Avoid Probate on Offshore Investments

While we are waiting for Greece to exit the EU, we might as well discuss something important regarding your death. Did you know that, if you've got investments Offshore (as a South African), the executor of your estate will have to request an authorized person in the country your investment is registered in, to release the investment to the estate. This is called Probate.

This can take months, if not years to happen and the fees will be sky high. Now imagine the nightmare if you have got 10 different investments in 10 different countries! Property in the UK, shares in the USA, Unit Trusts in Guernsey etc. The easy solution is to invest in products where you can nominate a beneficiary or where you can nominate a joint owner. In such a case probate will be avoided.

One product that can actually do all the probate avoidance tricks as well as consolidate a portfolio consisting of a number of different assets like bank account, shares, unit trusts etc, is the new Old Mutual International Investment Portfolio. This product not only allows the sophisticated investor with the means to invest in a range of assets under one admin roof, but also allows for tax free returns (no Capital Gains Tax, no tax on Dividends or Interest, nothing).

The only drawback is that the minimum investment is $150 000.


As a South African, investing in a country outside the political grasp of the SA government, investing in a market offering products and services not offered in SA, investing in countries where the assets are cheap compared to similar assets in SA, one has no choice but to do it, if not for your own wealth diversification, then for your children and grandchildren's.

Clarity on previous post about Greece

I mentioned the trading range on the Top 40 and the return day traders (speculators) make as 15%. This is the "geared" return due to instruments they use being options,warrants etc. If for example I buy the index using a warrant (TopDWC) which is 9 times geared at the current moment, I will receive a return of 30% if the Top 40 moves from 29 500 points to 30 500 points (3.39% x 9). Usually you don't get the full participation and you average up or down and I halved the return to illustrate the point.

Still very risky when the range is broken!

If Greece should exit the EU

This is not for a long term, monthly investors. This post is aimed at those investors who sit on a pile of cash and want to make a quick buck. Be warned, if your timing is out and you invest into equities before a Greek default or even exit from the EU, you will see a 10% to 15% loss of capital.

Although the markets price shares on a forward looking basis, the actualization of an anticipated event will give journalists something to exaggerate about and blow the event out of all proportion, giving rise to an investor over reaction! Not only does the speculator sell (or buy on good news) regardless of the fundamentals, but the automated institutional trading desks get a "sell" or "buy" trigger and PRESTO!


The uncertainty in the markets, fuelled by the comments financial commentators and journalists have been making over the last 5 months, have kept the JSE Top 40 index in a trading range of  between 29 500 and 30 500 points, that is a 15% difference and for day traders this is heaven because when the TOP 40 gets to 29 500 points, they buy the index, and after a day or two, when it gets back to 30 500, they sell the index and buy a "Put" (sell the market using a warrant or other derivative instrument), and enjoy the ride back down, making 15% on their capital every couple of days.

I know this because I have been doing it myself (with a very small amount of money). The problem is that at some point the cycle will be broken and the market will re-rate out of the trading range, either up or down, and then the day trader (speculator) will lose big.

So, the morale of the story is either invest properly, over the longer term and forget about the short term volatility, or wait for a major correction and hope you don't miss the boat.

JUST remember, we live in dangerous times for making predictions. If you are sure about something, you are probably wrong!

Satrix RESI, time to buy?

The Satrix RESI is an exchange traded fund (ETF), providing the investor in one fell swoop with exposure to 10 of South Africa's biggest Resources companies. Naturally Anglo American, BHP Billiton and Sasol make up 75% of the fund so a person investing directly on the JSE might as well buy those 3 shares instead of the ETF.

The Question that needs answering is:  Do we invest in SA resource companies or not?


I am going to keep this short and to the point.

Pros:

• Satrix Resi is trading at the same price it has traded 5 years ago.
• Satrix Resi pays you 2.23% dividend yield.
• Over the last 12months resources has underperformed the JSE All Share index by 18% and the Financial/Industrial index by 30%!!
• Over the last 5 years Resources has underperformed the All Share by 27% and the Industrials by 65%!!!
• Anglo American is trading on a PE ratio of 8, Billiton on 7.9 and Sasol on 8.3 (cheap!)
• Commodity prices (Copper, Silver, Platinum) have come down substantially.
• World growth expectations are very low (sentiment is negative).

Cons:

• Growth in China is slowing down.
• EU is falling apart, hampering growth which supports commodity prices and demand.
• Most of our mines are unproductive due to high costs (labour, electricity).
• Mines might be nationalized in 10 years time.

So what to do!?

Everything has a price. If something becomes cheap enough, somebody will see value and start buying. I believe we will see some growth returning to the world over the next 5 years and demand for resources improves.

It might take 7 years or 3 years, the point is we have had spectacular returns from Industrial and Financial companies over the last 5 years and nothing from Resource companies. I punted Satrix Divi and Satrix Rafi over the last 3 years and am happy with the results. I will also not sell out of them but what I will do is start buying resources as part of my portfolio for the longer term recovery.

Alternative to buying the ETF or Shares

For the sophisticated investor who wants to participate in the potential upswing in commodities without buying the company with the operational problems, there is always the pure exposure to Platinum, Silver or Gold that can be bought using the SA listed Exchange Traded Notes on the JSE. You then effectively get the exposure to the metal and not the company.

Conclusion: Satrix Resi might become cheaper but for the patient investor with a monthly amount to invest, this asset class might produce lovely, succulent returns over the next decade.

Virtues of leading a simple life

Nepal

Contemplating the meaning of life in the thin air at 4000m above sea level in the high Himalayas of Nepal is not something I do every year, but it surely gives one perspective. 31% of people living in Nepal lives below the national poverty line (23% for South Africa).The Gross National Income per Capita is US$490 (SA is $6 090)

In the 21 days I spent trekking through the rural countryside and up into the mountains I have seen no luxury, not even in Kathmandu (the capital). Food consists mainly of starches like rice, noodles and potatoes with some vegetables in the mix, very little meat. In Kathmandu you get electricity for 3hours in the morning and again in the evening. For 18 hours of the day you have to generate your own or go without.

The roads are nonexistent. Eating and drinking is like playing dice with your health. Proper sanitation is just not in the top half of the daily grind list (I got violently ill twice). Kathmandu is so polluted that most people wear those surgical masks to prevent developing a horrible cough.

And after all the negatives there is one grand positive, the people get along just fine. 

I have spoken to many of the locals and they all tell me that the problem is with the government playing politics all day and not helping with the upliftment of the country's infrastructure and managing the huge potential tourism offers. 

And at the end of the day the thing that kept coming back to my mind was that people are very adaptable. We can forgo our creature comforts if we have to without too much tears. We can adjust our lifestyle (up or down) without too much fuss. But there is one thing that we have to guard against with much vigil, dropping below the minimum level of comfort to the level of suffering.

Many people earn just enough to cover their expenses from month to month and have nothing to save for a rainy day. The best they can do is making sure they keep their job by doing it exceptionally well. For those of us who do have a couple of coins left over at the end of the month, please consider saving it instead of spending it on something useless. 

There is no shame in having very little money, but having some helps in desperate times.

I have great admiration for people living a simple life, taking pride in what they do.

Comments on Satrix

I have received plenty of comments regarding Satrix posts. You can have a look at my 10 Jan 2012 post for some of these comments. In short my reply to any questions regarding investing in Satrix at the moment would be:

• Be selective, I prefer Satrix Divi and Satrix Resi at the moment.
• If you have a lump sum to invest, phase it in over the next 6 months.
• I prefer active unit trust fund managers at the moment like Coronation Top 20 or Foord Equity Fund.
• Always remember the 5 year + time frame for these investments.

In general I prefer increasing my direct offshore exposure at the moment especially if you do not have any. This will serve as an investment diversification strategy, protecting you and your children from any unforeseen changes in South Africa.

Retirement Annuities: The sting in the tail!

There are many risks to consider when investing, one of them is the Political risk of the country you invest in. South African investors saw the risk of investing in South Africa as VERY high in 1994 and some of them built bunkers and stocked up on canned food and bottled water.

Well, those who predicted SA to crash and burn were SO WRONG!

R10 000 invested in South African shares for the last 10years gave you back R33 000. The same amount invested in Foreign shares returned only R10 900! But Political Risk is very real and one only needs to look at a country like Zimbabwe to realise how devastating it can be. The Arab Spring also highlighted the risk of investing in a specific country or region.

What has this got to do with investing in a Retirement Annuity then!?

Consider the following. A Retirement Annuity (R/A), like other Pension instruments, are governed by the laws of the country which are drafted by the government in power. The benefit of investing in a R/A is that you can deduct some of your contributions from your taxable income and in the 2012 Budget the Minister declared that no tax on Dividends or Capital Gains will be paid in R/A's while at the same time INCREASED those two taxes for investments in shares outside of a R/A and other Pension instruments!

In short what he did was to make it very favourable for you as a SA citizen to increase your savings towards an R/A, and decrease your savings towards "discretionary" instruments.

The downside of the R/A investment is that when you retire out of the R/A from age 55 onwards, you may only withdraw 1/3 of the capital and with the remaining 2/3 you have to buy another Pension (regulated by the Government off course).

So if you believe in Political risk, you will start thinking about what will happen to your R/A investment if the Government decides in 15 years to CHANGE the legislation and force the manager of your funds in the R/A to buy Government Bonds at some ridiculous valuation? Or, changes the tax law and tax you at a rate of 50% on all the withdrawals you make from your Pension?

Remember, money will flow from the rich to the poor. In a country where only the "rich" have R/A's, what will a government do to maintain the popular vote?

At the end we might have another decade of fabulous returns in South Africa. Just make sure you can decide how you want to access and invest your savings when things change. I would still make use of the great benefits an R/A offers, but carry on investing in discretionary funds as well!