Rui asks: I have about R2 500/month free to invest. I’ve been turned off RA’s. I’m looking at the Satrix Rafi investment.
Maya replies: Personally, I invest in Satrix Rafi, so I should say that upfront. However I also have an RA as I am self-employed and that forms the basis of my retirement funding. I do believe there’s a place for both retirement products and investment products as they serve different needs. However cost and performance need to be considered.
A case for an RA
I personally avoided RA’s for many years due to cost structures and the inflexibility. However when I met with a financial advisor to look at my retirement options I realised that I was literally giving money away to the taxman by not taking advantage of the tax saving. The projections of a lump sum on retirement actually doubled as a result of the tax benefit. Firstly, I could use pre-tax earnings which meant I could invest an additional R1 000 a month and still have the same disposable income, but also because there is no capital gains tax.
Then I looked (very carefully!) at the costs of a unit trust RA. These are new products which are offered by fund managers and because they are not invested in a policy like a traditional RA, there are no penalties if you stop contributing. Also, the costs are acceptable.
If you are not contributing to a pension or provident fund through your company you should consider looking at cost effective RA.
The case for Satrix
I am a fan of exchange traded funds and in particular, ETF’s that track the Rafi index. This is a value-based index which weights shares according to their relative valuations. In other words it follows a more value-based investment approach by selecting those shares that are relatively undervalued. Back testing shows that this index outperforms the JSE all-share index by several percentage points. Since its inception it has outperformed the JSE index as well as the average return from general equity unit trusts. It is a relatively inexpensive way to invest and outperform the market.
The annual total expense ratio for Satrix Rafi is 0,52%, which is lower than a unit-trust fund. However there is a catch. You can invest through your stock broker and brokerage and annual custodian fees will apply.
Alternatively you can invest through the Satrix investment plan. This plan charges 0,8% per annum management fee on balances of less than R100 000. So your total annual fee would be about 1,32%, which starts bringing it closer to the annual fees charged by unit-trust companies, although still a bit lower. There is also a debit order fee of R3,50 charged to cover bank costs.
The other thing to keep in mind is that an exchange traded fund that tracks equities is fully exposed to the stock market at all times and there is no active fund manager lowering the exposure to shares during more volatile markets. An RA is limited to having 75% in shares at most.
An actively managed asset allocation unit trust fund can move between different asset classes or have exposure to non-equity asset classes like property (which has been a great performer). You need to decide if you are comfortable with taking full market risk on your investment.
For more information on Rafi index see www.eftsa.co.za or www.satrix.co.za
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