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This is the Sharenet company blog where we will bring you the latest news and events on the go at Sharenet, together with tips on using our site and our products.

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    Retirement Annuities as an Estate Planning Tool

    Whilst most people see Retirement Annuities (RA’s) as a vehicle to fund provision of capital for their old age, this isn’t always the case as I was recently shown an example by one of my colleagues whereby changes in the rules relating to RA’s have given certain individuals an opportunity to plan their estates a lot more effectively.

    Previously, members of an RA were compelled to retire from that fund before the age of 70. This rule has now fallen away and it is now possible to join an RA after the age of 70 with no mandatory retirement age; you may ask yourself “Why on earth would anyone in retirement want to purchase an RA?” But the following example will illustrate its effectiveness as a retirement planning tool for certain individuals:

    “Mr A is 80 years old and has more than enough income and capital to fund his lifestyle. He has R 3 000 000 invested in a Money Market account at a bank which he decides to invest into an RA. For ease of calculation, we will assume that none of the R 3 000 000 is allowed as a deduction in the tax year of contribution. We will also assume that the underlying portfolio in the RA is a Money Market Fund earning the same rate as what he would have earned outside the RA. Mr A dies and the growth of the RA at this point is R 300 000 (which is the same as if he had left it in the Money Market account).

    “If he hadn’t used the RA, Mr A would have had to pay R 120 000 in income tax (40% on the R 300 000 income from the Money Market account) leaving a net payout of R 3 180 000. The Money Market Fund would also be an asset in Mr A’s Estate, and if we assume that his estate duty rebate has been used on other assets, estate duty of R 636 000 would be payable. Executors fees of R 126 882 would also be payable on this asset leaving a net (after income tax, estate duty, and executors fees) R 2 417 118.

    “By investing into the RA the interest earned is not taxed, leaving a total value of R 3 300 000 (all growth in an RA is currently tax free). The RA is not an asset or a deemed asset in the estate and is dealt with as a taxable lump sum death benefit received from a Retirement Fund. All contributions made to a Retirement Fund, not previously allowed as a deduction, are allowed as a deduction when calculating the taxable portion of the death benefit. If we assume that Mr A has already used his R 315 000 tax free retirement benefit, then total tax of R 54 000 will need to be paid, leaving a net benefit after tax of R 3 246 000.”

    One must bear in mind that by locking up capital in an RA, accessibility will be greatly reduced (only 1/3rd is available as a lump sum) so this is a tool which should only be used by individuals with a large amount of free capital which is not going to be used or required during their lifetime. Naturally this type of strategy doesn’t make sense for most investors, but for those that it does, the potential benefits should not be ignored.

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    Kind regards,

    Barry Hugo
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2012-04-24, 12:04:19, by Mike Email , Leave a comment

    PSG – More than the Sum of its Parts?

    PSG Group Ltd released its annual results for the financial year ended 29 February 2012 on Monday, once again reporting some strong numbers and hinting at promising opportunities for further growth on the horizon.

    PSG Group is an investment holding company with stakes in 39 underlying investments, including three companies separately listed on the JSE. PSG has its roots in financial services and as a result has a large exposure to the financial services, retail banking, and private equity sectors, but recently also ventured into agriculture and education. The company’s market capitalisation currently stands at approximately R 9.5bn.

    Recurring headline earnings per share improved by 27.6% to 308.6 cents per share, while the dividend for the year increased by 22.4% to 82 cents per share. The Sum-Of-The-Parts (SOTP) value per share, which is explained below, has increased by 19.4% to R 55.92.

    By the nature of its business, which is purchasing companies and unlocking their intrinsic value, it is unlikely that PSG will ever have a massive dividend yield and more likely that it will instead aim to reinvest as much of its profits as possible into new investment opportunities. Therefore, an essential valuation tool to value PSG is the Sum-Of-The-Parts (SOTP) value per share. The SOTP value per share metric looks through to an investment company’s underlying holdings and then calculates what the share should be worth in the market, based solely on the underlying holdings.

    An extract from PSG’s financial statements shows the contribution of the underlying investments to PSG’s asset value and SOTP value per share:

    Source: www.psggroup.co.za

    PSG has also issued an updated SOTP value per share of R 61.66 as of 4 April 2012, which amounts to a further increase of 10.26%. The share price currently hovers around the R 53 - R 55 range, indicating a discount to SOTP. From the graph below it can be seen that the share price remains relatively close to the SOTP over time, although a discount has been in place for the past three years or so:

    Source: www.psggroup.co.za

    We will now have a brief look at the performance of two of PSG’s underlying investments that are also listed separately on the JSE, namely Capitec Bank and Curro Holdings.

    Capitec Bank (32.5% Holding)

    Capitec has taken the lower income market in the retail banking sector by storm, and has grown rapidly to a point where it currently employs over 7,000 people, has 3.7m active clients and a market capitalisation in excess of R20bn.

    Capitec have delivered a return of 29% on ordinary shareholder’s equity, which is slightly lower than 2011’s figure of 35%. Understandably such high RoE figures are difficult to maintain in an environment where other banks are trying their utmost to capture a share of the lower income market. Capitec achieved headline earnings of R 1.08bn for the financial year, with headline earnings per share increasing by 49% to R 11.25.

    Capitec is vitally important to PSG’s future success as it comprises 50% of PSG’s asset value. PSG CEO Piet Mouton attributes much of Capitec’s phenomenal growth to their management team, which has been in place since the company’s listing. He further displays confidence in their ability to grow the business’ client basis even further and to remain profitable going forward.

    Curro Holdings (63.1% Holding)

    Curro Holdings comprises about 9% of PSG’s asset value, and has enjoyed a lot of media attention since listing on the JSE AltX in June 2011. The excitement among PSG enthusiasts can be attributed to the company’s interesting business model of developing, acquiring, and managing private schools in South Africa, as well as the believed upside potential waiting to be unlocked.

    Curro has expanded its number of schools countrywide from 3 to 16 since 2009, while the number of learners has increased from 2,000 to over 10,500 at present. This expansion came at quite a cost, with R 142m spent on the development of four new school campuses and a further R 80m to upgrade and expand their existing schools. As a result of all this capital expenditure, Curro reported a headline loss of R 7.5m for the financial year ending 31 December 2011, compared to a profit of R 5.2m reported for the previous year.

    PSG cautions that Curro is still in its capital expenditure phase, which will be costly and capital intensive over the short to medium term. However, management believes that their long term growth strategy will unfold with very favourable results once the foundations are in place.

    PSG has been a brilliant performer over the years, and has a strong management team in place, but as we mentioned last week one needs to ensure that a good company remains a good investment before making a capital allocation.

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    Kind Regards,

    Cor van Deventer
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2012-04-19, 09:42:02, by Mike Email , Leave a comment

    Compounding for the Long Run

    Most investors have heard the saying, generally attributed to Albert Einstein, that compounding is the eighth wonder of the world. Compounding is a fairly straightforward concept (making gains on prior gains) but it can be very difficult to completely grasp as its effects are only truly felt over the extremely long term (think 20 years and more).

    At the beginning of this year the Seed Weekly Report looked at 2 investors that invested a lump sum into the SA market (via the ALSI) for a 10 year period. Investor B used the dividends paid out to enhance his lifestyle, while Investor A slavishly reinvested the dividends. At the end of the period Investor A had 33% more invested than Investor B. While it is obvious that Investor A is better off, there can be the argument that the fruits that Investor B enjoyed as a result of his withdrawals could equal the financial value that he lost out on.

    Agreed. Over a 10 year period, while compounding is good for your investments, the added benefits do not obviously always outweigh the opportunities lost. Over longer periods, however, the added benefits become more and more obvious.

    For the purposes of this article, let’s assume that two 25 year olds each inherit R 100 000 from a distant aunt. They both decide that it’s not enough that they are able to stop working, but it’s a sizable amount that they want to invest in the stock market (ALSI – as they are able to take on the full market risk). Here their 2 strategies diverge slightly (or at least they don’t think there’s much difference at the outset).

    The first recipient decides to reinvest his dividends with the following mindset, “This money is a windfall to me, and I don’t need to look at it or use it until I retire. I therefore want all my dividends reinvested”.

    The second recipient is disciplined in that he wants to invest the inheritance, but would like to have a bit of extra cash each year to splurge, “I’m being responsible by investing the inheritance, but it won’t make much difference if I just have the dividends paid out to me as they are declared rather than having them reinvested”.

    In the first 5 – 10 years the second recipient boasts that he’s a) got an investment that has grown nicely in real terms, and b) has ALSO been able to go on a few nice holidays and buy some new gadgets. The first recipient just keeps his head down, knowing full well that the power of compounding will kick in down the line.

    At age 65 (retirement) the difference in size between the two portfolios is mindboggling! The portfolio that had the dividends reinvested is now over 5 times larger than the one that had the dividends continuously withdrawn. Both men have been made wealthy by their investments, but the one that reinvested his dividends has created significantly more wealth than his counterpart. The chart below shows the difference between the two portfolios using ALSI data over the past 40 years.


    Less than 40% of the difference between the two portfolios can be attributed to the money that was spent on the holidays and gadgets. The remainder, over 60%, is the opportunity cost of not reinvesting the dividends. In this example, nearly R50m extra is generated through returns on the reinvested dividends!

    While we agree that money can’t buy happiness, each investor needs to assess the pro’s of instant gratification versus the con’s of the opportunity cost of missing out on the compounding effect. Further, both investors did well by investing their inheritance rather than immediately spending it on a new car (or other depreciating ‘assets’), or a trip around the world, but one just did a WHOLE lot better than the other!

    Take care,

    Mike Browne
    info@seedinvestments.co.za
    www.seedinvestments.co.za
    021 9144 966

    Permalink2012-04-11, 15:25:22, by Mike Email , Leave a comment