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South Africans have taken to investing in the Section 12J investment universe in growing numbers, particularly since 2015 when demand started accelerating.

About R9.34bn has found its way via the Section 12J initiative into smaller businesses, while more than 10,500 jobs have been created. There are now more than 180 12J venture capital companies in SA, making it the fastest-growing alternative asset class in the country.

At the heart of this high rate of adoption is the fact that Section 12J is part of SA’s Income Tax Act and that it provides investors with an immediate tax deduction equal to 100% of the amount they have invested. 

Launched in 2021, SA’s first Section 12J portfolio of funds provider Metta Capital, acts as an independent aggregator in the Section 12J asset class. Metta Capital’s investment committee, chaired by Dr Adrian Saville, compiles and weights diversified portfolios of Section 12J funds. It allows investors a single-entry-point access into a portfolio of Section 12J investment strategies, while charging no additional fees to the investor for the use of its platform. 

Metta Capitals’ recently launched fourth portfolio, High Income Fund, which reduces the minimum investment requirement to just R350,000, is open for investment until February 25 2021. The portfolio is designed to include investment strategies that yield stable and predictable income returns, earned off the back of strong asset underpins. 

In the current low interest rate environment and with a shortage of strong yields being achieved in traditional asset classes (such as listed equities and property), the High Income Fund looks to provide investors with:

  • an expected internal rate of return of 18.62% (net of fees and all tax considerations);
  • an average annualised dividend yield of 8%, with dividends paid biannually;
  • access to multiple Section 12J funds in key growth sectors (renewable energy, agricultural and infrastructure).  

Section 12J investing has now become an important asset class to consider when building a client’s portfolio. Its significant tax and uncorrelation benefits are driving wealth managers to ensure its clients have at least a portion of their assets allocated to this asset class. 

Standard Bank Wealth & Investments has been ahead of the curve by running client webinars that educate its clients about Section 12J investing, and the importance of having alternative assets within their portfolio mix. Metta Capital has been its partner for two years, and will offer its comprehensive Section 12J investment solution to its clients in February.

Section 12J vs RAs

To understand the benefit of having a Section 12J investment, it’s worth looking at how it compares with what exists in the market, such as the retirement annuity (RA) space.

For decades, RAs have had their place in SA, especially when it comes to automating monthly savings and providing a cash lump sum upon retirement.

Yet in recent times, RAs have been under the spotlight regarding their performance, with some funds even lagging inflation. And with fears circling around regulation 28, this is a recipe for further uncertainty.

Metta Capital’s Section 12J High Income Fund is a real alternative to RAs, especially when considering the following factors. 

RAs have an investment cap of R350,000. With Metta Capital’s High Income Fund, the minimum investment is R350,000, but Section 12J allows you to invest up to R2.5m a year and still receive the full deduction. Corporate taxpayers can also invest a maximum of R5m and receive dividend returns exempt from dividends tax.

In addition, the exit date for an RA is 55 years old, while for 12J it is five years from the date of investment. 

Another advantage that Section 12J has over RAs comes to returns and withdrawals. Returns from the High Income Fund can be taxed either as dividends at 20% or as a capital gain at 18%. Meanwhile, an RA withdrawn outside a living annuity is fully taxed at up to 45% when paid out.

Metta Capitals’ High Income Fund provides investors with a similar level of diversification that South Africans have become accustomed to with many RA funds, but in faster-growing parts of the SA economy. Section 12J is one of the only mechanisms to access direct renewable energy investments, and its 40% allocation to this sector provides investors with access to the enormous growth that has been seen within this segment of the market.

This year presents investors with an important opportunity to benefit from the risk-adjusted returns that are provided to them through the government’s Section 12J incentive. Section 12J investing has never been easier and investors have a one-stop shop in the Metta Capital High Income Fund, which will provide them with diversified access into the market’s leading Section 12J investment strategies. 

This article was paid for by Metta Capital.

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