IN THIS ISSUE

From The Ceo’s Desk

Income In A Low

Interest Rate (Low

Return) Environment

Being Active Is Good

For Your Retirement

Health

NFB FINANCIAL UPDATE

Volume51 Aug 2010

FROM THE CEO’s DESK

WOW Mzansi! You guys are GREAT!

Having said that, this is not a time

where politicians and citizens alike

should be gloating. It is a time for

consolidation. Adjectives such as brilliant,

unforgettable and life-changing are the flavour of

the day as we exit a mind blowing month; the

culmination of the joint efforts of Government,

Soccer S.A. and a nation at large. From a rather

doubtful beginning, to rather embarrassing

infighting, to sinkholes in Rosebank, to transport

infrastructure worries and impending labour action,

the list goes on and on; we have not done badly

at all. In fact I'd hazard to call it a resounding

success.

Now all that remains is for all of us, from

government, business, the media and the

population to pledge our commitment to what we

are capable of achieving. I will be asking our

Board of Directors to support me in advertising our

shared pride and belief in this remarkable country

and its people. We need to treat obstacles and

challenges with the same sense of urgency,

ownership and pride we have displayed not only

to the globe, but much more importantly, to

ourselves and each other. Our reputation as a

miracle nation has been bolstered not by yet

another peaceful election, but by a remarkable

event, the biggest of its kind in the world. And

we've done it with grace, uniquely African

character, in a safe way and as one! Most

remarkable to me was the lack of partisan politics

or blame being apportioned. The delivery was all

that hit the headlines, whilst no doubt there were

some difficult discussions taking place behind the

scenes.

The global reach of the money well-spent on

advertising our country and its yet-to-be-

discovered attractions remains to be seen, but

what a stage! On a few occasions, I was

emotionally touched by the service, friendliness

and ownership displayed by folk, employed to

usher us on and off buses and the awesome

Gautrain, to offer us a cool drink, or being given

directions by a traffic officer whilst walking down

the Fan walk in Cape Town. These guys are

supposed to be rude, accept bribes and not care

a damn. Not the one's on duty in the World Cup.

They went out of their way to “Protect and Serve”

and did us all proud. The SAPS also deserve a huge

hug and thanks for doing the impossible i.e.

keeping the peace in an environment where

supporters can get a little testy at times.

The lasting impact of

the Soccer World Cup will

be with us forever. One

hears of a migration of

sporting codes, notably

rugby, to these new world

class facilities. It is up to

South Africans to support

these initiatives and make it

work, not watch others and

criticize from the sidelines.

The attitude between

service providers and

customers was world class

and plenty of people from

the previously negative and

skeptical media, locally and

abroad, have changed their opinion from

doubting Thomas to impressed disciple of Madiba

magic. On this note, it was with a mix of adoration

and worry that I joined the 85 000 spectators to

give this old gentleman a rousing welcome to

Soccer City last night. He looked rather frail, but

that smile still carries the magic that still reflects the

inner strength and magnanimity of this amazing

human being.

Changing tack to markets and the more

mundane, but nevertheless important business: I

remain concerned that these markets still carry an

unusual level of volatility and risk. The globe is an

unsettled place and, until this moderates, I would

advocate caution. NFB has a series of Funds which

we manage through the capable team in our

Asset Management business. These funds, in their

current form, have a track record which has them

delivering outstanding results whilst (and probably

because) they err on the cautious. The results we

as a business are interested in, are three years and

longer in duration as we regard measurement of

shorter periods too vulnerable to “noise”.

Please ask your advisor to discuss these as they

certainly have a place on the smorgasbord of

choices out there and, if blended well with other

top performing funds with a specifically aggressive

or alternatively cautious mandate, can and have

delivered results we are proud of.

AYOBA. They say the time is now, but I have a

feeling it is just beginning!

, CFP

CEO, NFB Financial Services Group

Mike Estment ®

f i n a n c i a l s e r v i c e s g r o u p

2525

Mike Estment

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INCOME IN A

ENVIRONMENT

LOW INTEREST RATE (LOW RETURN)

By Stephen

Katzenellenbogen, Private Wealth Manager, NFB Gauteng

When considering various investors and their portfolio objectives they

could loosely be categorized as growth investors, income investors or

a blend thereof. In many instances a portfolio will have both growth

investments and those that provide the investor with an income. This

article will focus on the income investor and will explore current

investment considerations and investment products.

Whilst equity markets have fallen off substantially from

their 2008 highs investors who

have had market exposure, and have had this for a

number of years, have been rewarded with

generous long term returns. Furthermore, those investors (growth)

who still have a long term investment horizon, and those who

picked up some exposure during 2007, should not be too

concerned about current volatility and short term prospects.

Now consider those investors who are unable to watch from the

sidelines and who rely on interest income, or income of another

form; they are faced with a slightly different proposition with interest

rates currently at their lowest level in 30 years coupled with volatile

equity markets still well off their historical highs. In terms of interest

rate prospects we do not expect rates to rise substantially any time

soon; nor do we expect rates to rise, over any time, to the fifteen

and twenty percent levels seen historically.

Before we get in to the detail of our discussion let us look at a

quick example illustrating the effects of income on an investment in

a negative return environment. If you had R100 and took

income/withdrawals equal to 10% over a period where that

investment return was -20% your total investment return for that

period would be -30%. Thus, in order for your, now R70, to get back

to your original R100 you will need a return of 43%.

(see graph below)

(As a side note and potential topic of discussion with your

advisor: there is an inverse relationship between the amount of

income you are taking and your possible exposure to growth assets;

although dependent on your overall portfolio and risk appetite.)

The above example, and discussion, highlights a number of

topics of that will be discussed throughout this article:

- Return expectations – is the past a good predictor of future

returns?

- How much (income) is too much?

- A means to an end…

When attempting to quantify a probable investment return there

are two ways we can go about this:

• Assessing historical returns

• Predicting future returns based on the economic climate and

variables

In reality both the methods above are filled with pitfalls, but do

give us something to work with. In the context of this article we will

venture that a combination of both assessment tools can provide

some insight.

Interest rates are likely to remain low for some time and unlikely

to flirt with low, double digit returns in time to come. When

considering equity markets returns it will take global markets a

number of years to deleverage and work the historical structural

faults out of the system. This is not a doom and gloom scenario, but

rather perhaps a signal to start readjusting our return expectations

to something more muted and commensurate with inflation, interest

rate and future market return expectations. Furthermore, we must

not forget tax and expenses which will impact your investment

return.

A final remark on this topic is that your portfolio will require a

portion of growth assets, commensurate to your risk profile, in order

to provide a measure of inflation protection.

Once comfortable with the likely investment returns the next

step is to, in some cases, adjust downwards what we believe to be

sustainable levels or amounts of income.

When considering what level of income is ‘safe’ or reasonable to

draw from your investment you will need to consider both inflation

and the potential duration of the investment. When pondering

these factors, for this and any other investment, rather err on the

side of caution than have an unwanted surprise should you outlive

your assets.

Either directly or indirectly all of us are affected by inflation

every year through rising medical expenses and a rise in the general

cost of living. This in turn means that year on year we require a bit

more to cover our expenses. Therefore, consideration must be given

to the fact that you will need 5% - 10% more income each year to

carry on with the style of living to which you are accustomed. If you

are currently 60 years old and require R40 000 each month, in 30

years’ time this will translate into an income requirement of R230 000

per month with inflation at 6%. Put another way, R1m today will only

be worth R175 000 in that same 30 years’ time.

When possible, an income level of 1%-5% should allow the asset

to grow beyond the drawings which will then naturally give you

additional income every year. Let us, for illustrative purposes, use an

investor who has R1m and draws income at 3% per annum. Let us

also assume that the investment return in year one is 9% net of costs.

At the beginning of year 1 the client’s income will be equivalent to

R30 000 (3% x R1m) and then at the beginning of year 2 the income

will be R31 800 (R1m + (9%-3%) x 3%).

The older you get the more aggressively you can increase your

income, as reducing your capital base become less of a potential

problem.

All of the above takes careful analysis and forecasting as well as

a thorough understanding of investment markets and vehicles –

please contact your NFB financial advisor for assistance and

thorough planning.

To have a regular income from an investment does not necessarily

mean that it must be a traditional retirement product.

We will not be discussing all of these, but here are some

examples of products that can deliver or supplement income:

• Living annuity

• Compulsory annuity

• Voluntary annuity

• Shares – dividends

• Unit trusts

• Matured endowments

• Structured products

• Income funds

• Dividend income funds

With cash in the bank currently returning around 6%, a dreary bond

outlook and slowing property market, dividend paying shares

provide an interesting alternative.

If you are a marginal tax payer (40%) your current net return on

cash, assuming 6% interest, is 3.6%. (as an aside: have you ever

stopped and considered that cash is the most expensive investment

you have – you earn 6% and the bank ultimately lends your money

out to the guy next door at 10%, thus making a 4% margin?).

Currently, there are a number of shares available displaying

attractive dividend yields – if you were to buy a stock that has a 3%

dividend yield all you then need is a modest 1% capital

appreciation and you are ahead of cash.

These funds provide a very attractive after tax yield for high tax

payers (and corporates), in the form of a dividend. Although

conservative in nature these funds are not without risk, and more

specifically, tax risk. NFB is currently analyzing the dividend income

fund universe and suggest that all current and potential investors

speak to their advisors in order to fully understand the investment

opportunities and possible pitfalls.

If not limited by space it would not be hard to write a few thousand

words on our topic. What is difficult is to temper investor

expectations as well as ignore short term market movements in

favour of a properly aligned long term portfolio.

We look forward to getting your thoughts and input on this

challenging subject.

Shares and dividends

Dividend income funds

Return expectations – is the past agood predictor of future returns?

How much is too much?

A means to an end…

Outcome…of income

A licensed Financial Services Provider

Johannesburg Office:

NFB House 108 Albertyn AvenueWierda Valley 2192,

P O Box 32462 Braamfontein 2017,Tel: (011) 895-8000 Fax: (011) 784-8831

E-mail:Web: www.nfbfinancialservicesgroup.co.za

NFB House 42 Beach RoadNahoon East London 5241,P O Box 8132 Nahoon 5210,

Tel: (043) 735-2000 Fax: (043) 735-2001E-mail:Web: www.nfbec.co.za

:

110 Park Drive Central Port Elizabeth 6001,P O Box 12018 Centrahil 6001,

Tel: (041) 582-3990 Fax: (041) 586-0053E-mail:Web: www.nfbec.co.za

East London Office Port Elizabeth Office:

nfb@nfb.co.za nfb@nfbel.co.zanfb@nfbpe.co.za

It would be naive to expect the recessionary consequence to

have hop-scotched one's living annuity, and it would be

hazardous to carry on regardless. Unfortunately, the holding of

thumbs and the ability to quote sound bites from Summit,

although making for interesting debate, is not really adding value to

the management of one of your most important retirement assets.

Active management, which assumes action, is essential, and if ever

there is a time for the dynamics of the working relationship between

advisor and client to take hold, it is in the management of a living

annuity.

The hangover from the historic

Bull Run is the delusional

expectations of an easy income

stream. Three years ago cash was

giving you 11%, and an income rate

of 10 % was sustained with no risk

and a real return on capital left

under the Christmas Tree. But one needs to put this into some sort of

economic context and defer to the lie of the land at that time -

inflation at the beginning of 2008 was sitting at 10% and the Repo

rate was 11%. If we were to mirror the context in today's terms, it

equates to an income of 6% and a cash return of 6.5%. The obvious

conclusion is that a 10 % income stream in today's world comes with

a whole new set of dynamics.

Like any going concern, cash flow is an active element of

management. When demand falters and prices bottom out,

successful business owners focus on their bottom lines, cutting costs,

retrenching and tightening up on the entertainment allowance, all

in a bid to preserve working capital in readiness for when the

shoppers return. One surely needs to copy and paste this ethos into

the Living Annuity strategy.

There are really only three components an investor can

manage:

what risk is one prepared to take in order to sustain income?

how will one invest capital in order to sustain a growing

income stream over the long term?

what rate of income is sustainable without

compromising the appropriate risk mandate (1) and ensuring the

longevity of income stream by growing capital (2)?

In a world where risk is up and

growth is down, cost cutting must

surely be the first responsible step to

take in a bid to protect the longevity

of one's income stream. The reality

of the matter, however, is that not

everyone is in a position to manage

a bottom line, when ultimately, it is managing them.

It is in this space that something has to give; either one

compromises the growth element and focuses on capital

preservation and income generation, or one compromises the risk

element and risks capital erosion in the short term, trusting the

growth assets to adhere to the cyclical nature of the markets. Both

seem reasonable options - but neither is sustainable for a long

period and requires close monitoring together with your advisor.

As mentioned above, one needs to actively assess the world

around us, and adapt accordingly. The good times will come again,

but for the moment, “vasbyt” comes to mind.

1. Risk -

2. Growth -

3. Income -

Active management assumes action – now more vital than ever in

the management of your living annuity. Written by Philip Bartlett,

Private Wealth Manager, NFB East London

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BEING ACTIVE IS GOOD FOR

if ever there is a time for the dynamics

of the working relationship between

advisor and client to take hold, it is in

the management of a living annuity.

YOURRETIREMENT

HEALTH