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Thursday, 11 October 2018

The Best Preservation Fund In South Africa

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Money for jam. 
Okay, confession time - I think I need to come clean about my dirty little secret.1

Despite strongly advocating that everyone should keep their investment fees to a minimum, I haven’t exactly been practising what I preach with all my investments – specifically my preservation fund.

Over the last few years I have been paying a 0.56% annual platform fee, and then an additional ~0.7% for the products I held inside of the preservation fund. So that’s a total annual cost of around 1.3%.

Poor form Stealthy! Slap on the wrist for you!

Okay, so with that confession and scolding out the way, there is some good news and some better news.

The good news is that I managed to move my preservation fund to a cheaper provider. And the better news is that, whilst investigating the move, I think I have found the cheapest/best preservation fund in South Africa!

It comes in at an all in cost of under 0.5% (including VAT)!

I will reveal it to you shortly (for an upfront fee of 1.5% and ongoing fee of 1% of course :-P)

But first, some up front warnings and disclaimers:
  1. I am most certainly not a financial adviser, and so none of the below is financial or investment advice.
  2. Even though I did my best to condense everything I wanted to say while still giving the complete picture, this post is a little lengthy (over 3500 words – please don’t count!) Best read this with a cup of coffee! If you are out of coffee (my thoughts and prayers are with you!) or just want to skip to the winner, you can find the results summarised in tabular format near the middle of the this post (under the heading "To Summarise")
Right, here we go. Fasten your seat-belts.

Let’s kick off with just a little bit of theory…

What Is A Preservation Fund?


Many employers in South Africa automatically contribute to a retirement fund on behalf of each of their employees. This is a good thing, because my sense is that, without this, many people would not contribute to their retirement at all!

So that’s all well and good while the person is working for the company. But as time moves on, so do employees – hopefully to bigger and better things. So now they may no longer be eligible for the company’s pension fund, and so them and their funds needs to be released from the company's pension plan.

This leaves the employee with two options:
  1. Take the funds as cash and incur a possible Tax hit (or best case use up some of their pension lumpsum tax exempt allocation). Yuck! This is a really bad option (check this article and this article)
  2. Make like jam and preserve. They can move the funds into what is called a preservation fund, where there will be no Tax payable, and your funds will stay invested and growing for their intended purpose – your retirement. Jam is yummy!
Think of a preservation fund as a container for pension funds which do not have a home. So you can move your money in there and you will enjoy the same tax free growth that a normal pension fund gives. But since this is just a container for existing funds, you are not allowed to make additional contributions. You can also take the money out at any time – but the same Tax rules that Pension and Provident funds are subject to will apply.

In a nutshell, a preservation fund is pretty much a pension/provident fund with no additional contributions allowed. They are really useful because cashing out your pension when moving jobs is bad, making jam is good!

And just in case the above wasn't clear enough:

If you are leaving your job, and you have a pension/provident fund, don’t be a dumbass and take the cash, move the money into a Preservation Fund.

(If you want an explanation that is more nut and less shell, check out this 10X write up which explains Preservation Funds in much more detail.)

So now that we know what a preservation fund is, it's time to sift through the many options and try to find the best one!

The Best Preservation Fund In South Africa


As I did with my article on the the best RA in South Africa, I define the best Preservation Fund as the one which will give you the most amount of money in the end. That’s the point right?

There are two factors which will affect your final investment amount (ignoring time and initial amount, since these will be identical across preservation funds). These are:
  • Fees
  • Investment Performance
Research confirms that the only thing mildly correlated to future performance is fees (past performance is actually a really bad indicator of future performance). And so you will see that the only factor you should be considering is – fees. I.e. in my view, the best Preservation fund is the one with the lowest fees.

To summarise - for the average investor, the best Preservation Fund is the one with the lowest total fees.

Time to look at some of the fees related to a Preservation Fund...

A Preservation Fund is like a bucket (very similar to an RA– read the start of this article for a more in depth explanation of the bucket analogy). In this bucket you need to put investment products. And again, like an RA, there can be a fee for the bucket, and there will be a fee for the products you put inside the bucket.

To minimise the overall fee, you need to minimise the cost of the bucket, and the cost of the investment blocks inside the bucket. So we are trying to find something with a 0 bucket fee, and cheap investment blocks (pronounced passive :))

So where to start?

Generally speaking, most of the financial product provider’s which offer RA’s usually also offer all of the other related retirement products like Preservation Funds, Living Annuities, Guaranteed Annuities etc. And the fee structure for each of the products are usually pretty similar.

So I figured a great place to start looking for the best Preservation Fund, would be with the best RA providers in South Africa.

So let’s zoom in a little on the top 3 from that article:
  • Easy Equities – they are still fairly new in terms of pension products, and for now they only have an RA. I have heard rumours they will be launching a Preservation Fund, but no indication on when that will be, and how much it will cost. So unfortunately, for this article, they out.
  • 10X – They have a Preservation Fund. And it’s relatively cheap and passive. So their name goes into the hat.
  • Sygnia – They're really cheap, and they have passive products. They definitely go into the hat.
And then I must mention, that the top 3 from the article, and there have been some developments since then. I have also received some great feedback from the blogs readers identifying some providers I had not previously considered. One of these is Alan Gray, and it turns out that they are a really decent option!

So that gives me the three contenders to battle it out for the top spot - 10X, Alan Gray and Sygnia.

Boxing gloves on. Let the games begin!

In Third Place - 10X

10X are very strong advocates of keeping investment fees low. Their website is filled with charts and tables and I have seen many of their articles in the media showing how low fees will leave you Millions of Rands better off. I’m In full agreement.

But I also find them a little bemusing – surely you should only be allowed to bang the low free drum as hard as 10X does if you are the cheapest provider in South Africa?

With all the 16th’s on the hi-hat, crashing cymbals and double bassing, you might be surprised to find that 10X are actually only the third cheapest in South Africa, and more than twice as expensive as the cheapest option.

The all in fees for the 10X Preservation Fund are 1.035% per annum (but could be slightly less if you have a lot of moola).

A feature of the 10X product that some people may appreciate, is that there is 0 DIY – you buy the Preservation Fund and they invest it in their passive portfolio, and that’s that. Personally I want a little DIY – because when you are young or have a very long time-frame, there is a lot to be said about maximising your allocation to equity all the way to 100%. With 10X you can’t do that, and you are going to get around 23% in Bonds and Cash whether you like it or not.

More details on their fund here - https://www.10x.co.za/preservation-fund

Okay, moving swiftly along then…

In Second Place - Allan Gray With Nedbank Core Accelerated Funds

One of the blog’s readers alerted me to this interesting combo. And I must say I was both surprised and impressed that two of the traditionally expensive providers (Allan Gray and Nedbank) could offer a really cheap product. Way to break the mould!

If you open an Alan Gray Preservation Fund, and put the passive Nedgroup Investments Core Accelerated Fund into it, you will pay a total of 0.87% (including VAT) per annum. Nice price!

A small downside is that with this option, you are again at the mercy of the fund in terms of not being able to maximise your equity allocation, and you will be stuck with around 10% in cash and bonds (as per the latest fact sheet).

Also note that the Core Accelerated Fund is the High Equity option from the Nedgroup range (and the one I would want). If you wanted lower equity exposure you should probably consider one of the funds like the Nedgroup Investments Core Guarded Fund (which will cost you a little more - 0.96% p.a. but has a lower equity allocation).

As you can see, with the Allan Gray option you will need to decide which fund(s) you want to put into the Preservation Fund. In my view, if you have a longer time frame, the Nedgroup Core Accelerated Fund is cheap, passive and perfectly fine. But you need to make your own decision, and so this option has a teeny tiny bit of DIY upfront. You will also need to decide for yourself if you want to switch your money to a lower risk option as you get closer to when you plan on taking the money out – so there will be a little bit of DIY towards the end as well.

The full details on the funds available on the Alan Gray platform and how much you will pay for each can be found here - Allan Gray Fund List.
If you do go the Allan Gray route, just be careful what you put in, there are some really cheap options, but there are also funds which will end up costing you 2.6% per annum! Madness!

I just recently found out that it may be possible to go directly through Nedgroup and reduce the fees even further. I haven't had the chance to investigate this option fully, but it looks like you may be able to get it for an all in cost of 0.57% per annum. More info here.
*Update (2018/12/11) - at this point Nedgroup do not offer Preservation funds direct to the public (only RAs and TFSAs). More info in this tweet

Okay, so second and third place are out the way, onto the moment we have all been waiting for!

In 1st Place - Sygnia With Sygnia ETFs

I was super impressed when I found it was possible to get a Preservation Fund for an all in total cost of less than half a percent! Yes you read that right, an all in total cost of less than 0.5%. (By the way you can get a Sygnia RA for this price as well).

In my previous RA analysis, I found the cheapest RA to be Sygnia with the Sygnia Skeleton 70 fund inside. This came in at 0.65%. But there were a couple of things I didn’t like about this:
  1. The fund was sort of pseudo passive (or actively passive) in the sense that they implement their asset allocation passively, but actively decide on the asset allocation. So they would assign more to local equities if they thought SA was going to do well, or add more to Listed Property if they thought it was under-valued. I learnt long ago that this is a pretty futile exercise, and predicting the future is probably more about luck and not so much skill. Sure they may get the allocation right, but they could well get it wrong, or very wrong, in which case you will under-perform.
  2. The Sygnia Skeleton 70 has around 13% in Cash and Bonds – I am trying to avoid these asset classes in order to try maximise long term returns.
  3. I see that the fund now has around 10% allocated to SA Alternative Investments. I read this as “hedge funds” and swiftly run for the hills. No thanks!
I have also just noticed that Sygnia no longer disclose their TER on their Skeleton 70 MDD – which seems little suspicious… Maybe hiding something….

Anyways, luckily I found a way to bypass the limitations on the Skeleton 70 fund, choose my own asset allocations, and get the cost down even further!

The way you do this is to chuck in some Sygnia ETF’s into the Sygnia Preservation Fund bucket. This allows you to pay 0 bucket fee, and you only pay the (very low) cost of the ETF’s inside the bucket.

I put in a mix of Top40, Global Property and S&P500 index trackers, and my total annual all in cost will be around 0.43% p.a. (and I confirmed with Sygnia that VAT is included).

I must just mention that if you go this route, there is more DIY involved than the previous two options. You will need to decide what asset allocation you are comfortable with (and re-balance from time to time) and which ETF’s will be best to implement that asset allocation. Also if you want some bonds and cash in your Preservation Fund, you may find that the total fees will start creeping higher (since Sygnia currently do not have any Bond ETF’s and you will need to get this through one of their more pricey Unit Trust options).

What you will also find, is that by using ETF’s you will have to select a number of different ETF’s to make sure you are Regulation 28 compliant (unlike the previous two options where you can buy one fund and your compliance is sorted). Luckily Sygnia provide a spreadsheet which will help you with your Regulation 28 compliance, and you can play around with various options and weightings to see if your selection is compliant. the spreadsheet also shows you the the overall fees you will pay for a given combo

What I really like about this option is the fact that I can work the Regulation 28 system a little by getting 100% high growth exposure. Regulation 28 says no more than 75% in equities and no more than 25% in listed property – I imagine the thinking to be that within that framework some Bonds and Cash would be included. But by doing the full 75% equities, and full 25% listed property I was able to avoid Bonds and Cash entirely. You can read more about my ETF’s selections to implement this a little lower down.

I must also mention that the cost for the first year will be higher (in my case 0.54%). This is because when you buy the ETF’s to put into your Preservation Bucket, you pay brokerage. Luckily this is a one off cost, and the long term savings make it easily digestable.

Keep in mind with the Sygnia option, if you want to de-risk your Preservation Fund as you get closer to retirement, you will need to do so manually. This will involve some selling and buying of ETF’s which will incur some brokerage, and that will bump the cost up (but only a little). (Maybe we should round the fee up to about 0.5% per annum to account for the additional cost of de-risking? Either way it is still dirt cheap!)

Having said all that – for less than 0.5% all in, the DIY part could be well worth it in terms of the amount of money you could save in fees!

To Summarise

If you want to be totally hands off, and don’t mind paying away some of your investment in fees, goe the 10X route. They will manage your asset allocation and automatically de-risk you as you approach retirement.

If you don’t mind a teeny tiny smidge of DIY in exchange for a decent saving on fees, then go the Allan Gray/Nedgroup route.

If you don’t mind getting your hands a little dirty, and saving some decent money in the process, then Sygnia is your friend. They are by far the cheapest and allow you an immense amount of control over your investments.

A summary is below:

Rank
Preservation Fund
DIY Required
Fees (p.a.)
1
Sygnia
Some
0.43%
2
Allan Gray/Nedgroup
Minimal
0.87%
3
10X
None
1.04%

I went the Sygnia route...

I Moved My Preservation Fund

Once I had settled on Sygnia, the process of moving my preservation fund over took quite a lot of time, but only a little bit of effort.
  1. I requested Sygnia’s Effective Annual Cost Spreadsheet (I just sent them a query via their website’s contact form to get it). This spreadsheet allows you to play around with your allocation across the various funds available on their platform. It then tells you if your asset allocation is within the Regulation 28 requirements, and it also gives you a breakdown of the total cost per annum. More on the funds I selected a little later…
  2. I then completed the Sygnia Preservation Fund Application Form and sent it to them.
  3. They replied and said they required a signed a Letter of Intent. So I sent a letter to my previous provider informing them that I was going to be moving to Sygnia, and then forwarded the letter to Sygnia as well.
  4. About a month after submitting the initial application, I got an SMS from my previous provider stating that they were processing an external transfer instruction.
  5. After another 3 weeks, I got an email from Sygnia that the funds had been received, and they would send me my login details for access to their online platform.
So in total, the transfer took about 2 months, and involved a lot of waiting around.

What I Put Into My Preservation Fund

The Sygnia “Preservation Fund Bucket” is only free if you put Sygnia products into it. So initially I looked at just dropping in the Sygnia Skeleton 70 fund, for a cost of 0.65%. Even though that was pretty cheap I was a little reluctant because of the reasons I mentioned previously (its not truly passive, it has some cash and bonds, it has some hedge funds in it).

But then I saw that Sygnia had now included all their ETF’s in their list of Sygnia products which qualify for the 0 platform fee. Nice!

Sygnia has a decent range of ETF products, but unfortunately they don’t have everything. So my decision of where to put my money in was a combo of making the best out of the available ETF’s, while keeping costs as low as possible, all while staying within the requirements of Regulation 28.

A quick recap of Regulation 28 :
  • No more than 75% in equities
  • No more than 25% in property
  • No more than 30% offshore
  • Some other stuff, but the main ones are above
Okay, so ideally I would want an Equal Weighted Top 40 for local equity exposure, but Sygnia does not have one. They do however have a dirt cheap Top 40 fund (0.15% TER).

For local property, Sygnia do not offer anything.

I like a broad-based Worldwide index tracker for international equity exposure. Sygnia have one, but at 0.68% TER it was a little on the expensive side. Next best in my opinion (based on cost and diversification) is their S&P500 tracker at a TER of 0.2%

In terms of Global Property, Sygnia has the cheapest option out there, I would pick their Global Property ETF (at a TER of 0.25%) over anything else from any other provider anyways.

So keeping my allocations in Regulation 28 meant I went with:
  • Sygnia Itrix Top 40 ETF – 70%
  • Sygnia Itrix S&P 500 ETF – 5%
  • Sygnia Itrix Global Property ETF – 25%
Now something very important that I must stress, is that the decision of which funds to go with was also influenced by the fact that this is not my only investment. A Top 40 ETF is made up of around 23% Naspers, and I would certainly not sleep very well at night if 16.1% (70% of 23%) of my entire retirement was invested in one share. As it stands, my preservation fund makes up around 25% of my investment portfolio (and set to decrease going forward as I am not allowed to add to it while I will continue to add to my current pension fund, TFSA etc.). This means the Naspers exposure from my Preservation Fund is a far more palatable 4% (and will get lower over time).

The Sygnia online platform is quite nifty, with some cool graphs and tables. There is even a button which will show you the fees you are paying.

I clicked it, and here is the total cost (the cool kids call it the EAC) I am paying per year for my (and Sygnia confirmed that this amount includes VAT). 0.43% all in!


Two things you may have noticed:
  1. The EAC varies with time. ETF’s are bought on the market (like regular shares) and therefore you pay brokerage when you buy them. That is why the first year’s cost is so much higher, because the entire brokerage is reflected in the cost for that year. As this brokerage cost is distributed over more and more years it has less of an effect, and so the cost decreases for each subsequent year. I don’t mind this up front hit because TER trumps brokerage over the long term.
  2. Years 22?? WTF, are they just pulling out random numbers? That was my thought too! But then I realised in 22 years I would be 55 years old, which happens to coincide with what the industry, Government and regular peeps consider normal retirement age. I guess they show that so you can get an idea of the annual fee you would have effectively paid for the entire duration of your retirement savings years.
0.43% - I don’t think you will find cheaper than that ANYWHERE in South Africa. (But if you do, please let me know!)

And as an added bonus, this is purely passive, and full on equity/listed property – my kind of fund!

I am hoping this article ages quickly, and becomes irrelevant in a few years as more and more cheaper and better options come into existence. If you happen to stumble across any - please let me know!





Till next time, Stay Stealthy!
 - ~ - ~

1 Sho, that song takes me back to varsity days!