could generate substantial profits for investors across different economies and markets. By allocating a portion of your investments offshore, you could spread the risk, and enhance the possibility of generating better returns by diversifying. It also gives you access to sectors that you would not find on the JSE. It is important to keep in mind that you need to have a longer time frame for offshore investing because of the dual volatility of currencies and the markets.
Another reason for investing offshore is to save tax in tax havens or lowtax jurisdictions. Offshore investments could be owned by an offshore trust for estate planning purposes. Your financial planner and fiduciary specialist can advise you on this.
As mentioned earlier, investing offshore can also provide for children’s tertiary education at overseas universities, travelling extensively or wanting to retire overseas. Offshore investing offers a hedge for people who fear political or social unrest and is also a way to protect your investments against the depreciation of the rand.
Risks of investing offshore
To set up an appointment with our Financial Planners, please contact Kevin, email: firstname.lastname@example.org tel no: (011 658-1333)
Source: Old Mutual
Apart from estate planning benefits, the latest budget changes further strengthen the tax benefits of the endowment, which is encouraging investors to revisit the case for this often overlooked product.
To build a successful long-term investment portfolio, one must consider ways to enhance their capital whilst finding efficient mechanisms to reduce your taxes. Endowments remain a useful investment vehicle and offer a disciplined way of saving where you are committed for a certain period so that you can reach your goals.
The tax benefits of endowment policies
Endowments offer an attractive tax-efficient option for people who want to save more than the maximum annual limit for tax-free savings accounts, and those who have exhausted their annual tax allowances such as tax-free interest income.
The recent increase in the CGT inclusion rate means:
an 18% effective tax rate on capital gains for individuals in the highest income tax bracket, and 36% for trusts,
for an endowment policy, the effective CGT rate for these individuals and trusts is just 12%.
In addition, tax on income is 30% for endowments as opposed to 45% when these individuals are taxed according to their marginal tax rates in other investment vehicles. This tax treatment is also beneficial for other income categories as well (i.e. for everyone with a marginal tax rate above 30%).
In addition to tax savings, an endowment offers the following advantages:
Simplified tax administration as tax is recovered within the endowment and taken care of on behalf of the investor.
Insolvency protection – the entire value of the policy will be protected against creditors three years after inception until five years after the maturity, or termination of the policy.
Beneficiary nomination can lead to potential savings on executor’s fees (up to 3.99% of fund value). Where a beneficiary has been nominated, payment of the death benefit does not depend on the winding up of the estate and beneficiaries will receive the proceeds relatively quickly.
Liquidity is created in the estate as payment of the death benefit does not depend on the winding up of the estate and beneficiaries will receive the proceeds relatively quickly.
Advantages of staying invested in an endowment, even after maturity
What is the fund’s objective? The Fund aims to create long-term wealth for investors within the constraints governing retirement funds. It aims to outperform the average return of similar funds without assuming any more risk. The Fund’s benchmark is the market value-weighted average return of funds in the South African – Multi Asset – High Equity category (excluding Allan Gray funds)
Fund description and summary of investment policy? The Fund invests in a mix of shares, bonds, property, commodities and cash. The Fund can invest a maximum of 30% offshore, with an additional 10% allowed for investments in Africa outside of South Africa. The Fund typically invests the bulk of its foreign allowance in a mix of funds managed by Orbis Investment Management Limited, our offshore investment partner. The maximum net equity exposure of the Fund is 75% and we may use exchange-traded derivative contracts on stock market indices to reduce net equity exposure from time to time. The Fund is managed to comply with the investment limits governing retirement funds. Returns are likely to be less volatile than those of an equity-only fund
Suitable for those investors who:
For each percentage of two-year performance above or below the benchmark Allan Gray may add or deduct 0.1%, subject to the following limits:
Source: Allan Gray
On Saturday 26 May 2018 Folpic Investors Forum, which is one of our clients held an Investment workshop. Folpic in partnership with us as their Broker and Allan Gray as their investment provider shared insight to shareholders on understanding Investments and how their current investments portfolio works. There was also an informative presentation from Njabulo Sithebe who is a Economist and he shared information The gaps and history in local market regarding investments as well as the effect of Global market on clients investments.
It was truelly a successful information sharing event where shareholders got to ask questions and engage with Kevin Yeh from Dabersitic who as a Wealth Manager with a focus on Unit Trusts in his presentation. Below is a picture of Kevin with the Folpic Management team .
In times of trauma or grief, you and your loved ones should not have to deal with the stress of having a life policy payment rejected or delayed.
In times of trauma or grief, you and your loved ones should not have to deal with the stress of being denied disability benefits or having a life policy payment rejected or delayed.
“Ensuring that you are paid when you call on life or disability cover requires a little more than just paying a monthly premium” advises Selwyn Kahlberg, Managing Director, Alexander Forbes Life Limited.
For cover to remain valid, policyholders need to comply with all requirements in the policy.
While this should not be a difficult task, Kahlberg urges consumers to be aware of the following pitfalls when taking out or maintaining a life and disability policy:
1. Failing to disclosure all relevant information on your application
Deliberately withholding or giving misleading information to your insurer is a direct violation of your policy agreement. This can result in all claims being rejected.
Policy holders should fully disclose any previous medical conditions when applying for life and disability cover. If, for example, you have suffered a heart attack and it re-occurs, your insurer may refuse to settle your claim if you did not inform them of the first attack.
2. Taking out insufficient cover
Life cover is meant to provide financial security for your family when you die. Similarly, disability cover needs to ensure that you and your dependents are able to maintain your lifestyle should you not be able to perform your current job. As such, “it is important to draw up a budget reflecting your family’s daily needs and expenses when deciding on the level of cover required” advises Kahlberg.
It is also important to continue to revisit your insurance requirements as circumstances change. At the very least you should take account of inflation to ensure that your benefits do not lose their purchasing power over time.
3. Not informing your insurer that you have changed jobs
Changed employment terms can affect the cost and level of your cover. For example, if you were an office clerk and get a new job as a fire fighter, your risk level would increase substantially and your insurer would need to review your policy.
4. Failing to inform loved ones of your cover or whereabouts of documentation
If you do not inform your loved ones about your life or disability cover, there is a possibility that they may never claim when the need arises. As such, it is “advisable to keep the policy in a safe place, telling loved ones where the policy is and who they should call in the event that it is needed” advises Kahlberg.
5. Failing to inform insurers of a claim within the required time
Almost all policies require that claims are notified to the insurer within a specified time where after the claim can be declined. This is one of the most common reasons for claims not being paid. Dependants may forfeit their benefits if they delay telling the insurer about a claim or do not supply the required documents to the insurer within the times specified.
6. Not keeping the nominated beneficiaries up to date
Always ensure that you let the insurer know about changes to the nominated beneficiaries on all your policies. Once a claim arises, the insurer will always pay according to what you last instructed them. For example, if you have had another child and want a specific amount set aside for it you will need to change the beneficiary forms held by the insurer.
7. Not providing full information when making a claim
Always insure that the insurer is given as much accurate information and documentation as possible. This is especially the case on disability claims. Incomplete or conflicting information will cause delays in getting a claim paid. For example, “if you forget to provide your insurer with your dependents’ ID numbers, or supply incorrect or different numbers” warns Kahlberg.
8. Not disclosing that you have taken on additional risk, like smoking or engaging in dangerous activities
Insurers charge higher premiums for individuals that smoke or are at higher risk of getting ill or dying.“If you sign on as a non-smoker and then start smoking and develop lung cancer, your insurer is within their rights to reduce your benefits or maybe even repudiate your claim” warns Kahlberg. Similarly, if you are disabled in a once-off parachute jump you will not qualify for disability cover if you have not listed this as one of your pastimes which the insurer has accept
9. Not familiarising yourself with the circumstances under which your policy will not pay There are times when a policy will not pay out even if you have made full disclosure to the insurer. “These circumstances should be clearly set out in your policy under the exclusions heading and you should take the time to understand these exclusions before signing up” recommends Kahlberg.
Typical exclusions relate to alcohol consumption, drug usage, suicide and violation of the laws of the land.
10. Allowing your insurer to repudiate your claim without good reason
Consumers should not sit back and allow insurers to repudiate claims except for valid and legal reasons.
If you believe you have a strong case, yet your insurer refuses to settle, Kahlberg recommends that consumers take the matter to the insurance ombudsman. The ombudsman acts as a mediator to settle disputes between insurers and their clients and is an inexpensive alternative to litigation.
Getting all this right is important as the onus falls on the insured to make sure that they understand all terms and conditions that they have been told about by the insurer when taking out a life and disability cover. The first step is to read all the documentation they receive from the insurer.
“If you are unsure of any clause during the application process or anything in the policy wording once you receive the policy document you should ask your insurer to explain” concludes Kahlberg.
Written by: Selwyn Kahlburg
Most businesses ask themselves if they should have social media liability and the answer is most probably a yes. Fact is, most small and medium size businesses are using social media in one form or another to promote and advertise themselves. This, of course, brings great reward to those who embrace the digital age.
What this age unfortunately also brings with it, is a new type of risk of which most of us are not quite familiar with yet. We are hearing about it on the news and reading it on, yes you guessed it, social media itself. How many of us has first-hand experience of this relatively new type of risk to businesses and business owners? My guess would be not many of us.
Businesses and business owners will know very well that if a new type of risk raises its head and pose a threat, the best way to go about it is to take a pro-active type of approach, rather than a reactive approach.
Let’s start by looking at the different types of risks associated with having a presence on social networks:
Discovery Business Insurance is launching 1st of June 2018 and they will be offering Social Media Cover as an extension under their Public Liability policy. This extension will offer cover for any liability as a result of social media interactions and it will also include:
If you would like to get a quote for Social Liability quote, please contact Jan in our Short-Term department, email email@example.com , tel (011)658-1333
Source: Jan Prinsloo (Daberistic Short-Term Broker)