The Good, the Bad, and the Risky

We have all experienced them: the self-proclaimed “trading experts” on social media promising to turn your R1000 into R100 000 in a week. They have a 100% success rate and happy customers named Sibusiso, who is apparently in the Bahamas.

They’re likely pushing leveraged products such as CFDs and Options, which carry risks that are often left unexplained or downplayed. The reality is that leveraged products are legitimate financial instruments – but they require proper understanding, regulation, and risk management.

At Moneybetter, we’re not promising overnight success. We’re here to give serious South African traders and investors access to local and global markets, supported by regulated products and professional-grade tools.

 

More than just CFDs

Locally, Moneybetter provides CFDs on JSE-listed stocks, while our offshore offering includes CFDs, futures, options, and spot FX. Beyond these products, we offer a broad suite of instruments including equities, commodities, indices, bonds, mutual funds, and ETFs. These are not quick-win tools. They’re instruments that demand discipline, strategy, and an understanding of the risks involved – because leverage can magnify losses as much as gains.

 

Why offshore matters for South African traders

Trading offshore isn’t just about chasing returns, it’s about managing risk and accessing sectors, currencies, and economies that the local market doesn’t offer. Whether you’re hedging against Rand weakness, trading major FX pairs, or using futures and options to manage exposure, going offshore opens up new ways to diversify your portfolio.

 

More tools to manage risk and stay informed

At Moneybetter, we know trading involves more than placing an order. That’s why our platform gives you more choice, more guidance, and more control:

• You get a detailed view of individual instruments, customise columns, or export data to Excel to analyse your portfolio your way.
• Manage your money confidently: deposits, transfers, and withdrawals are protected by third-party verification to ensure funds only move to accounts in your name.
• Use professional tools like charting, trade signals, watchlists, and different order types (like take-profit and stop-loss) to help manage risk proactively rather than reactively.
• The Content Hub keeps you updated with market news, data, and educational resources, helping you make informed choices instead of following social media hype.
• Our Financial Risk Report goes further than a standard risk score: it highlights behavioural biases that can affect your decisions, helping you trade with a clearer view of how you might react when markets rise or fall.

All of this is built around the idea that real investing combines knowledge, discipline, and the right tools, not promises of overnight wealth.

Conclusion

Derivatives such as CFDs, futures, options, and FX can be powerful in the right hands –but they also carry significant risk. They’re not suitable for everyone, and it’s essential to understand how they work before trading.

If you’re looking for hype, you won’t find it here. But if you’re ready to approach trading seriously, backed by real products and global access, we’re ready to help.

Disclaimer: Trading leveraged products carries significant risk and may not be suitable for all investors. Ensure you fully understand the risks involved and seek independent advice. This content is for informational purposes only and does not constitute financial advice.

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Picture this: You’re in a restaurant, scanning the menu, and the waiter asks if you’d like to split your meal into two courses. One is for now—your immediate hunger fix—and the other is for later when you’re ready to savour the flavours. That’s essentially what South Africa’s new two-pot retirement system is offering, but instead of food, it’s all about your hard-earned money.

On July 21, 2024, President Cyril Ramaphosa put pen to paper and officially signed the Pension Fund Amendment Bill into law. And just like that, the two-pot retirement system was born. This new system is designed to help you balance the here and now with your future, offering financial flexibility while keeping your retirement intact. Sounds great, right? But, as with any good deal, there might be a catch, especially when you factor in our good friend, the taxman.

What is the Two-Pot Retirement System?

So, what exactly is the two-pot system? Let’s break it down into digestible pieces.

1. The Vested Pot: Your Pre-two-pot Savings

This is where all your pre-September 2024 retirement savings will be kept. Think of it as your old-school savings account—same rules, same growth, nothing really changes here. But here’s the twist: a “seeded amount” of 10% (capped at R30,000) will be taken out of this pot and poured into the new Savings Pot, to get things started. After that, the Vested Pot will keep growing, but you can’t add any more contributions to it.

2. The Savings Pot: Your Financial lifeline

Starting from 1 September 2024, you can dip into this pot if you need a little extra cash. Between then and 1 March 2025, you can withdraw a minimum of R2,000 and up to 10% of your retirement savings, capped at R30,000. If you have less than R2000 after your withdrawal, you can still withdraw the remaining amount in the same tax year.  After 1 March 2025, one-third of all future contributions will go into this pot, ready for you to access once a year in case of financial emergencies. But remember, this pot isn’t for that new gadget you’ve been eyeing; it’s meant to be your financial lifesaver, and any withdrawals will be taxed at your marginal income tax rate—the rate applied to your highest portion of income. So, the more you earn, the more tax you’ll pay on these withdrawals. It’s important to consider this, as taxes could significantly reduce the amount you get when you need it most.

3. The Retirement Pot: Locked away until retirement.

The remaining two-thirds of your contributions will be locked away in this pot, safely out of reach until retirement. Think of it as your money tree—you nurture it now so it can provide you with a steady income stream when you retire. The only way to get your hands on this pot before retirement is if you leave South Africa for good or if your total savings fall below R165 000, you can then withdraw that amount at retirement instead of having to purchase an annuity.

4. Provident Fund Members aged 55+: you have a choice.

If you were 55 or older by March 1, 2021, and you’re still with your provident fund by September 1, 2024, you have options. You can either keep your savings in the Vested Pot, sticking to the old ways or jump on the two-pot bandwagon. If you go with the latter, your funds will be split between the Savings Pot and the Retirement Pot, giving you the flexibility to withdraw a bit before retirement if needed. Bear in mind that this choice is irrevocable, once you choose it you are locked in till retirement.

What You Should Know Before Making Withdrawals

There’s been quite a buzz about this two-pot system, especially on social media. Some folks are already planning to use their Savings Pot to pay off debts—a smart move in line with the government’s recommendations. But before you start dreaming about what to do with that money, let’s talk taxes. Here’s a simple calculation for a 34-year-old male with R334,844 in his retirement account, earning a gross income of R28,000, who wants to withdraw R18,000 from his Savings Pot.

From September 1, 2024, 10% (capped at R30,000) of his retirement account will be used to jump-start his Savings Pot.

This will leave him with R304,844 which will be kept in the Vested Pot until his retirement. This money will remain untouched and continue to grow.

Withdrawal Amount: R18,000

Marginal Tax Rate: 26%

Your financial institution will also charge an administration fee for the withdrawal. The predicted amount is R100 – R600. For this calculation, let’s go with R350

To find out how much tax will be deducted:

Tax Payable=Withdrawal Amount×Marginal Tax Rate

Tax Payable=R18,000×0.26=R4,680

After the tax is deducted, here’s what he’ll receive:

Net Withdrawal=Withdrawal Amount−Tax Payable

 R18,000−R4,680=R13,320

Total Withdrawal Amount=R13,320-Admin fee

Total Withdrawal Amount= R13,320-350

R12,970 is the amount he will receive from a R18,000 withdrawal.

This withdrawal will leave him R12,000 in his Savings Pot. So how can he make up for that withdrawal? Let’s assume his employer contributes 10% of his gross income (R28,000) to his retirement savings each month:

Monthly Retirement Contribution=Gross Income x Employer Contribution

R28,000×0.10=R2,800

Out of this, one-third goes into the Savings Pot:

Monthly Savings Pot Contribution= Savings Pot Contribution Value x Employer Contribution

1/3×𝑅2,800=𝑅933.33

Now, to replenish the R18,000 withdrawn:

Months Required = Monthly Savings Pot contribution/withdrawal Amount

​𝑅18,000/933.33=19.28months

He will need to work for an extra 19 to 20 months after his retirement age to fully replenish the R18,000 withdrawn from his Savings Pot, assuming consistent monthly contributions of R933.33 into the Savings Pot.

Understanding how this withdrawal could impact your overall finances is crucial, so crunch the numbers or get some expert advice before making any decisions. It is also important to check if the institution withholding your retirement has approval to implement the two-pot system and if you owe money to SARS because that will be deducted from your withdrawal amount.

Conclusion

The two-pot system is shaking up how South Africans save for retirement. It’s a delicate balance between giving you some short-term financial wiggle room and ensuring you’re set for the long haul. Keep an eye on how things develop as this system rolls out, and don’t hesitate to get professional advice. After all, your future self will thank you for it.

The post Understanding South Africa’s Two-Pot Retirement System: Financial Feast or Famine? first appeared on Moneybetter.

Empowering individuals to take control of their money is a hallmark of modern technology. Nowadays, you can make life-changing investment decisions at the click of a button. But with all that control comes added responsibility, which can feel a little overwhelming, can’t it? This is where Moneybetter comes in.

Moneybetter is a platform that changes how you view “DIY” investing. With its innovative approach to guided investing and a user-friendly interface, Moneybetter lets you make the most of your financial strategies and explore new ways to grow your money. And the best part? You don’t have to switch between financial institutions to invest in different products from different providers or scour various content sites for the education you need to make better-informed decisions. Here, everything you need is conveniently consolidated in one place. Want to see what Moneybetter looks like? Watch the walkthrough video

What does “more-in-one” mean for you?

So, you’ve decided to start taking control of your money by embarking on a self-directed investment journey. Or maybe you’ve made it past the “Investing for Dummies” stage and are now executing more complex strategies. Either way, you don’t want to feel alone on this journey. Here’s how Moneybetter’s approach to guided investing can give you the support you need:

1. More user-friendliness 

Moneybetter stands out in the crowded online broker space with a platform built on guided architecture to support you on your investment journey. The goal is to make you feel less alone and more confident in your decisions. The platform boasts an intuitive design and user-friendly interface, making it easy to navigate your investments and review your performance with consolidated data and reports. With Moneybetter, you’ll spend less time trying to understand the tech behind the platform and more time investing.

2. More ways to grow your money

The platform gives you direct access to the award-winning TraderGo execution engine, which lets you browse over 50,000 instruments, across 9 asset classes, and 40 global exchanges, with arguably the best offshore offering in South Africa. Additionally, you gain access to essential information like news feeds, market data, and economic reports, with professional-grade features such as charting tools, trade signals, watchlists, and various order types. Whether you’re executing complex multi-leg strategies or single trades, TraderGo ensures smooth execution every time.

For those more inclined towards managed investments, Moneybetter offers access to products like Tax-Free Savings Accounts, Retirement Annuities, Exchange-Traded Fund portfolios, and Structured Notes.

3. More education to guide your decisions

Don’t worry if the idea of DIY investing seems overwhelming because Moneybetter is here to give you the education you need to make better choices for your money, now and in the future. Whether you’re a beginner trying to grasp the fundamentals or a seasoned investor in search of advanced strategies, the Moneybetter content hub provides access to a variety of resources, including articles, tutorials, and expert opinions.

4. More control over your money

Investing doesn’t have to be complicated. With Moneybetter, you can easily withdraw, transfer, and deposit funds into your investment account. With the added benefit of third-party verification, you can feel at ease knowing that your transactions are processed smoothly without any unnecessary delays or security concerns.

5. More insight into your investments

For those who require a review of their investment data, Moneybetter provides access to detailed reports and statements such as month-end reports, end-of-day files, tax certificates, and capitalgains. You can generate these reports whenever you need. And because these reports are consolidated, you’ll have a single view of your money’s performance throughout your investment journey.

6. More human support when you need it 

Moneybetter is more than just a platform, it’s a community of like-minded investors and industry experts committed to mutual success. For those of you who prefer human interaction over chatbots,
rest assured that real people are behind the Moneybetter screen. Feel free to reach out to the Moneybetter team if you have any questions and feel confident knowing that they are dedicated to ensuring a seamless experience for you.

Moneybetter is not just another DIY investment platform. If anything, it’s a “Do-It-Together” platform. With its intuitive interface, access to a myriad of investment options, and comprehensive educational resources, Moneybetter empowers investors of all skill levels to take control of their financial futures. With the added reassurance of robust security measures, safety of assets, and invaluable human support, you can start to invest with real confidence.

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The Good: Fortitude

At High Street our investment process is consistently applied while our investment style is determined by the respective fund in consideration. One of the oldest debates is between “value” and “growth” which we believe can only be applied loosely at best given the vast array of style classifications. That said, what is evident is the differentiation in annual performance between the two styles.

Source: Bloomberg & High Street Asset Management

Our local balanced fund is designed for retirement savers seeking to maximise offshore exposure and minimise local risk, within the limits as set forth in the Pension Funds Act. In recent years, it has had a bias towards “growth” stocks as this is where our process suggests the greatest upside exists. This allocation buoyed returns in 2020 which led to our local balanced fund being one of the top performing funds in category over a three-year period ending December 2021. Joy quickly turned to despair as the Fund underperformed the peer average by -23.4% in 2022 following “growth” underperforming “value” by the second biggest margin on record going back to 1979, primarily due to the current unprecedented interest rate hiking cycle which we have previously commentated on. For the year-to-date, the weakening of the Rand, coupled with a re-emergence of “growth” stocks, has seen the Fund’s mandate shine through by outperforming its peers by over 30% to regain a position in the top performing quartile since inception for similar funds.

Source: Bloomberg & High Street Asset Management

Short-term performance will no doubt swing with the vagaries of the market, however, the Fund will always adhere to its mandate of protecting the global value
of your retirement savings. Our thanks goes out to our investors who stomached the short-term volatility seen in 2022, it definitely escalated the balding process for our Chief Investment Officer.

The Bad: SA Inc

In February 2018, Cyril Ramaphosa took office with the promise of a “new dawn” for South Africa. Many took solace in the belief that this could mark the beginning of the rejuvenation of our country, our economy and the businesses that operate in within our borders. Unfortunately, more than 5 years later this has not been the case. The same problems still prevail.

This is exemplified by the performance of the South Africa’s domestic shares, or ‘SA Inc’, being companies who earn the bulk of their revenues locally. These companies are at the mercy of SA’s economic inefficacies and the risk premia investors place on our country. The table below shows the total return of the 4 biggest SA Inc companies, per each of the sectors they operate in.

Source: Bloomberg & High Street Asset Management, Data from: 01/01/2018 – 26/05/2023

These are household names whose products and services are ingrained in our daily lives. Yet their returns have been dismal. On average these names returned -11% in Rands and -44% in USD. Not one has managed to post a positive return in dollars. This level of wealth destruction is severe for those invested in these, especially over such a prolonged period. It also doesn’t help that the average price of goods and services in SA has increased by almost 30% in that time.

Yes, the JSE Allshare did manage to return 8.7% per annum in Rands over the period (although still negative in USD), but this return has largely been driven by the performance of the Rand-hedge names (Richemont, Bidcorp, miners etc). In general SA Inc has had torrid time as the weak state of our economy has weighed heavily on them.

While we would welcome a rebound in the SA economy, we will not bet on it. The fact that in 2001 there were 601 companies listed on the JSE, but now are just 348 highlights the difficulty of operating successfully in South Africa. At High Street we focus on growing your wealth as a global citizen. Our local balanced fund aims to achieve this through its differentiated ability to minimise South Africa specific risk via 95%+ Rand-hedge exposure.

& Powering the AI revolution

The emergence of generative AI has been one of the most forceful drivers of market returns so far this year. Hyperscale cloud vendors, cyber security merchants, and semiconductor manufacturers have all benefitted from the anticipated benefits of this revolutionary technology. However, beneath the excitement there remained the pressing question about whether this level of optimism was justified, or whether this was yet another bubble waiting to pop. That was until the release of Nvidia’s Q1 earnings…

Source: Statista

Nvidia, the world’s leading chip designer, rocketed up 24% and added $184bn to its market cap in what became the third largest single-day addition of value in US stock market history. Their impressive Q1 results came in well above expectations, however it was their outlook for the future that captivated market participants. Management indicated that they expected next quarter sales of around $11bn, more than 53% higher than what Wall Street analysts had been projecting.

This overwhelming evidence of physical demand helps put credence to the essential role Nvidia plays in powering the AI movement. Nvidia is currently the only company on the planet that can design the high-performance chips that can accelerate development and reduce training costs for AI “large language models”. Their H100 chip, for example, has five times as many transistors as Apple’s newest iPhones. Increased power comes at a higher cost, with specialised chips selling for as much as $40k each. Tesla CEO Elon Musk recently indicated that the minimum investment to set up generative AI capabilities sits at around $250mn of server hardware.

While competitors will no doubt invest heavily to avoid missing out on this huge potential revenue driver, Nvidia currently leads the rest by a wide margin. The opportunity ahead of Nvidia CEO Jensen Huang is enormous; their accelerated chips are becoming the clear preference for the data centre industry, and yet the majority of the $1 trillion market is currently unaccelerated. Industry insiders see Nvidia chips as being “among the most scarce engineering resources on the planet”, and demand for this crucial technology is unlikely to slow any time soon. High Street clients continue to benefit from exposure to this critical industry, both from direct exposure to Nvidia itself and also a number of other key players.

The post The good, The bad. Powering the AI revolution.  first appeared on Moneybetter.

With a multitude of options to choose from, which fund should you select and why? With or without a financial advisor, the fund selection process can be overwhelming with several factors to consider, such as past performance, fees, track record and fund size. One of the most impactful but overlooked factors relates to the geographies in which the investments generate their revenue. Regulation 28 compliant funds are permitted to allocate up to 45% to offshore investments, previously 35%, but is there a way to maximise this further? Many funds do not deviate significantly from their benchmark and ultimately underperform once fees have been deducted. High Street Asset Management differentiates itself by employing an extreme offshore bias by taking full advantage of the 45% offshore allocation and, then, selecting locally-listed stocks with significant foreign revenue streams.

Stock markets can be highly unpredictable and the price which investors pay for a share can deviate significantly from the company’s fair value. However, over longer periods, the picture becomes clearer, with share prices reflecting the company’s cash-generating ability. Most businesses and their ability to produce profits are highly susceptible to the economy in which they operate. From 1995-2023, South Africa (SA) produced a satisfactory annual economic growth rate of 2.4%, which equalled that of the United States (US) over the same period.

Consequently, the local equity market (JSE All Share Total Return Index) accounted for this growth and has risen by 12% per year, including dividends. This annual return is over 6% ahead of inflation and would be considered acceptable for most retirement savers. The chart below shows the total returns, both in Rands, of the local market against the major equity market in the US (S&P 500 Total Return Index) shortly after attaining democracy in 1994.

Source: Bloomberg (23/06/2023)

Until recently, the local market had outperformed the US equity market; a notable achievement given the US has been a difficult benchmark to beat. Buoyed by surging commodity prices, the SA market was amongst the top-performing markets in the world over a sustained period. However, over the past decade, local economic growth has slowed to just 1% per year and diverged from the sustained growth seen in the US.

Source: Bloomberg (23/06/2023)

Not surprisingly, the divergence in economic fortunes has been mirrored in the financial markets with the US outperforming the local market by a staggering 339%! Many of the issues that have caused this dislocation, from corruption to ongoing load shedding, have been well documented.

Source: Bloomberg (23/06/2023)

Two of the largest locally-listed companies, Naspers/Prosus and Richemont, derive almost all their income from offshore operations and their share prices have increased sharply over the last decade. They account for a significant portion of the local market and have been responsible for lifting the index’s performance. Despite the SA market significantly underperforming the US, if one were to remove these two behemoths from the index, the performance looks considerably worse. 

Recent poor performance can be attributed to locally-focused SA companies who are largely dependent on the local economy to support revenue growth. The extent of this extreme underperformance can be illustrated by the recent performance of the largest companies within sectors that are notoriously sensitive to the local economy. The figures below reflect the difficult operating environment that these companies have endured over the past five years as the economy has stalled. When converting the Rand returns into US Dollars, the value destruction in global terms becomes apparent.

Source: Bloomberg (23/06/2023)

Some market participants believe that the decline in share prices of locally-focused companies fail to reflect the company’s prospects and their share prices are set to rise following years of stagnation. Others are of the opinion that the current share prices accurately reflect the local environment and the economic outlook does not justify a recovery of any nature. Depending on a retirement saver’s stance on the matter, one should consider their fund’s offshore allocation and its vulnerability to the Rand exchange rate. 

Many funds cater for a local recovery but few cater for retirement savers who want to maximise offshore exposure. High Street applies its mandate consistently and will always aim to deliver a fund with a 90%+ offshore bias while remaining compliant with retirement regulation. For retirement savers who believe that offshore markets will continue to outperform the South African market over the long term, you might wish to consider the fund’s unique and enhanced offshore bias.

High Street Asset Management is an offshore and Rand-hedge investment specialist managing a retirement compliant fund that maximises offshore exposure and minimises local risks. It has a track record of strong performance during bouts of Rand weakness. For more information, see www.hsam.co.za. DM

The post Reg28 Funds. Efficient in sheltering savings from SA economy. first appeared on Moneybetter.

You’ve heard of extreme athletes, but have you ever heard of extreme savers? Okay, granted, they might not sound as sexy, but perhaps you’ll change your mind once you realise that the pastime involves early retirement and an escape from the 9-5 grind.

These extreme savers are part of the FIRE – Financial Independence, Retire Early –movement, which is focused on a grueling saving and investment strategy that aims to allow for a retirement age long before the traditional 65. The general rule would be for FIRE Investors to invest as much as 70% of their income while they are working so that they can achieve retirement as early as possible.

Flexibility

One of the key drivers of the movement is “flexibility” – a desire for freedom from traditional employment. Many FIRE Investors aim to continue working, but on their own terms, while others want to put aside enough money to allow for a life completely free of work.

But to put aside the majority of one’s income in order to save enough to allow for early retirement requires intense discipline, sacrifice and aggressive investment – hence the “extreme saver” tag. Those who follow this lifestyle generally live as frugally as possible in order to drastically reduce expenses, work to find a variety of income streams and invest their money as wisely as possible.

First off, FIRE investors need to know their “FIRE number” – the amount of money they need to accumulate in order to allow for early retirement.

The Rule of 25%

This is a method that is often used by FIRE investors (and anyone else) to get a high-level understanding what their retirement savings goal or FIRE number is. 

The rule says you need to save 25 times your annual expenses to retire (and maintain your current lifestyle).

For example, Fire Investor A earns R60 000 a month / R720 000 a year.

Fire Investor A is happy with this annual amount as it is enough to cover her lifestyle.

The annual figure of R720 000 multiplied by 25 is R18-million.

R18-million would be Fire Investor A’s “FIRE number” – the target amount that she needs to save in order to retire and draw down the same annual income as she receives now.

For most people it would take a lifetime of working, disciplined saving and clever investing to get to the 25 x annual expenses, but FIRE savers aim to get there much earlier by extreme sacrifice and saving and/or by reducing their annual income requirements so that they can reach the 25x goal as soon as possible. (Of course the latter option would mean that you’ll have to continue living the pared-down lifestyle.)

It must be noted that the Rule of 25% is a broad guide, and its accuracy depends on a variety of factors (eg how the savings are invested, or whether lifestyle needs change) and individual circumstance.

FIRE types

As the FIRE movement has matured, so has its permutations. The traditional method of FIRE investment is known as “Trad Fire”, with a variety of other categories of extreme savers within the movement:

Fat FIRE: Fat FIRE investors want to enjoy the good life forever, and to do so they know that they need to accumulate a very generous lump sum to invest so that when they retire and apply the 25% Rule, they will be able to live off a generous passive income.  Unless you’re the beneficiary of an unexpected “liquidity event”, most Fat FIRE investors will only achieve this by reaching Trad FIRE level early on, and then continually adding to their lump sum

Lean FIRE: This is the opposite of the Fat FIRE investor, requiring the utmost dedication to cutting costs so that their annual living expenses and thus the total amount required to accumulate in order to retire (based on the 25% Rule) is minimised. This is the most frugal and extreme FIRE investing philosophy and would require a lifetime of pared-down existence.

Barista FIRE: The Barista falls between Fat and Lean Fire. Those who follow this strategy don’t necessarily want to stop working altogether – but want to build enough of a nest egg early on so that they can ultimately choose to work part time or on projects that they love but don’t necessarily pay huge salaries.

Investing

A critical element for FIRE investors is how to invest the money that they are working so hard to put aside. Stashing cash in a general savings account is not going to be any help in getting to the fabled FIRE number – but if it’s invested wisely, the money can be put to work. Typical FIRE investment strategies would include using tax-advantaged accounts (like a tax-free savings account) or low-cost index funds. Putting aside money from as early as possible also allows for investors to reap the rewards of compound interest.

Universal principles

Although following a FIRE investment strategy may seem like an incredibly unrealistic lifestyle to maintain – if you earn a modest salary or if you have a family to support, for example – the movement encompasses general principles that are useful for anyone. These include:

1. The importance of retirement planning: whether you aim to retire at 50 or 70, it’s critical to understand how much you need to save for retirement so that you can continue to support the lifestyle you desire once you stop working. Without a plan, you’re relying on luck.
2. Living within your means: FIRE investors live well below their means so that they can put aside as much money as quickly as possible. For everyone else, a more realistic goal is to spend only as much as you earn, and to manage any debt wisely.  
3. Investing for growth: A savings account won’t cut it – in order to put your money to work you need to invest your money in products that suit your risk profile and life stage.

The post FIRE investors first appeared on Moneybetter.

In the face of global uncertainly – which has been in large supply of late – capital preservation is top of mind for many investors. Rising inflation, the consequent hiking of interest rates, recession fears, war worries, pandemic after-effects and crypto crises have made the investment landscape a precarious one, and the protection of investments a priority.

It’s against this background that structured notes can offer an interesting opportunity for investors.

But what are structured notes?

Structured notes are “pre-packaged” investment products that have a fixed term. They can vary in their structure and have different rules and functions, but generally consist of a combination of different financial products. That’s why structured notes are also known as a “hybrid security”.

Often a structured note will be made up of a capital amount that is protected (a bond), as well as a portion that is linked to the return of an underlying asset (the variable element of the investment). The latter isn’t a direct investment, but rather tracks the value of another product – in other words, a derivative.

This derivative can be  linked to a variety of investment assets: a single share or an equity index, commodities or even currencies. The returns of the structured product are linked to these assets which can be structured to provide a variety of different payoff profiles  depending on how the structured note is constructed.

Most Structured notes are designed to protect the investors initial investment via the bond element. The bond element is predictable (thus giving the investor the security that the initial investment amount will be secure), while the underlying return of the  derivative element is unpredictable e.g the return of an index is not known until the product expires. The return on the latter element will depend on the underlying asset’s performance.

Structured Products can be designed to  protect all of your capital amount or some of it. Generally the greater the level of capital protection will result in less participation in the growth of the underlying asset and visa versa.

An example

Let’s look at an example of how a structured note might work. 

Our imaginary investor opts for a structured note that that aims to return the initial investment at maturity plus an interest payment that is linked to the performance of an underlying asset (for example, the Euro Stoxx 50 index) over a 5-year period.

For every R1000 invested:

• R700 is used to purchase a zero coupon bond which will grow to R1000 at maturity providing the capital protection. (The provider of the structured note can secure a rate of interest over 5 years that is enough to return the initial investment.)
• The balance of R300 is used to buy options over the underlying asset which provide the performance element.

The performance element will determine the final return.  If the Euro Stoxx 50 performance is positive at maturity, then the investor will receive the initial investment plus an amount based on the Euro Stoxx 50’s performance. If the Euro Stoxx 50 performance is negative or flat at maturity, then only the initial investment amount will be returned.

“Like an investment in equities or an index, the return on structured products is dependent on the return of the underlying asset, which cannot be determined upfront … it is subject to the return of the equity or index,” says Investec’s Brian McMillan.

Why would I invest in a structured note?

Structured notes are gaining in popularity for investors who want to protect their investments while still having an opportunity to gain from the potential upside of investment growth. In a nutshell, they offer the possibility of protecting portfolios while generating income. This means reduced volatility in a time of global uncertainty.

“Structured products provide investors with the best of both investment worlds – the stability of bonds with the growth potential of equities. By combining these two elements in one product the investor has a pre-defined investment outcome,” adds McMillan.

In addition, structured notes can also offer exposure to assets that are otherwise difficult for individual investors to access. Again, they offer this investment alternative while providing the security that your initial investment is protected. They are also attractive because they vary in maturity terms, investment amounts and risk/return profiles and so investors are able to pick and choose structured notes that suit their individual investment needs.

Returns on structured notes are usually paid on maturity of the product, and because it’s a long-term investment product, investors need to factor in the holding term of the product.

Advantages of Structured Notes

• In most cases, the principle is protected – this means you will get your initial investment amount back, no matter the performance of the underlying asset.

• They can give investors exposure to assets that they can’t usually access.
• They can complement a diversified portfolio.
• For South Africans, it can mean investing in global equity markets but with capital protection.

Disadvantages of Structured Notes

• Structured notes mean trading potential higher growth for capital protection.
• Early termination of the product can be a problem. There are often costs associated with accessing an investment before the end of the term. Also, the value of the investment cannot be guaranteed with early termination, so it is also possible to lose out on this front.
• If you don’t invest with a reputable institution and don’t receive protection for your principal amount, risk enters the equation. “Structured products are issued by banks and as such investors are taking credit risk on the bank that issues the product. Investors need to be aware of the credit worthiness of these banks and any additional credit that is added to the issuing bank,” says McMillan. “Having said this, most structured products are underwritten by the largest banks globally and there have been no major credit impairments of structured products even in the global financial crisis.”

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A beginner’s guide to ESG investing

Growing awareness about the need to make a positive societal impact – and the economic benefits of doing so – is starting to make itself felt in the world of investment.

There have been persistent calls from international bodies such as the United Nations for corporates to “do the right thing”, as well as a growing push from individual investors who want to know that their money is being invested in an ethical way. These factors have influenced large investment companies to take Environmental, Social and Governance (ESG) factors into account when making decisions about where money should be invested.

And although ESG investing has a strong ethical element, it’s not all about “doing the right thing”. While ESG investing might initially have been driven by moral concerns, it is increasingly being linked to superior performance. The argument is that companies that make good ESG choices become well-run companies, and that well-run companies become good investment choices. For example, a 2019 McKinsey study found that companies in the top quartile for diversity in gender or ethnicity on executive teams were 25 percent more likely to have above-average profitability than companies that had less diverse representation.

Because of these factors, ESG investing has moved from the fringes of the investment world to the mainstream over the last decade, with an ever-growing inflow of money into ESG funds.

How ESG works

When deciding what companies to invest in, asset managers have always used a variety of criteria to determine profitability and future returns. These would include traditional factors such as cash flow, market position and industry trends.

ESG investing uses ESG factors (which are non-financial factors), such as a company’s practices and policies, in the analysis process when weighing up profitability and future returns. Investments would be made in companies that score high on ESG ranking scales.

These rankings are created by independent third-party companies and research groups, which would look at non-financial factors such as sustainability measures, annual reports, resource and financial management, and board structure. They would then create scores for companies, based on multiple criteria, that enable investors to compare different investment opportunities.

The bottom line with ESG investing is that the primary consideration remains financial performance – it is not intended to be implemented at the expense of returns. This is different to other sustainable investment styles, such as impact investing (which aims to maximise societal reach).

Let’s take a closer look at the three criteria making up ESG:

Environmental

This focuses on the impact a company has on the environment. Specific elements of this would include pollution, approach to waste, the treatment of animals and compliance with environmental regulations.

Social

This covers a company’s social impact, both internally and externally. For example, how a company might deal with employee health and safety or encourage racial diversity within its staff, or it’s social impact in the wider world, such as whether it donates to local communities.

Governance

Governance would look at the behaviour of a company’s board and management. For example, leadership choices, renumeration for executives, transparency in accounting methods, conflicts of interest etc.

Investing with an ESG focus

There are various ways for individual investors to incorporate ESG strategies into a portfolio. One entails taking a company’s ESG profile into consideration when deciding whether or not to by shares. In other words, the investor targets individual stocks that follow ESG principles and align with his or her investment goals. But for many investors a simpler route is to opt for one of the growing number of ETFs focused on ESG strategies.

Advantages of ESG investing

The obvious advantage of ESG investing is that it gives investors confidence that their money is playing a role in creating a better world. Investing in ESG-orientated companies can potentially play a role in helping protect the environment, creating a positive social impact and encouraging ethically focused corporate behaviour.

Initial criticism of ESG investing was that it meant comprising returns. But various reports have shown that focusing on sustainability considerations can be in the best economic interests of companies – resulting in innovation, low employee turnover, operational efficiencies etc – and can help them develop competitive advantages. And so a focus on ESG can deliver value for both shareholders and the planet. It is also argued that ESG funds have shown resilience during periods of high market volatility.

Disadvantages of ESG investing

By opting to invest in line with ESG principles, it is argued that investors don’t have the entire investment spectrum available – potentially limiting diversification.

Some commentators have noted that many ESG indexes and index funds have shown strong performance in the past due in part to the large exposure to tech companies – and that this over-concentration on one sector can present a risk to investors.

Analysts also warn that although expense ratios for ESG funds have decreased over the years, they can still be higher than other funds – which means that you might be paying a slight premium to invest in these funds.

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