Middle SA rushing for exit: Demand for offshore investments highest since 2008

Middle class South Africans have reacted quickly to the latest political ructions which included the firing of respected finance minister Pravin Gordhan and the resignation of two key Treasury officials. It’s in times like these that the value of offshore diversification is highlighted – but while it is too risky to get greedy on SA assets while most are fearful, it’s also important not to panic. That’s the message driven home in this interview with Daniel Kriel, CEO of Sanlam Private Wealth, who is in London visiting his company’s mushrooming UK business. The Sanlam Group now has 400 staffers in the UK from a standing start in 2012. And the growth is accelerating with demand for offshore investments at levels last seen during the Global Financial Crisis. – Alec Hogg

I’m with Daniel Kriel, who is the Chief Executive of Sanlam Private Wealth. Nice to see you in London, do you visit often?

Yes I have Alec, and likewise, we haven’t seen each other for years. In fact we were just chatting. I think last time was a couple of years back at Berkshire Hathaway AGM but I’m here quite frequently since we started this business in all seriousness back in 2012.

Good call 2012 if you look at where you are now.

We didn’t think so at the time, it was tough to set it up, but certainly, it’s worked very well for us. We have set it up because we identified the need amongst our clients to diversify their portfolios offshore and we thought let’s rather do it ourselves, and set up shop in London in order to allow our clients to diversify their portfolios and we started a global equity proposition. We also manage balanced portfolios and fixed interest etcetera, but the global equity proposition we started up in 2012. We recruited a great person to manage it for us, Pieter Fourie.

He doesn’t sound Greek.

No he’s not Greek; he’s a South African that’s been living in the UK for the last 14 years. He came with a track record and he developed this capability for us over the last four years, and he’s done very well. Just two weeks ago, he and his team were awarded for the Sanlam Private Wealth High Quality Equity Fund; he was awarded the Fund of the Year at the Annual City Wealth Awards Ceremony.

That’s extraordinary, is that something I think Kookie Kooyman might have won years ago?

Yes you’re quite right. His global financial fund won, so it’s not the first time that Sanlam has been up winning a global fund award. We’re actually very proud of that.

I don’t think people realise quite what a big deal it is because you’re talking about thousands and thousands of competitors in that area. How did you find Pieter?

Pieter was in fact working for one of our competitors and I’ve known Pieter from the Stellenbosch days. He is younger than I am but we were at school together and then at University and in fact, his father was one of my lecturers at the law faculty in Stellenbosch and we found Pieter here. I’ve known him for many years and it was the right time for him to move. Pieter has built up this capability, as we said, over the last four years. In the fund itself, we now manage close to £130m and in the total global equity capability, which includes the portfolio’s direct share portfolios on behalf of our big clients in South Africa and some of our Australian clients, we now have close to £600m that Pieter and his team manages here from London.

You’ve come a long way in just five years but currently with the political uncertainly in South Africa, are you finding that your clients want to get more money offshore?

Oh yes, absolutely. We have not seen our clients as concerned and unsettled with regards to the future as we’ve picked up over the last few months and I think President Zuma’s sacking yet again of a trusted finance minister led to that. Unfortunately we have to deal with that and we’ve certainly seen a pickup of clients wanting to take more money offshore and I think that trend is going to continue because unfortunately, let’s face it, in the run up to the leadership election at the end of the year within the ANC, there’s not much that’s going to change in South Africa. We don’t’ see a change of fortunes in the local economy in South Africa and I think we’re going to hover along as policy uncertainty continues as the leadership battle odds are up. TWe’re just going to hover along, I’m afraid, which is not good for us. We’re seeing and certainly experiencing a pickup in demand for offshore investments.

Emerging markets are where politics trumps economics and in this case, politics as in the front page and economics not even on page 6.

You’re absolutely right, but I’ve asked myself the question, whether it’s only limited to emerging markets or whether that is not also creeping into developed markets. If you look at what happened with Brexit last year, if you look at the surprise win of Trump and the elections taking place in Europe now, due political events have certainly been on the front pages and has driven investor sentiment for the last year and a bit already. Rather than the old school fundamentals as we’ve known it.

Now your people when they have a look at how to allocate the money on behalf of clients, do they take this geopolitical stuff very seriously or do they go bottom up, analysing individual companies.

Alwyn van der Merwe, our Chief Investment Officer addressed this at our recent client roadshow in South Africa and said that the long-term investment cycle is still intact and in place and we should follow the long-term, look at the long-term trends, follow the bottom up approach, stick to your investment philosophy, stick to your investment approach because all these geo-political soap operas that are playing off around us, is a lot of noise. So, I think on the shorter, certainly it’s going to impact the market, but if you’re a long-term investor, which most of our clients are, you have to stick to your knitting and stick to what you believe in.

So try and look past the turbulence that is probably going to get worse, not just in South Africa, but elsewhere.

Exactly, we’ve had some good news tough with the results in the French election this past Sunday. Hopefully I think together with the potential increased mandate for Theresa May in the June 8 elections here in the UK should provide some short-term stimulus to the European markets, but as I said earlier, I’m afraid, in South Africa, I don’t see that happening.

The business environment in South Africa, how are you finding that?

It’s tough and it’s very challenging. In our space, certainly, and you could see that in the companies that we analyse and that we want to invest in, that it’s extremely challenging. South African economy is not growing and if you look at the JSE over the last two years, up until the end of the first quarter over the last two years we’ve just moved sideways. That’s a reflection of the underlying earnings growth in the companies that are just not there. So it certainly is tough but what we also know is that over many decades South Africans have shown themselves to have perseverance under difficult business circumstances in the past. Businesses in South Africa have shown their metal and I have no doubt that we’ll be able to do it again, even under these trying circumstances that were experiencing at the moment.

That’s what Pravin Gordhan used to wave his flags around, the resilience of the nation, as it were, but I guess there is a point where you take just one hit too many. Are you finding that the flood of money or the demand for offshore investments has been as high in the past as it is now?

Currently we are certainly experiencing one of the peaks that we’ve seen.

What was it like, when last was it like this?

The environment has been so tough. The last time it has been so tough was with the global financial crisis back in 2008/2009. The last time that we’ve seen this spike in offshore investments or the demand for offshore investments was the same with Nenegate in December 2015. That was the previous big spike and we’re experiencing exactly the same now over the last two months as we did in December.

Image courtesy of Currency Partners

What do you recommend to your clients?

At the moment we’re telling our clients, we must give them comfort to say, we are sticking to our knitting, we’re sticking to our investment philosophy, we are going to sit through this cycle. One must be very careful of not getting emotional and investment decisions being driven by emotion and sentiment, rather than the fundamentals. So our first job really is to say, let’s just sit it out and let’s not take decisions which are short-term based rather than long-term based but then we must also use the opportunities when you get the short-term strength in the Rand, one must utilise the opportunities to diversify more of your portfolio offshore.

Sanlam itself, apart from the investment that you’ve made in the UK here in 2012 has been pretty smart in globalising.

Yes but mostly in emerging markets. If you look at Sanlam’s international strategy, it’s been focused on emerging markets, specifically Africa and India where Sanlam has been very successful. On the wealth management side and the investment management side, the institutional investment management side, we are involved in developed markets because that is what our clients demand. So that is client driven rather than business driven, but by and large Sanlam’s global expansion has been in emerging markets.

You’re right next to the monument to the Fire of London in London, very easy to find the Sanlam offices. How big an operation do you have now in the UK?

On the Sanlam Private Wealth side we have about 140 people working for us in the UK. We manage £2.5bn. Then we have an institutional investment manager, which is also based here in Sanlam Investment Management UK, we have a life business down in Bristol and we have a substantial shareholding in a platform business called Nucleus, so overall just over 400 people working for Sanlam in the UK.

And growing…

And growing. We are very selective about the growth opportunities that we utilise. There have been too many examples of South African businesses burning their fingers abroad, so we’re very selective of what we tackle, and we want to make sure that whatever we take on, that we could make a success of that.

Regarding staffing, do you get many people from the old country?

No, not really, by far the bulk of our colleagues here in the UK are Brits and its’ a very small component of South Africans, but what is great is that you could give, especially in the investment markets, you could give young, bright South Africans the opportunity to come and work in London. Can you imagine if you were a young portfolio manager or analyst, the experience that you gain working in London, which is still, as we speak, probably the financial hub of the world. We don’t know whether that’s going to persist or not after Brexit, but it’s a great experience, so we send people over here for a two or three-year stint to better prepare them for a career back in South Africa.

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Daniel you mentioned earlier that the last time we saw each other was in Omaha to go and listen to the ‘ou baas’ and the other ‘ou baas’, the Berkshire Hathaway AGM. Is there much from the stuff that Warren Buffett teaches, that you can apply now when people are panicking as they are in South Africa, maybe it’s the time to get greedy or not just yet?

No it’s not a time to get greedy. You’re quite right, going back to the basic philosophy of Warren Buffett is very valuable at this point in time, I think his criticism over the weekend, and I haven’t read it. Well, you’ve watched the webinar, but I haven’t read much about the weekend as yet, but his criticism of Wells Fargo and what went wrong there, I think is very valid for business today. In a low return environment, in a highly regulated environment that we find ourselves and a low return environment, I think business could get caught up in the wrong practices very easily and one has to be very careful of it.

So, get your incentives right.

Absolutely yes, no question about it.

Are you still hopeful about South Africa?

Of course we have a great country with great people, tremendous talent and as I said earlier, in business, in our society, and in politics we have mastered much bigger challenges in the past and I have no doubt that the current challenges we’ll overcome in due course.

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