The asset allocation problem (#230)

Investing history teaches us success is all about asset allocation, as Grant Locke explains in this presentation. History is unfortunately annoyingly silent on what precisely the best asset allocation would be. Where does that leave those of us investing for the long haul?

Should we pick a mix and stick to it? Should we adapt our asset allocation mix to suit the current market conditions? While Ash asks this important question in relation to a retirement product, it’s a question each DIY investor would have to answer for themselves.

This is an excellent way to end our Fat Wallet year, because we’re once again reminded that intentionality and mindfulness matter when it comes to money management. 

2020 gave us all a lesson in having high expectations of a new year, so this year I won’t toast 2021. Instead, let’s all raise a glass to the end of 2020 and have that be that.

Thanks for listening!

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Ash

I get that you partner with Outvest and their Coreshares offering based on their incredibly low fees. I have since been looking at the passive balanced funds available in the market and have picked up that they are not all the same.

Could you possibly comment on what is termed a "hard-passive product" which invests in ETFs like the Coreshares OUTmoderate Fund that has a Fixed Asset Allocation? vs a "soft-passive fund" like the Sygnia Skeleton Balanced 70 that is able to adjust its asset allocation on a regular basis however it still uses ETFs and low cost passives in its portfolio.

When reading multiple articles online it's seems asset allocation brings in the bulk of your returns over stock picking, so wouldn't it be beneficial being in the Sygnia portfolio that is able to adjust its asset allocation to market risks over time?

A prime example being that Sygnia currently doesn't hold any property in its portfolio vs Outvest with 15% exposure to Property (Domestic and Local).

When looking at their returns it seems that Sygnia may be more expensive by roughly 0.2% per annum but has managed to deliver far better performance because of its flexibility over the last few years making the 0.2% difference probably worth it.

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Win of the week: AN

I started a Stanlib Unit trust when I was 23 and had stable employment. I injected approximately R100k p.a averaged over the 8 year period. The average returns have been about 7%. However, I suspect that I am being too risk averse and losing out on many opportunities.

Please can you help me decide how to progress from this into more diversification. I have opened a TFSA with EE and I will be purchasing ETFS. What amount of my current unit trust should I move over to ETFs as a guideline and what would be the best 2 or 3 ETFS for me to start with?

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Pascal

When you guys mention Interactive Brokers, you imply that it's totally off limits to anyone with less than 100,000 USD.

There is no minimum account balance with interactive brokers. Only a small monthly "inactivity" fee if your balance is less than 100K. It costs 10 dollars a month, minus the cost of each trade made in that month (at 1 dollar a trade).

So if you buy shares of 2 ETF's each month as I do, your monthly fee is 8 USD (excluding the trades). In other words, aside from the 10 dollars a month, you can buy and sell ETFs for free, up to 10 trades a month, so you're never paying more than ~R160 (at current rates) a month.

R160 does not seem like that much for access to global markets though such a feature-rich platform. To put that in perspective, that's less than the fee for some current accounts in SA.

When you consider EasyEquites USD fee is 0.56% of each trade value, a 10 dollar fee equates to a trade value of (I think) ~1785 USD. So, IBKR actually becomes cheaper than EasyEquities anytime you invest more than 1785 USD a month. (if my math is correct? Please feel free to check this).

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Magan

If one passes on with a living annuity, can the spouse transfer the amount that is due to her to her own living annuity? What will the tax consequences be, if any?

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Andy

I would like to believe that I was listening before the famous Wilhelm stole the limelight. I was also on the ships and scratched my head on similar issues faced by some of your doctor listeners.

I’ve made so many of the mistakes you have spoken about in your show, but I can certainly say I have learnt some lessons and am getting better.

From a horrid financial advisor who had never even heard of ETPs, to being invested in some kak expensive funds on Alan Gray. (Said advisor had also not heard about TFSAs).

A lot has transpired since then.

I now run my own portfolio except a minimal amount for my RA with GEPF (which I can’t control) and 10x, which I am kind of okay with.

I’m now 5 years into TFSA. The majority of my other investments are in ETFs and I’ve had some success (read luck) and some failures (read Woolies) in single stocks. I’m also teaching interns who want to listen about the pitfalls of getting a good starting salary with little financial background and I find this really rewarding.

What is the difference between dividends and distributions. What are the tax implications? Which products would be better to hold in the tax free space, one that reinvests distributions or one that pays the dividend? 

On a similar vein- if an etf like satrix world reinvests distributions, what are the tax liabilities?

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Santosh

I understand the argument on fees, but one has to also acknowledge that service is worth paying for.

When I sold the last lot of my Satrix Property, I experienced the same as most ie. no response to emails, ineffective and incompetent staff on the other side of the telephone, when one could actually speak to an individual.

Ask practically any question unrelated to that day's share price and you're greeted with a stunned silence. Then there's the JSE process and it's associated fees and processing times I decided never again! 

The level of service, competence and responsiveness of Allan Gray and Coronation, for example, is stupendous to the point where I'm willing to pay a premium. When I have had questions, I've directed it to the individual fund managers themselves and have received detailed, well thought-out responses. Before I invested with Prescient, one of the fund managers actually took the time to meet me over coffee and today still answers my questions directly.

Would an ETF provider do this ? Never - not in a million years.

The funds are expensive, but the service by the asset managers is worth paying for that is if that is important to you. In 2018 after I met with 10X and he was "blown away" with my interaction with Allan Gray and how professionally and attentive Allan Gray was. Any transaction—irrespective of complexity, local or international—is handled either on the day or 24hrs and really, they respond to EVERY email. 

Furthermore, the level of staff knowledge at any of the Asset Managers is incredible! Irrespective of who answers the phone, the competence is assured. I really don't know how these asset managers are able to find and train staff to this level. It seems to be something unique to the asset management industry.

Even performance-wise, the Ash1200 is not without its competitors. The 1-year performance of the Ash 1200 against the Coronation Optimum growth fund is practically identical after fees and in this case, the Optimum Growth fared marginally better.

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Taya

I have been contributing to an RA since 2014 through one of the dreaded 'old school' companies. I blame this on a younger, stupider version of me. I am investigating the fees I am paying and will most likely move this to another provider such as 10X / Outvest. 

My employer is dead set against RAs. He knows his way around tax (he has a Masters in Tax law and worked for SARS for some time), so I am inclined to give his advice some thought. His view is that by the time I am of retirement age, the government would've gotten their hands on RAs through prescribed assets. In addition, RAs don't typically perform very well. His advice is to take the tax knock and invest your money elsewhere.

What are your thoughts on this? If I am going to continue investing in an RA I need to seriously figure out how to contribute more to it monthly, but I am questioning whether this is something I should even be figuring out in the first place. 

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Laurence

We're on the bus to Portugal, due to roles that allow remote working and passports for EU access. I have a question around CGT on offshore funds (e.g the Vanguard.VT USD fund) when becoming a non-tax resident in South Africa. 

We plan to become non-tax residents in South Africa, and not financially emigrate (even though we assume we won't return to the country). 

I currently own the Vanguard USD fund through Easy Equities. I plan to do a position transfer from EE to Interactive Brokers. I would sell up any remaining South African funds (e.g. Ashburton 1200) and convert to Irish domiciled Vanguard funds. I know that Vanguard is US domiciled and there's some concerns about Estate Tax above $60K without tax treaties, but I'd like to think I can manage it based on the fact that Portugal may not be our final destination. 

I've (somewhat) come to terms on taking the CGT hit on the SA funds when leaving, but what happens to the offshore funds (e.g. USD VT) from a CGT perspective when becoming non-tax resident of South Africa? Do you have any insights around the need to pay the CGT on the VT gains (to date) in South Africa when becoming non-tax resident, or would the double taxation agreement with another country mean you only pay CGT in Portugal/EU when selling off the fund in e.g. 15 years time?  

Alternatively, am I just complicating the hell out of it and should I sell the VT fund whilst it's of moderate size and take the CGT hit now? 

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Garry 

I am in my early fifties, married and dad to two high-school kids. My wife doesn’t earn an income.  

I have a good pension fund through work. I have also been contributing to an RA since 2005.  

The RA with Momentum is offshore denominated, which avoids over-exposure to section 28 regulations. I have stopped the 10% annual escalation on this so will now pay a fixed amount until my 55th birthday. 

We have an additional discretionary investment into unit trusts.  We also have an emergency fund in a USD account. I think by and large we have been doing the right sort of things. 

Here are a few things I would like to correct:

• We have been investing in Unit Trusts rather than Tax Free investments first!  
• On my older Unit Trusts I have a financial adviser associated with them and I am annoyed that he is getting free money without adding value. 
• The Unit Trusts are in my name rather than my wife’s. She is a stay at home mom, so it seems sensible from a tax perspective that these investments should be in her name. 
• The Momentum RA is USD denominated. 2 years ago I stopped the annual automatic increase and paid a penalty for that.  
• I also have a few small paid up RAs from back in the day when I was young,  naïve and exploited.

Can you please comment on my proposed corrections:

• Open tax free investment accounts for my children, my wife and myself (last) before further funding other discretionary investments. 
• Sell off my unit trusts in annual tranches, keeping the capital gains below the R40k annual limit and use this money to fund the TFIAs. This will have the additional benefit of reducing the free money to my financial adviser.
• Top up the TFIAs on a monthly basis, keeping below the annual limit.
•  Put any additional funds into an ETF like an MSCI World fund from one of the providers
• Do you have a recommendation for what to do with my Momentum RA?
•  When I reach 55 it seems best to take my various RAs as lump sums and add them to my discretionary savings.  Any thoughts on that? 

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Mary

I wonder if there is such a thing as tax free converting, where you take R36,000 from your retirement annuity to deposit in the tax free account without being penalized. I read this is possible in the US with their version of tax free accounts they call Roths accounts. You transfer money from a 401K to a Roth IRA or Roth401k. It all sounded very interesting. I wondered if you two knew something similar existed here at home.