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SA investors in deep denial, should invest 80% offshore 

SA investors in deep denial, should invest 80% offshore 

South African investors are in a precarious position. The JSE is underperforming its emerging market counterparts, real house prices are falling and rolling blackouts is making the threat of a ratings downgrade more imminent. Political and economic uncertainty is adding to that discomfort. The future looks bleak for those trying to grow or even just preserve their wealth in local markets.

South Africa is now in its longest downward business cycle since the end of World War 2 and the performance of its assets continue to reflect this unfortunate reality. The Rand has lost a third of its value against the US dollar in the past five years and remains under pressure. Investors in South African equities have lagged developed markets while house prices have increased at less than half the rate of inflation for several years.

The S&P 500 for example has delivered a total return of nearly 100% in the past five years, the NASDAQ 147% and even the 10-year Treasury bond a return of 12%. The total return in Rands for the SA general equity market over the same period is just nudging 30% versus a 131% total return of the MSCI World Index, also in Rand. But the SA general equity market return rebased to US dollars is down 13%. Many popular equity funds are also showing negative dollar returns over five years.

More local money managers are advising South Africans to rather invest with their heads and not their hearts and consider taking a greater portion of their savings offshore.

This is the view of Ian Edwards, partner and Africa regional manager of Austen Morris Associates, a global, independent wealth manager. “We are advising our clients to invest as much of their money as they can elsewhere in the world. We do not see a single reason why people should keep any discretionary investable funds in the country. People should keep their house and their pension as their only assets here if they live in SA. But the rest should be invested in hard currency assets that will protect their buying power which has already been deeply eroded.”

Edwards says they have seen a sharp uptick in the numbers of clients who are now very worried about the future of South Africa and want to protect their wealth for their families. He added that their clients are typically higher net worth individuals who have made money from their own businesses or have risen to c-suite level in the corporate world.

He adds that despite already being in a recession, South Africa is marching on with plans to expropriate land without compensation while carrying on with an economic and industrial policy which will only make things worse for the country – potentially leading to further rating downgrades, a bailout and sustained high unemployment.

“Much of the advice we see out there does not reflect the reality of South Africa today. For instance, it is a long-held belief that local investors should hold about 30% of their assets offshore. Some braver souls have advocated for that to be upped to 50%. But being completely independent, we believe it should be 80%, perhaps more if practical. We don’t think people should just close their eyes and keep investing in the local market as they have always done. We are banging the table on this one and saying get your money out.”

Magnus Heystek, investment strategist and director at Brenthurst Wealth Management shares a similar sentiment. “There’s no point beating around the bush or trying to pretend that the negative and destructive trends concerning SA’s investment markets are not happening or that they will miraculously arise out of their slumber,” he says.

“Residential property has not beaten inflation over almost 11 years now while listed securities has shown the same trend over 5 years now. The JSE overall index declined by 4% year on year during 2018 while listed property lost almost a quarter of its value. The only two asset classes that have consistently beaten inflation has been cash in the form of high-Income funds and offshore assets and that still remains our major investment recommendations to protect your retirement capital.”

 

He says that the local asset management industry and thousands of advisors in the country can no longer ignore the fact that with the JSE being one of the worst-performing stock markets in the world over the past 5 to 7 years, that a stronger offshore focus should become an obvious choice. Heystek suggests that advocating a predominant local shares strategy is a misplaced sense of loyalty and investors should be much more cautious.  “A more in-depth analysis of SA’s precarious economic and financial situation suggests that the rose-tinted forecasts of the investment giants need to be approached with a great deal of circumspection,” he says.

 Every year during that period I’ve watched the investment giants such as Old Mutual, Coronation, Sanlam, Allan Gray and others trot out that hackneyed appeal for investors to “stay invested”, that “cash is trash” and that over the long-term equities will beat inflation. Well, we are now in year 5 where cash has beaten equities, and not only by a slim margin, but by a massive one. It’s very nice and dandy to tell people to “remain invested for the long term” when it’s not your money. Many investors cannot afford a pro-longed period of non-performance as we have experienced.”

But not all money managers are paying mind to the ruckus, with the limitations of Regulation 28 of the Pension Fund Act adding to the resistance. According to the Alexander Forbes Global Balanced Manager Watch Survey, which represents the best investment views of 27 fund managers regarding their Regulation 28-compliant portfolios, the average global allocation dropped from 24.66% at the end of 2017 to 24.56% a year later. The average was influenced by a few managers who had low offshore allocations, including Kagiso at 15.5%, Cadiz at 15.6% and Ashburton at 22.5%. Only nine of the 27 managers were at 26% or less at the end of 2018.

The Regulation 28 offshore allocation limits for pension funds were increased from 25% to 30% and the allocation to African investments (outside South Africa) from 5% to 10% in 2018.

Janina Slawski, principal investment consultant at Alexander Forbes Investments told Moneyweb that the average offshore allocation came as a surprise. She expected it to be higher given the relaxation of offshore allocation limits and the rand depreciation over the course of 2018, but the marginal dip in the average should be seen against the background of a few low allocations.

“Since asset allocation has a meaningful impact on returns in the long run, the limits imposed by Regulation 28 are a contentious issue, with critics arguing that capping equity and offshore exposure is to the detriment of long-term investors, while proponents say the limits are critical for risk management for the average retirement fund investor,” Moneyweb reports.

But there is no doubt that local investors will lose if they stay too close to home and not  widen their geographical horizons. The Denker Global Financial Fund (previously known as the Sanlam Global Financial Fund) is case and point. It generated a compound annual growth rate of 15.8% since 2008.  Kokkie Kooyman who heads up the fund says the local banking sector is under tremendous pressure, and even though it is very well managed and performing relatively well under tough circumstances, their valuations will double if they moved their operations overseas.

“As things stand however, if you look at what you can buy in India, Brazil and Mexico at growth rates of over 4% taking money offshore is a no-brainer,” he says. He says the return on offshore financials in rand terms over ten years was between 17-18%, and taking the falling rand into consideration, 12.9% in dollar terms. The fund has holdings in the US, Europe and Asia.

Edwards adds that they are advising clients to put money in the US despite many predictions that the market there have run so hard a steep correction is imminent.

“The US is the most dynamic, innovative economy in the world and represents about 41% of the world’s overall stock market capitalisation. And despite stock price gyrations, for the longer-term investor we think being exposed to many of the world’s best companies is a far better play that investing in the JSE. The JSE does of course have many companies with offshore earnings but it is still an investment in South Africa; the money is still in the country.”

He added that he also favoured property investment in select cities in Europe such as Barcelona and Berlin which have the potential for capital appreciation and attractive yields of between 6 and 8% from rental income.

Edwards concludes that South Africans should of course hold enough cash back home to meet expenses and liabilities and also manage short term liquidity requirements.

DM

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