Conversion of the Wealth Associates portfolios from a Wrap Fund to a Fund of Funds structure

Wealth Associates Asset Management has announced the further evolution of their portfolio offering. The tremendous success of the investment process and the support from clients has allowed for the evolution from the wrap fund structure to a more efficient fund of funds process and structure. This offering allows for significantly more flexibility in structuring the most suitable risk structured portfolio for clients, further reducing costs and enhancing the risk-adjusted returns for clients.

 

The objective of the Wealth Associates offering is to provide investors with cost effective, risk profiled, diversified multi manager and multi asset class portfolios which provide predictable inflation beating returns over the targeted term of client’s investments. Wealth Associates have been able to do this by utilising specialist fund managers in each of their diverse fields, and blending them into the model wrap funds offered to clients thus far.

 

This strategy and process continues unchanged, other than the change to the model structure from a wrap fund to a fund of funds as from 1 July 2016.

 

What is a wrap fund?

 

A Wrap fund is a collection of unit trusts which are “wrapped” together under the instruction of a registered Discretionary Investment manager on a linked investment services provider (LISP) platform, like Momentum, Glacier, Allan Gray or Investec for example. There is a Discretionary management agreement in place between Wealth Associates Asset Management and each of these LISP platforms.  Each of the platforms administers the asset class weightings and manager selections on a continuous basis so that the intended portfolio is at all times representative of that stipulated by the Wealth Associates Asset Management Investment committee. Clients will have seen from the periodic investment statements issued by the LISP platform on which they are invested, that the portfolios are named “Wealth Associates Cautious/Moderate/Balanced or Growth fund and all of the component parts of the Wrap fund are listed under the heading. A Wrap fund is a model and is not a listed unit trust.

 

What is a Fund of Funds?

 

A Fund of Funds is a “Unit Trust” fund registered by the Registrar of Collective Schemes under the Collective Investment Schemes Act. Each Fund of Funds (FoF) is registered with the Financial Services Board and is under their constant supervision and monitoring processes. Each fund thus has:

  1. A management company (Manco) to run the day-to-day operations of the unit trust
  2. Auditors, custodians and compliance officers
  3. Investment Managers of each fund – this being Wealth Associates Asset Management that Investors have become accustomed to thus far
  4. Underlying fund managers – these being the unit trusts of the specialist fund managers Investors currently see in their investment reports.

 

What is the difference between the two?

 

The physical difference Investors will see on investment reports is that the investment does not reflect the whole list of underlying unit trust managers, but one fund, being either the Wealth Associates Cautious, Moderate, Balanced or Growth Fund and not the underlying unit trusts itself.

 

From a compliance perspective, the new fund structure is regulated like all the other unit trusts, so there is an addition layer of compliance and regulation to protect investments and to ensure compliance to the strategy.

 

From a tax perspective, changes in a fund manager in the current wrap fund structure created a capital gain (CG) event, which was thus taxable on an annual basis. All changes in the new fund of funds will not create a CGT event, and thus tax will only be due when units are eventually redeemed.

 

Why are Wealth Associates doing this?

  • Maximise greater efficiencies – The Fund of Funds (FoF) structure allows the investment management team more diverse fund selection and better price negotiation. These efficiencies will translate directly into more active management (improved returns for investors) and reduced costs, all beneficial to the investor.

 

  • Certain funds that qualified for inclusion into the portfolios are not available on all the linked investment service provider’s (LISP) platforms. These and other institutional funds can now be considered within the FoF structure.

 

  • Unit trusts select currently have differing price structures across differing LISP’s. We now get the lowest pricing structure across all platforms. These cost savings are directly transferred to the investor by lowering Total Expense Ratio’s (TER) within the portfolios.

 

  • Capital Gains on change of fund managers within the FoF are not taxable in that tax year. Capital Gains Tax (GCT) will only be due on the sale of units which will be a conscious decision by the investor. At present in the wrap funds, any manager changes trigger a capital gain event in that tax period. Be reminded that all retirement structures (Preservation funds, Retirement annuities and living annuities) are exempt from CGT.

 

  • Administratively it will now be easier to deal with 1 Manco (BCI) as opposed to multiple Platforms.

 

  • With a registered Unit Trust, daily prices, performance, risk etc… will now be publically available via newspapers and Electronic media. For those who need it, this infers greater transparency.

 

Who are the role players in the Fund of Funds

  • Management Company (Manco) – Boutique Collective Investments (BCI). They are the Manager/Administrator of the Fund of Funds. BCI are part of the JSE listed Efficient Group and their management and operations teams have extensive experience in fund administration. Wealth Associates have had many years dealing with this team and so found the choice of Manco partner to be an easy process.
    • Within the fund of funds compliance, there are also numerous other statutory appointments to add further protection to the client’s investment and process.
  • Discretionary Manager – Wealth Associates Asset Management remain and PortfolioMetrix remain as the Investment advisor to Wealth Associates. Accordingly, the success formula applied over many years remains unaltered.

 

How will this change impact tax liability on your investment portfolio?

 

  • Within retirement investments. No tax implications for the investor as these entities enjoy nil tax on capital gains, dividends and interest income.

 

  • Within endowment policies. An endowment sits on the Life Assurance licence of the administrative LISP who administers your portfolio. In such structures, tax is paid by the Life company on behalf of the policyholder/investor. The change will effect a CGT liability of 12% on the capital gain, but this is settled by the Life company within the endowment structure, so there is no personal liability to the investor.

 

  • Within voluntary investments. On the transfer to the fund of funds on the 1st July, any capital gain will be taxed in the hands of the investor, which will be due in November 2017 when the investor submit his/her 2017 tax return. This will be disclosed in IT3 certificates in 2017.

What is the difference between regular CGT or on redemption?

 

Numerous studies have shown that there is a negligible difference between annual capital gains events (through portfolio changes during the year within a wrap fund) as opposed to the capital gain many years later when an investor sells units. In essence, investors will pay CGT at some point.

 

There is a perceived benefit of being able to use the capital gain exclusions (currently R41 000 pa) on an annual basis. However, there is also the debate about gaining the compounded growth within the fund of funds and only paying the capital gains tax at the end.

 

While Wealth Associates are aware that the change from wrap fund to fund of funds will create a capital gain event in the 2017 financial year, the impact on investors over a three to five year period will NOT have any effect on the final after-tax value. CGT is a reality for private investors, and most of us are never happy to pay tax, be it now or later.

 

This communique was used to advise existing Investors of the upcoming change and was compiled by members of the Investment Committee of Wealth Associates Asset Management (Pty) Ltd.