BNC#5: Magnus Heystek on the record – Western Cape; best offshore geographies; Greylisting; and much more

Half an hour of Magnus Heystek being quizzed at BNC#5 by members of the BizNews community. Here’s his response to the curveballs, penetrating and tough questions on the hot financial topics of the moment.

Timestamps of the interview topics below:

• 00:00 Governance in the Western Cape and the difference between politics and financial services
• 04:09 Not being positive about South African listed property and views on relative fair value
• 06:48 Greylisting and the potential damage to the Rand if not fixed
• 10:35 Potential detrimental effects on South Africa
• 13:14 Recommended offshore regions and asset classes
• 16:44 The potential of a Rainbow Coalition materialising come 2024
• 18:17 Magnus Heystek’s competition with fellow investor, Piet Viljoen
• 21:01 Magnus’ property in the Western Cape
• 23:03 Advice for medium-sized businesses
• 26:32 End

Excerpts from the interview below:

Not being positive about South African listed property and views on relative fair value

My issue with the property sector started in 2016 / 2017, when first of all, the market was totally overblown. The valuations were absolutely crazy. I mean, there were cap rates of 6%, which never existed and from then, you know, at that point we moved out of listed property, and did not have a cent for our clients. So we save them between 40 and 60% of losses. The market at the moment might represent fair value. I don’t think it fully reflects what’s going on as far as the infrastructure is concerned. The collapse of the municipalities, the cost of electricity, you just simply need to read the quarterly or annual statements from these fund managers. And you pick up something very worrying. A lot of office buildings in Sandton, 25% are empty. Rent revisions as they come up are down, not up yet. The cost of diesel electricity is going through the roof. So some people are trying to make the case for value. I’m saying it might happen.

But what are the risks involved? That’s why I said this is a game of risks and returns. Now, considering the risks of a further meltdown in listed property, I cannot recommend it to my clients. I say there are better investments where enhanced income funds are beating property funds, hands down, for seven years. Now why would I want to take money out of a predictable 8% yield for my clients and put it into something that may or may not give them a ten, 12, 14% return? That’s when the decision comes in as to the risk and the reward. And I haven’t seen it yet. I don’t think that the listed property has gone through its cycle, absorbing all the incredible attacks on it as an investment entity.

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Greylisting and potential damage to the Rand if not fixed

The Rand has kind of already absorbed a lot of the future damage, so it moved very sharply up from R17 to R18,50 to the Dollar. That’s a big drop for any currency. I read this morning that cabinet was warned in 2014, that this greylisting is becoming an issue. They were warned then that our mechanisms to control money and to identify connected people is creating a problem for the rest of the world because they were looking at what’s happening with the Gupta saga, and the money flowing around it. It was rejected by the cabinet because they felt they did not want to publicise the ultimate beneficiaries of trusts and companies.

Again, they were warned a long time ago, but it didn’t suit the ANC because there was too much money flowing around. And the minute you have to publish ultimate beneficiary ownership, you could be exposed and they didn’t want this. So they were living in denial, postponing it, hoping it’ll go away. Well, yes, now we have greylisting.

And again, one hopes sincerely, it will be sorted out quickly, because if we don’t, the IMF has done a report and it’s quite a lengthy document. They warn that if it’s not fixed, it could lead, and I’m not saying it’s going to, but the IMF have studied this and they’ve said on average a country loses 7% of its GDP in capital outflows. Think about that. If they are even remotely correct and we don’t fix the problem. Then over the next 2 to 3 years, we can expect to see a massive outflow of capital. Nothing coming in, and you can make up your mind about what it’ll do to the Rand. Now that’s just a scenario. But other people who spent time analysing this problem say it could happen. 

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Recommended offshore regions and asset classes

I’m not a fund manager, but I’m a manager of fund managers. So our job is to go and spend a lot of time researching fund managers that we think have performed well and we talk to them. So, once we identify a fund or an asset class, we try to do research and say, ‘Who are good managers of that type of asset class?’ I can use biotechnology as an example, health care, commodities – it can be anything. So there’s a lot of research and then you start looking at the Morningstar reports and you start talking to the fund manager. We tend to stick to a global kind of approach to offshore investing. And then they all have some pockets. We call it the satellite approach. 

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I’ll give you an example. One other commodity producing country that is still doing better than the JSE is Australia. Australia, over the last ten years, in fact the last 30 years, has beaten the JSE by about 5% per annum over that period of time because they don’t have electricity issues, they don’t have railway issues, they don’t have labour issues, but they are selling the same product. So their profits, put in a very simple way are from the same products that we are selling. They’re making much more money because we have all these added issues. We like a general type of approach, we tend to like smaller fund managers who can be more mobile in the market. And then we work on research based on the flow of news. What we think can do well, whether it’s technology or health care funds. Another example. Nobody ever talks to Japan or about Japan in South Africa. Japan has been a phenomenal place to put your money in the last ten years. One of the few stock markets that did not crash last year, it has been straight. So we have an exposure to Japan. We could also be looking at listed property at some stage.