It seems that any kind of planning for the future on the back of a bullish stock market is fraught with danger, namely the danger that growth expectations may not be met, or worse, that a shortfall may occur if the investment is in any way funded by debt.
This is the lesson amply illustrated in the recent case of Legal & General, in which it was initially fined £1.1 million (R12.7 million) for "mis-selling" mortgage-linked endowment policies.
On appeal to the financial services and markets tribunal, Legal & General was largely exonerated in that it was confirmed to have mis-sold only eight out of 60 alleged mis-sales.
The mortgage product with which most of us are familiar is the one in which a monthly instalment, representing interest and capital, is paid to the bank. The instalment is designed to ensure that at the end of the agreed period the debt is fully paid.
Obviously this product is also available in the UK, but in the pre-1999 bull market, the endowment or interest only mortgage became very popular.
The home buyer or borrower would make monthly payments towards interest. An endowment policy, for which additional monthly payments would be required, would also be taken out, the aim being to invest these payments in what was then a booming stock market.
Strong growth in investment values was expected to enable home buyers to pay off their mortgages quickly and maybe have some extra money left over. Nice concept.
We in South Africa have not been immune to the vicissitudes of the stock market. African Merchant Bank, to pick one, listed at R8 a share, peaked at around R80 and plummeted to R7.70 before it was delisted.
The booming stock market encouraged financial innovators to design funding instruments based on the rise and rise of the stock market.
In South Africa, the special purpose vehicle (SPV), first edition, was born and became the structure of choice in black economic empowerment deals.
Shares purchased via an SPV were normally pledged to the funders as security. Optimism turned to despair when the market dipped.
The bad news was that the security was forfeited to the banks. The comfort for empowerment investors was that the early deals were ring-fenced. In other words, personal assets were safe.
Unfortunately for home buyers who invested in endowment mortgages, there was no ring-fencing. When investment values fell below the amount still owing under the mortgage, home buyers were faced with the prospect of having to make up the shortfall one way or the other.
One of the cases in which Legal & General was confirmed by the tribunal to have mis-sold involved a postman who had had only one 20 minute meeting with a Legal & General adviser.
The policy document was not discussed and, as the postman said, the way in which the investment product worked "was all a bit over my head".
The tribunal's view, sensibly, was that 20 minutes could not have been sufficient time to explain the risks and make sure they were fully understood.
It is likely the administrators of the Financial Advisory and Intermediary Services Act, in addition to consideration of the usual insurance products, will take a critical look at all funding structures which facilitate investment.
- Bert Chanetsa is a corporate and financial analyst and a director of Chanetsa Incorporated