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Investors barred from savings party

Hedge fund managers have decried a proposal by the treasury to exclude its new tax exemption savings programme from schemes that charge performance fees.

The treasury’s proposed savings incentive allows South Africans to save up to R30 000 a year tax-free. A total amount of R500 000 a person can be invested in this manner and it will be free of capital gains tax, and no income or dividends tax will be paid on the interest derived from the savings.

Members of the public have until December 3 to submit their opinions on this new section of the Tax Laws Amendment Bill 2014.

But, as the Bill now stands, only some products will qualify as tax-free savings accounts. Those that charge performance fees are excluded – in other words, hedge funds and unit trusts with fee structures that vary based on achieved performance.

“I think it’s an exceedingly bad idea. It’s very silly,” said Jean Pierre Verster, an analyst at 36ONE Asset Management, which oversees the largest single hedge fund in the country. “I don’t know why, all of a sudden, performance fees are seen as bad.”

The proposal for tax-free savings is part of the treasury’s plans for a sweeping overhaul to the retirement sector, in a country with a low savings rate and an over abundance (several thousand) of savings products.

Management charges
The reforms aim to address the treasury’s concerns that a large part of South Africans’ savings are being swallowed by management charges. In its discussion papers, the treasury says that if fees were reduced from 3.5% a year to 0.5% then a person would derive the same financial benefit by only contributing about half the amount to their retirement.

The treasury has reportedly criticised performance management fees, saying they tend to fluctuate and can be expensive, sometimes to the surprise of the uninformed investor. But Verster said the fee structure was generally a simple one. “How difficult is it to understand that, in a 10% performance fee, if I make you R1, I keep 10 cents and you keep 90 cents? It’s not complicated.”

As for the funds being overpriced, he said that performance fees needed to follow the same principles as any other. “It needs to be appropriately structured in terms of a benchmark, and the fee must not be excessive,” he said. “But we see performance-based fees as preferable to paying a fixed fee regardless of how the fund performs. It’s about the total cost of saving, not the fee component alone.”

Pieter Koekemoer, the head of personal investments at Coronation Fund Managers, said that he hoped the treasury would shift its position.

“We remain hopeful that, following further consultation, we will be able to reach an accommodation with treasury where unit trust funds charging fairly structured performance fees will eventually be allowed in the tax-free savings account framework,” he said.

“A number of South Africa’s most popular unit trusts charge capped performance fees when funds do better than the market and discount fees when performance is worse than the market. These variable fee structures have been around for years and have found broad acceptance in the market.”

But Paul Theron, the managing director of the wealth management company Vestact, said the decision to exclude performance fee-related funds was “excellent”.

“I think it’s a fabulous move that they’re going to be excluded because, to be perfectly honest, that industry is a rip-off,” he said.

But, Theron said, if the treasury’s proposals were implemented as is, it would probably not mean a loss of business for the hedge fund industry. Their clients generally comprised the super-wealthy. The treasury, with its R30 000 a year tax-free savings cap, was aiming at middle-income citizens.

“The bigger objective is not necessarily to shift or change the existing industry. I think they are trying to get people to save on a structural basis, defer spending and get out of debt,” Theron said.

In his opinion, the government needed to focus its efforts on making tax-free savings worthwhile.

“It’s very difficult for firms to provide cost-effective products for small amounts. And R30 000 is not a huge amount. So, unless they work hard at making them cost-effective, there might not be too much benefit for the saver.

“Anyone who puts their money into an retirement annuity [at the moment] is being eaten alive because of all the white-anting that takes place along the way,” he said. “Hopefully the same won’t take place here.”

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Thalia Holmes
Thalia Holmes

Thalia is a freelance business reporter for the Mail & Guardian. She grew up in Swaziland and lived in the US before returning to South Africa.

She got a cum laude degree in marketing and followed it with another in English literature and psychology before further confusing things by becoming a black economic empowerment (B-BBEE) consultant.

After spending five years hearing the surprised exclamation, "But you're white!", she decided to pursue her latent passion for journalism, and joined the M&G in 2012. 

The next year, she won the Brandhouse Journalist of the Year Award, the Brandhouse Best Online Award and was chosen as one of five finalists from Africa for the German Media Development Award. In 2014, she and a colleague won the Standard Bank Sivukile Multimedia Award. 

She now writes and edits for various publications, but her heart still belongs to the M&G.     

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