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Personal investing

Q&A: What’s on your mind about the Allan Gray business?

We field a lot of questions from clients and advisers each week. Earl Van Zyl offers some answers to questions that are coming up frequently.

1. Would Allan Gray consider introducing a flexible or income fund?

We are not looking to introduce a flexible or income fund as we believe that our Stable Fund fills this niche. Because it is an asset allocation fund, it is more resilient to shocks than cash and the ability to invest up to 40% in shares gives the Fund the potential to deliver returns in excess of cash over the long term. While the offshore exposure can add to volatility, it also adds an important diversification element to the Fund.

2. Would Allan Gray consider offshore debit orders and an offshore endowment?

As part of our ongoing effort to make it easier to invest offshore via our offshore platform, in 2018 we lowered the investment minimums and introduced the option for investors to use South African rands for lump sum investments in new and existing offshore accounts, with Allan Gray facilitating the conversion to foreign currency at a competitive rate. Over time we would like to make investing on our offshore platform as simple as investing in local unit trusts, including the ability to invest via rand debit orders. We are hoping to be in a position to offer this in the next 18 months.

We have evaluated adding an offshore endowment to our offshore offering but decided to rather focus our efforts on making the current offshore offering simpler, as we described above. We acknowledge that for some clients an offshore endowment adds significant value, especially for estate planning purposes, and we will continue to weigh up the costs of adding this option against the benefits of focusing on our existing offering to make it even simpler for clients. The work required for us to offer an offshore endowment would be significant though, so even if we did decide to offer this product, it is unlikely to be available in the next 18 months.

3. Are clients worrying about prescribed assets and is this leading to an increase in withdrawals?

Some clients have raised concerns about prescribed assets; however we have not seen this manifest in a higher rate of withdrawals from retirement products. The impact has been mostly on sentiment, compounded by conversations around land reform and the National Health Insurance policy, which are all making investors nervous, and adding to the desire to diversify offshore.

There is no shortage of appetite from investment managers to invest in well-governed and transparent infrastructure projects or bonds issued by government entities that are well governed and show good discipline in capital allocation. It is important, however, that investors are rewarded with an appropriate level of return to compensate for any risks involved, which normal market mechanisms generally do well. Prescription implies being forced to allocate capital to projects that do not meet market-driven rates of return for the amount of risk taken on by investors. In the long run, prescribed assets therefore are likely to erode the wealth of long-term investors.

Should the government ultimately consider implementing prescribed assets for retirement funds, collective investment schemes and/or for insurers, the regulators would need to undertake a lengthy consultation process and consider submissions from industry and the general public. Allan Gray, as a member of the Association for Savings and Investment South Africa (ASISA), would participate in providing comment together with other financial institutions in an attempt to work with the government to find a viable way forward that would be in the best interests of our clients and all South Africans in general.

4. What is Allan Gray saying about CEO pay?

As active shareholders on behalf of clients, we believe that we can play a constructive role in the continued improvement of companies’ governance policies in general, including remuneration. We engage actively with company’s remuneration committees where we believe policies can be improved, and we are comfortable to vote against remuneration policies that are materially behind current best practice.

We believe that a company’s remuneration policy should aim to attract and retain competent executives, reward these executives fairly in a way that is consistent with their performance, and align the incentives for these executives with the best interests of shareholders. The key criteria we consider when evaluating a company’s remuneration policy include quantum, appropriate linkage to company performance and value created for shareholders and the balance between short and long-term incentives.

This is easy to say but can be difficult to implement in practice. The perfect remuneration policy probably does not exist. We remain mindful of this when considering our voting on remuneration policies. We also remain mindful that the value key executives can add to (or subtract from) a company can dwarf their remuneration, and that companies compete to employ competent executives.

5. Will Allan Gray launch a life annuity?

We are not currently planning to launch our own life annuity, but we are evaluating how clients may be able to access a guarantee inside of an Allan Gray living annuity – a so called ‘hybrid annuity’. The guaranteed portion would be insured by a third-party insurer, not Allan Gray.

6. Is Allan Gray seeing an increase in emigration and/or offshore investing?

We are seeing an increase in withdrawals where the reason given is emigration or financial emigration – but not at levels that reflect the very negative sentiment towards South Africa in 2019.

On the flows side, we are sensing a heightened anxiety from investors who wish to place more of their money offshore, but again, the reported numbers do not reflect a significant upweighting offshore. Advisers are telling us that they have helped their clients diversify offshore some time ago, so they do not need to make wholesale changes to clients’ offshore allocation.

As always, we encourage investors to invest offshore primarily for long-term portfolio diversification, and to continue to exercise careful due diligence in doing so. It remains just as important as ever to evaluate any offshore opportunity within the context of their longer-term goals, and not simply as a knee jerk reaction to concerns about the local political or economic backdrop.

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