The Lighthouse Issue 4

the
lighthouse
Issue 4 | July/August 2012
welcome
Winter is always an exciting
season for sport, with
Wimbledon, the Tour de
France, the British Open
and this year, the summer
Olympics. This makes for
excellent TV viewing and
great armchair travelling.
But winter is also the
perfect season to do some
real travelling: A winter
holiday in our beautiful
Drakensberg mountains or
a trip overseas to enjoy the
European summer - travel
is one of the things that
makes life truly memorable.
On a sad note, the
inspirational Stephen R.
Covey recently died. His
work and his legacy will
live on, inspiring people in
their private and
professional lives to be
the most effective human
beings that they can be.
Ensuring a More Predictable
Investment Return in a
'Paranormal' Environment
A common concern amongst clients is always how they can be
assured of a more predictable investment return. The Lighthouse
held a question and answer session with Stone Wealth Management's
CEO and Head of Advice, Linda Stonier, to get to the bottom of
this important question.
Why is it so essential to ensure a more predictable investment return?
Linda: We want to provide our retired clients with peace of mind,
to ensure that their capital provides them with an income for the
rest of their lives. We also want to make sure that the investment
experience is a stress-free one. In order to do that, our clients need
to understand that the longer the investor's time horizon, the greater
continued over the page
www.stonewealthmanagement.co.za | 1
the reduction in risk and the more probable the
return. In other words, to meet their goals, they
need to invest in the appropriate instruments for
as long as possible.
Why is trust key?
Linda: The issue of trust is paramount - building
an investment strategy based on trust is an
important principle applied by Stone Wealth
Management, because over the short term, the
return is unpredictable, but in the long term, it
becomes more probable. Many investors believe
that their most significant risk is short-term
volatility. In fact, for the long-term investor, a
much larger risk is not generating consistent returns
above inflation. If this is not achieved, the actual
spending power of the investor actually decreases.
Our clients have to trust us to achieve their longterm goals even if, in the short-term, it does not
look like this will be possible.
Why is an investment strategy necessary?
Linda: Before any person makes an investment
decision, they should first have established an
investment strategy. This provides a context within
which investment decisions can be made and
provides a benchmark against which investments
can be measured and monitored in the future.
How do you achieve this?
Linda: We build an investment strategy as part of
our client's financial plan, working off a model
where we calculate the client's required rate of
return. Our process is based upon the following
four elements:
1) We ascertain the client's goals
2) We look at their assets
3) We look at how hard the capital has to work
to give the client the required outcome, ie
required rate of return
4) We outsource to a specialist fund management
2 | a professional approach to preparing your future
firm with the capability, expertise and tools
to 'engineer' a solution to meet our client's
goals. They determine the optimal asset
allocation mix, to achieve the rate of return.
What do you mean by 'the right mix of asset
allocation'?
Linda: A well diversified portfolio is better able
to withstand market volatility than a portfolio
that is focused on only one asset class. Asset
classes (cash, bonds, equity foreign assets) are the
building blocks of a well-diversified portfolio.
When combining the building blocks to create
solutions, the starting point is to identify the
relevant asset classes and, as sensibly as possible,
determine their expected return, volatility and
correlations with the other building blocks.
There is always a large amount of uncertainty
regarding future asset returns and it is by no means
an exact science. The objective, therefore, is to
achieve reasonable, long-term, strategic allocations
rather than short-term forecasts.
How do you calculate the expected return?
Linda: For some asset classes, calculating the
expected return is relatively simple, while for
others it is far more complex and subjective. In
order to get estimates of the returns, use is made
of a number of fair value calculations for the
various asset classes. Take bonds for example:
Simply looking at the yield to maturity provides
a very good estimate of what the bond will return
Issue 4 | July/August 2012
over its lifetime. Equities on the other hand are
far more difficult: A model is applied that looks
at the intrinsic value of companies, the dividend
yield of the market, the expected inflation rate,
the expected growth of the economy and the
expected long-term re-rating in the market.
Once long-run returns have been established for
the various asset classes, a reality check is done
by comparing them to what has happened
historically. There is data on local and international
markets going back to 1900 - that's over 110 years
of data. Based on this data, an efficient frontier
can be developed and graphed. Any portfolio
that falls on the efficient frontier is an optimal
portfolio. In other words, for a desired level of
return, by investing in the portfolio that lies on
the efficient frontier, one can minimise the risk
that investors are required to assume in order to
generate that return. In addition, the risk and return
trade-off is better managed in a diversified portfolio.
The orange line shows the long term return since
1960, which is approximately 17% p.a. This is a
real return of 8%, or more importantly, inflation
plus 8%. The green lines show the range of returns
that would have been achieved over various periods.
As an example, an investor who kept his money
in the market for just one year might have achieved
a return as low as -27% or as high as 80%. This is
a broad range that makes it difficult for investors
to accurately predict the kind of returns that they
might achieve.
Over seven years, the range of likely returns is
narrower, with investors being able to reasonably
expect a return of between 4% p.a. and 34% p.a.
Over longer periods of time, the range narrows
even further.
While this is not a forecast of future returns from
equity markets it does demonstrate historically
the importance in investing for as long a period
as possible.
Conclusion
Given the issues facing the global economy
and the fact that inflation is closer to 6%
currently, equity investors are facing
significant headwinds. They should be
prepared for a bumpier road (especially over
the short term) and moderate their
expectations from equity markets.
Looking at equity market returns
The graph below summarises the results of
Negroup's historical analysis of equity market
returns since 1960. It shows the range of returns
achieved by investing over various periods. These
returns have been annualised to make them
Over the last five years, equities have barely
given inflation returns. Having said this, our
clients' portfolios, through diversification,
are well positioned to give them the highest
probability of achieving their required
returns, by protecting on the downside and
maximising and compounding on the upside.
comparable to each other.
www.stonewealthmanagement.co.za | 3
Issue 4 | July/August 2012
Economic and Market Overview: Quarter 2, 2012
For the period ended June 2012
The following review looks at the performance
over the past quarter of local and global asset
classes, as well as currencies, and puts this into
perspective relative to longer-term performance.
The purpose of this review is to provide a context
in which the performance of the investment solutions
in which you are invested can be assessed.
China surprised markets by reducing their interest
rate by 0.25% early in June, making it the first
interest rate cut since 2008. This was in an effort
to boost an economy that has been negatively
impacted by weak global growth.
International
The negative news flow and uncertainty in the
global environment has been reflected in a volatile
domestic currency. The rand weakened by 6.6%
to the USD over the quarter and by 20.6% over
the one-year period to the end of June 2012.
Over the second quarter of the year, we saw a
general drop in financial markets after a solid first
quarter. The MSCI World Index declined 4.9%
during the quarter as global macroeconomic
uncertainty continued.
Among the activities in the Eurozone was the
election of Socialist Francois Hollande, who
secured the French presidential seat. Elections
also took place in Greece and, after two attempts,
a new cabinet was formed, made up of three
different parties. Other prominent activities in
Europe included Spain having its long-term and
short-term sovereign foreign currency ratings
downgraded by Standard & Poor's, both with
negative outlooks, suggesting chances of further
downgrades. In addition to this, 28 Spanish banks
were downgraded by Moody's. Furthermore, Greece
was put under review by the MSCI to be reclassified as an emerging market, as it is no longer
in line with developed markets size requirements.
In the US, statements coming from the Federal
Open Market Committee indicated that the
economy expanded moderately this year. However,
in June, the Federal Reserve downgraded their
2012 GDP forecast from 2.4% to 1.9%. In addition,
the unemployment rate remained elevated with
employment slowing in recent months. The
committee announced that monetary policy will
continue to be accommodative.
4 | a professional approach to preparing your future
Domestic
In April, it was announced that South African
government bonds may be included in the
Citigroup World Global Bond Index, causing yields
to fall sharply across the curve. The final decision
is expected in September. The All Bond Index
delivered a return of 5% over the quarter. The
Business Confidence Index released by the South
African Chamber of Commerce indicated that
South African business confidence declined to
94.3 in April, the index's lowest level in three years.
There has also been weak consumer spending
combined with rising unemployment. The
unemployment rate increased to 25.2% in Q1
2012, up from 23.9% in Q4 2011. This was due to
growth in the labour force as well as 75 000 jobs
that were lost in Q1 2012. The Monetary Policy
Committee has kept the repurchase rate at 5.5%
to support economic growth. The decision may
have also been influenced by the improvement
in the short-term inflation outlook. Inflation is
expected to have peaked at 6.1% in Q1 2012. The
Reserve Bank expects the economy to grow at
2.9% in 2012 (slightly lower than the 3.0% initially
anticipated). The 2013 forecast has not been
changed at 3.9%.
Economic and Market Overview: Quarter 2, 2012
market overview
The tables below provide a review of key local and international investment
indicators for the past quarter, as well as over longer periods.
South African asset classes (in rands)
(Performance over periods to 30 June 2012)
Asset class Indicator
3 months
Equities
All Share Index
Property
Listed Property Index
1 year
3 years
5 years
LT-average*
1.0%
9.2%
18.4%
6.5%
12.5%
10.3%
26.3%
25.2%
14.8%
11.4%
Bonds
All Bond Index
5.2%
14.6%
11.9%
10.1%
6.9%
Cash
STeFI Call
1.3%
5.3%
5.9%
7.7%
6.0%
Inflation
CPI (one month in arrear)
1.6%
5.7%
4.9%
6.6%
4.9%
3 months
1 year
3 years
5 years
LT-average*
Source: I-Net and Nedgroup Investments
Global asset classes (in dollars)
(Performance over periods to 30 June 2012)
Asset class Indicator
Equities
MSCI World Index
-4.9%
-4.4%
11.6%
-2.4%
10.0%
Property S&P Developed Property Index
2.0%
2.5%
19.8%
-2.6%
8.2%
Bonds
1.0%
4.7%
7.1%
7.2%
4.7%
JPM Global Bond Index
Cash
US 3-month deposits
0.1%
0.3%
0.3%
1.4%
4.0%
Inflation
US CPI (one month in arrear)
0.9%
1.7%
2.4%
2.0%
3.1%
3 months
1 year
3 years
5 years
LT-average*
-6.6%
-20.6%
-1.9%
-3.0%
-5.5%
12.83
-4.6%
-17.9%
-0.3%
1.9%
-3.9%
10.38%
-1.6%
-5.6%
1.4%
-1.7%
-5.7%
Source: I-Net and Nedgroup Investments
Currencies
(Performance over periods to 30 June 2012)
Currency Value at 31/03/2012
Rand / Dollar
Rand / Sterling
Rand / Euro
8.18
Source: I-Net, Morningstar and Nedgroup Investments
* Updated annually from 1900, or longest available period
Returns for periods longer than 12 months are annualised.
www.stonewealthmanagement.co.za | 5
Issue 4 | July/August 2012
WIN/WIN
The Best Solution
and the Answer to
a Fulfilling Life
In an ideal world, we would all live our lives at our most effective, with all of our relationships personal and professional - working in harmony, for the best of both parties. According to the late
Stephen R. Covey, effective people solve problems easily, maximise opportunities, communicate more
openly and think more imaginatively. By default they lead happier, richer, more satisfying lives. The
reality though is that not everyone is wired to live their lives this way, so many people end up in
win/lose, lose/win or even lose/lose situations, instead of the ideal, win/win.
How can one ensure that win/win becomes the
default rather than the exception? This leads us
to Habit Four in Covey's The Seven Habits of
Highly Effective People *, which is Think Win/Win.
Covey says, “Win/win is a frame of mind and
heart that constantly seeks mutual benefit in all
human interactions. It means that agreements or
solutions are mutually beneficial, mutually
satisfying and all parties feel good about the
decision and feel committed to the action plan.
It is based on the belief in the 'third alternative'
- that it's not your way or my way, it's a better
way, a higher way.”
Stone Wealth Management's methodology is very
much based on this exact principle, with the
primary goal of finding solutions for clients that
put both parties in a win/win situation.
Says Linda Stonier, Stone Wealth Management
CEO and Head of Advice, “One way in which we
do this is to align our fees with our clients, as
opposed to the financial service industry's
6 | a professional approach to preparing your future
traditional commission-driven practice. This
enables us to base our fees on the assets under
management. While our income does drop when
a client's investment drops, it also grows when
the investment grows. Put this in contrast to an
advisor who takes an upfront fee for a retirement
annuity, so there is no financial incentive to look
after the client after the sale.”
Stone Wealth Management believes that this is
an inherently flawed remuneration model that is
aimed to push product instead of being advice
based. Product manufacturers and their brokers
or agents are focused on distributing product in
high volumes. Linda adds, “With a product-based
model, the only time the client is likely to see
the advisor again is when the advisor needs to
make another sale. With our advice-based,
win/win model, we are incentivised to look after
you on an ongoing basis. We believe in building
long-term relationships with our clients, based
on trust and integrity.”
In fact, Covey maintains that win/win agreements
cannot be maintained without personal integrity
and a relationship of trust.
Linda says that the Stone Wealth Management
Advice and Admin teams are also motivated by
the personal satisfaction gained from delivering
good service that makes a real difference to clients
and their lifestyles. When establishing Stone
Wealth Management, Linda was determined to
set up a financial planning practice focused on
meeting the aspirations of clients through a solid
financial planning process. She has successfully
formed an advice-based business peopled with a
team of like-minded, qualified, advice-based
financial planners.
She concludes, “Our clients come to us because
they need assistance with looking after their
money, to safeguard a lifestyle they have become
accustomed to, or are aiming towards. Our team
is passionate about the importance of really living
your life to the full; making your money and
investments work for you, so that you can enjoy
the wonderful things that life has to offer. The
substantial growth in assets under management
is testimony to how well received the concept
of advice-based financial planning has been in
the market place.”
*In The Seven Habits of
Highly Effective People,
Covey presents a
seven-part model for
effective
performance in
business and
personal life.
www.stonewealthmanagement.co.za | 7
“If money is your hope for independence you will never
have it. The only real security that a man will have in this
world is a reserve of knowledge, experience, and ability”
Henry Ford ~
talk to us
The Stone Wealth
Management team
welcomes your feedback.
If you have any queries,
suggestions, praise or
complaints, please email
admin@swm.co.za and we’ll
either get back to you
personally, or we’ll tackle
your topic in a future issue
of The Lighthouse.
Stone Wealth Management
a professional approach to
preparing your future
Ficus Building Sanyati Park
3 Abrey Road Kloof
PO Box 29275 Maytime Centre
Kloof 3624
Tel 031 764 5899
Fax 031 764 5647
christelle@stonewm.co.za
VAT reg no 4930234093
CK No 2006/038071/23
Stone Wealth Management is a licensed
Financial Services Provider FSP 29494
you asked us...
How is the Net Asset Value
(NAV) calculated?
NAV = the market value of the fund
+ all accrued income - permissible deductions
In other words, NAV is the price at which investors buy and sell units
in a unit trust portfolio. It measures the value of a fund's assets,
minus its liabilities and is typically calculated per share.
did you know?
Stone Wealth Management is investigating
the use of digital signatures
Not only are they safe, they provide an added level of security too:
They are equivalent to traditional handwritten signatures in many
respects, but properly implemented, they are more difficult to forge
than the handwritten type.
Furthermore, utilising digital signatures would assist us and our
clients to be more eco-friendly, by cutting down on printing and
the energy use linked to electronic printers and the manufacture of
the paper we use. It also saves fuel because documents can be
swopped via email instead of in person.
www.stonewealthmanagement.co.za | 8