What is Short-Term Insurance?

As the name suggests, short-term insurance protects assets for a short period. This type of insurance is designed to give you peace of mind and temporary protection against loss or damage to your private property when certain insured events occur, such as vehicle accidents, vehicle theft, or hijacking.

There are various types of short-term insurance: personal, travel, and commercial. However, not all insurance companies have a licence to sell all these types of insurance.

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From banks to Blackstone: How private equity continues to change the banking space

Dr Francois Stofberg
Managing Director: Efficient Private Clients, With Specialist Input From Renier Van Zyl

In 2007, on the eve of the global financial crisis (GFC), Hilton Worldwide announced that it was being bought by the private equity (PE) behemoth Blackstone. After the acquisition, Hilton’s fortunes changed abruptly under its new owner. Almost overnight, Blackstone managed to double the amount of Hilton rooms while tripling its own return on investment. Hilton Worldwide is only one of many PE success stories. PE giants with their fortress balance sheets, established contacts, and rare know-how are unrivalled in their ability to identify opportunities. That is why it is no surprise that they are now laser-focussed on the lending gap that has been left open by struggling banks.

Investors who wanted in on the PE bonanza had to wait an eternity. PE had its origins back in 1946 and it did not take long for the corporate world to discover how lucrative PE is. By the 1980s, PE was known for its hostile practices during corporate takeovers. It was not until the 1990s that PE firms regained investors’ trust. In fact, by 2007, PE regained so much trust that Blackstone, the biggest PE company in the world, managed to raise the largest sum of money in New York Stock Exchange history during their initial public offering. Endowments, family offices, institutions, and individual investors dashed to be part of the PE bonanza.

Why were investors so determined to get front-row seats to the PE experience? Superior returns prior to and during the GFC boosted PE’s appeal. From 1990 to 2010, PE managed to outperform the largest 500 companies by market capitalisation in the United States (US) (S&P 500) by 6.3% annually. Even amid the GFC, in 2008, PE gained 11% while the S&P 500 lost 38% in a single year. These returns improved even further between 2010 and 2020 when PE firms delivered returns of more than 13.5% per annum. Over the same period, their assets under management increased by a staggering 170%. These stellar returns were largely because of PE firms’ ability to identify opportunities during tumultuous times.

Today, the entire PE industry encompasses more than $11 trillion in assets while these firms sit on more than $3.5 trillion in cash, waiting to be spent on the ‘next big thing’. That ‘next big thing’ might be assisting failing banks. And Blackstone is doing just that: It is already in discussions with large US regional banks about providing them with extra firepower to lend to companies amid signs that the recent banking industry turmoil is morphing into a credit crunch. This follows the collapse of US lenders Silicon Valley Bank, Signature, and First Republic Bank.

The PE phenomenon is, however, not new. PE groups have been happy to fill the gap in the need for lending for decades. Over the past few decades, they have enjoyed regulatory freedom while regulators were busy regulating banks. Commercial banks are subject to a long list of restrictions, which is leading to an ever-shrinking market of global banks, and PE firms are all too happy to fill the gap.

While PE is still a relatively new phenomenon in the world of portfolio management, investors should be mindful of its existence and its ability to be agile and to provide value during difficult times. These firms are known to emerge stronger after periods of chaos and disorder, much like the period that we are currently in.

Our dearly beloved rand

Dr Francois Stofberg
Managing Director: Efficient Private Clients.

Over the past year, the rand has been battered and it seems as if there will be no relief any time soon. Consequently, we have had to revise our year-end USD/ZAR forecast up from R16.50 to R17.50 and we will consider taking money offshore for our clients at R18.00 levels.

At first, it was the United States (US) Federal Reserve that started to increase interest rates, together with recession rumours that began to spread, which caused investors to run to the safety of US markets. As short-term capital flooded the US markets, the US dollar (USD) got stronger and stronger, and the rand, consequently, weaker and weaker. History told us that the USD usually started to depreciate again 12 to 18 months after its initial increase, as the US economy came under pressure. This usually causes investors to start looking for yield elsewhere, which, in turn, helps to support other emerging market currencies, like the rand. Unfortunately, 12 to 18 months later, the US economy is still the healthiest economy out there and shows very few signs of slowing down substantially. Because uncertainty scares investors, and because developed countries now offer even more attractive yields and their listed companies seem to be getting through tighter monetary conditions, emerging market currencies are bleeding (note that this is not something that can be sustained indefinitely). Unfortunately, owing to a failing state in South Africa (SA), the rand has not only been battered by global waves but local waves too. We all know about government’s inefficiencies but the rate of deterioration has recently weighed more heavily on the rand.

Failing state-owned enterprises, like Eskom, have led to rumours about rolling blackouts. In fact, many larger corporates have already started to plan for a “no-grid” eventuality, when Eskom will simply fail and take the economy back to the dark ages. We do not believe that we are close to this point but markets seem to be starting to price this in as a potential eventuality. Even if we do not have a total grid collapse, government’s persistent erosion of the business environment is weighing down any potential we have for growing our economy sustainably.

Failing state relationships, poor political allegiances, and news about SA’s support of Russia’s war in Ukraine have soured our association with important trade partners who represent the bulk of our annual trade volume. Markets fear that we will be excluded from important trade agreements, like the US-based African Growth and Opportunity Act, as well as that other trade partners will enforce trade restrictions against us, fuelling concerns about lower growth, more unemployment, and higher inflation.

Failing state finances mean that we continuously allocate scarce resources ineffectively and inefficiently. Ineffectively means that most of our budget is allocated to the wrong expenditure items, like salaries and grants, instead of to capital, which includes infrastructure, healthcare, and education. We also allocate resources inefficiently, which refers to wasteful and irregular expenditure, and the horrific performance of those items that we do spend on. Compared with most other countries, and on a range of performance indicators, we still have the weakest performing education and healthcare results in the world. Put this all together and it is no wonder the rand is having such a hard time!

For now, we believe that the rand will remain weak but that the recent fall to levels beyond R19.40 is a bit too much. Markets are a collective of emotional human beings and, therefore, tend to overreact. We should see the rand strengthen back towards levels closer to R17.50. However, the longer the rand stays above trend, the more it gets used to staying there.

How to avoid permanent capital destruction

Dr Francois Stofberg
Managing Director: Efficient Private Clients.

We all know the age-old adage that has held true throughout history: “It is not about timing the market; it is about time in the market”. As investment managers, we have the pleasure of celebrating the wisdom of this adage with our clients when they achieve their long-term investment objectives. Unfortunately, we also witness the flipside of the coin, when clients sell out of underperforming investments and buy into the flavour of the month based on short-term return differentials. This is when the risk of permanent capital destruction is at its highest, and many investors make mistakes that are detrimental to their long-term financial planning.

Looking at historic returns data, performance between active investment managers diverge over time and, more importantly perhaps, tend to out-/underperform following a period of out-/underperformance, as each investment strategy has unique performance characteristics during different market conditions. This is common knowledge for most investors but clients tend to become short-term focussed when uncertainty is elevated. And who can blame them! The past three years have been somewhat of a rollercoaster ride, not only in the financial markets but in daily life as well. In the scope of less than three years, we have witnessed a pandemic that virtually shut down the planet, an ongoing war in Europe, a cost-of-living crisis caused by multi-decade high inflation, and two bear markets. Unsurprisingly, investors are cautious and feel as though they must do something, which is often erroneously changing investment managers.

We, as investment managers and financial advisors, are required to not only provide prudent financial advice but also to educate clients on behavioural biases that are more psychological in nature and that may lead to suboptimal decision-making. Behavioural biases are unconscious beliefs that influence our decisions and decision-making processes. We have found that investors often struggle with loss aversion, a bias that causes the investor to experience greater discomfort from losses than they find value in an equivalent gain. Compounding the problem is regret avoidance, in which investors fear the regret of not changing investment managers that are underperforming in the short term (experienced as a loss) without looking at the facts and remaining emotionally neutral during decision-making.

Historical analysis, therefore, unsurprisingly suggests that the probability of achieving long-term investment success increases as we manage biases and limit short-term decision-making – reducing the risk of permanent capital destruction by staying invested and by maintaining a long-term focus. The notorious investor, Peter Lynch, once said: “Stocks are a safe bet but only if you stay invested long enough to ride out the corrections”. We believe that this holds true for the stock market as well as for investment managers. It all comes down to trust. Trust your financial advisor to guide you through the process of planning your financial future. Trust your investment manager to invest your assets prudently. Trust is at the core of what we do here at Efficient, and we maintain it by investing time with clients, helping them stay true to their financial plans, and celebrating with them as they achieve their long-term financial objectives.

The good times are here to stay – or are they?

Dr Francois Stofberg
Managing Director: Efficient Private Clients.

“We believe in what people make possible.” This is the slogan of one of the fastest-growing companies in the world, Microsoft. Currently, Microsoft seems to be achieving feats beyond what is possible. Growth within the world’s largest economy, the United States, has recently slowed down. Gross domestic product figures show that the number of goods and services created in the last quarter registered the weakest pace of expansion since the second quarter of 2022. At a business level, the majority of corporate America is feeling the pinch of higher interest rates and slowing growth. The impact of higher interest rates is usually only felt 12 months after the original hiking decision was made. It is, therefore, apparent that the worst effects could still lie ahead. For the time being, however, tech stocks, such as Microsoft and Alphabet, seem to be bucking the trend. Since the start of 2023, their respective share prices are already up 28% and 23%. But, on an even broader scale, the top performers all seem to be tech-related stocks.

There are a few reasons why tech is performing strongly in 2023. One of these is investors hopping back into some of 2022’s worst-performing stocks, smelling a bargain. Investors also seem to like certain unique qualities in tech, such as resilient demand and growth, which stand in stark contrast to an environment filled with concerns about failing banks and inflation-strapped consumers. There are also company-specific reasons. For example, Microsoft has achieved a new 52-week high because of the current optimism around its artificial intelligence (AI) services, following its investment in OpenAI in 2022. This investment is already beginning to have an impact on market share and performance, and there is a lot more scope as Microsoft starts to merge its cloud (Azure) and AI (OpenAI) services. This combined service already has 2 500 customers, including Shell and Mercedes-Benz, with more customers being added at breakneck speed.

Investors’ attention has, therefore, been diverted away from the economically sensitive areas of big tech. For example, the weaker economic backdrop has resulted in consumers buying fewer personal computers (PCs) globally. This has not only affected Microsoft’s PC sales but also other areas of its business, i.e. the demand for its software. Other companies, such as Intel, have felt the effects of a softening in PC demand more acutely as many of those PCs are powered by Intel chips. Other segments of the market are also struggling. Google, for example, reported a second consecutive drop in advertising revenue, while Facebook informed its employees to expect a slower pace of hiring following the company’s latest round of layoffs amid uncertainty in advertising spending going forward.

Tech’s stellar performance over the last several months represents a unique problem for the market: Overdependence on big tech gains has done little to provide assurance about the health of the wider economy, which leaves investors especially vulnerable if tech should stumble again. Signs of this could not be reflected more clearly than by the ongoing layoffs at big tech, which serve to boost near-term figures but is also likely to signal a weakening in the intermediate-term outlook.

While investors have been rewarded for their contrary positioning in big tech, despite a weakening global economic backdrop, they will certainly have to exercise caution going forward as we continue to move into a stock pickers environment.

Fiduciary Services and why it is important

Although personal fiduciary services are a vital part of everyone’s financial portfolio, it is often a sensitive topic  that people would rather avoid. But ensuring that your loved ones are cared for after you pass away is a critical component of a comprehensive estate plan.  The confusion, uncertainty, and negative financial implications of dying intestate may be more severe for your loved ones than had you taken time to plan their financial future while you are still alive.

Personal fiduciary services may be as simple as ensuring that your last will and testament is adequately structured to cater to the needs of your family. This may include the distribution of cash, assets, company ownership, and individual inheritance clauses. Updating these documents when circumstances change is also important – specifically in cases where there are divorces, second marriages, or children from multiple relationships involved.

In this article, we at Efficient Wealth explain what fiduciary services are and why they are so important.

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Investment Management vs. Wealth Management

While investment management is an important segment of financial planning and overall wealth management, wealth managers take a more holistic view of a client’s financial health. Our expert financial planners at Efficient Wealth are proven leaders in the financial industry in South Africa. We specialise in wealth and investment management. With this in mind, in this article, we will explain how the two professions differ and why you may need the professional services of both.

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4 Types of Financial Planning

Different types of financial planning can aid you in achieving discipline over your finances and a layout a concise direction of where you wish to be in your life. In this article, we’ll discuss the four types of the practice and how sacrificing funds to support them will benefit your life now and in the future.

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Expert financial advisors: 5 ways they can help your small business thrive

Are you thinking of opening a small business? Partnering with an expert financial advisor can set you on your way toward financial success. In the beginning, it is about being passionate about your products and services, gaining and retaining customers, ordering stock, and a plethora of other things seemingly more important than balancing the books.

Opening a new business, or trying to manage an existing one, presents a veritable minefield of challenges that you need to overcome. It can be an overwhelming conundrum, a feeling similar to going on an African safari without sorting out the logistics or retaining an experienced professional to guide you.

However, the advice of professional financial advisors will make the challenges less daunting and, through the services that they offer, you can implement practices to grow your business.

In this article, we will explain a few services that we offer and why you may need them for your business:

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5 Types of Financial Professionals and How They Can Assist You

There are many different types of financial professionals, each with their own speciality, background and area of expertise to assist with almost all financial challenges. Even if it is not impossible for individuals to successfully manage their money on their own (despite constantly changing money markets and complicated financial decisions like when to invest or not), the value of professional expert advice should not be underestimated.

Many people spend too much, invest too little or simply need guidance and advice to get the most value out of their money. Financial professionals that are trustworthy and competent can be relied upon to assist you with almost any financial advice. The leaders in financial planning and wealth management at Efficient Wealth, discuss the types of financial professionals and how they might assist you.

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