How the JSE has destroyed your wealth: The facts laid bare – Magnus Heystek

As many who have saved and invested towards long-term financial independence will attest, it is incredibly difficult to make decisions that all stack up to ensuring your money consistently delivers a superior return. This is why investment advisers encourage us to have diversified investment portfolios, with a mix of asset classes – property, stocks, bonds, cash – and with variety within each asset class. There are many extra considerations, ranging from exactly which underlying assets to choose, when to buy them, when to sell them and through which vehicle. In this article, investment company founder Magnus Heystek – a former financial journalist who continues to use his writing skills to educate people – sets out why it is essential to have an international outlook when developing your investment strategy. It’s a controversial stance, because there are many reasons that local financial services providers would like you to keep your money in SA assets. – Jackie Cameron

By Magnus Heystek*

ISN’T it amazing how quickly one gets labelled, and once that happens, it’s very hard to shake off that particular label.

In the space of just two weeks I’ve been described as Dr. Doom by Felicity Duncan from Biznews, an Uber-bear (on the JSE) by Giuletta Talevi from the Financial Mail and to round off the threesome, I was called “someone who makes money out of white fears” by Jan de Lange, political editor of Rapport.

But even these descriptions pale into insignificance when compared to being called a financial pornographer a few years ago by a well-known financial advisor who also appears in print, radio and television. Perhaps too often.

I write for a variety of publications which ranges from Biznews, Netwerk24, Politicsweb, The Daily Friend and other websites. I also formerly wrote for Moneyweb.

I wrote my last article for Moneyweb almost 18 months ago. This was after a “career” of almost 8 years doing so, in the process writing probably 50-60 articles on a wide range of topics, but mostly finance, the economy and investment markets. I even sparred with Tim Noakes once or twice and my best-read article was the one wherein I asked the question: Which was best – cycling or sex?

I say career, but it’s not. You write articles and send it to these editors and if they like it, they publish it. No payment crosses hands but you get a little exposure and a lot of satisfaction when your work is published. Any writer will tell you that.

Other people golf, write poetry or paint. I like writing.

Editors are also – mostly – very glad to publish some good articles, because, as everyone knows, there is very little money in media work today with paper thin margins the order of the day.

In the old days there were many columnists who made a good living writing columns for one or more of the large publications. But as circulation figures and advertising collapsed , so has the amount of money one could earn as a columnist. Another dying career.

Investment returns

Being heavily entrenched in the world of finance and investments I naturally wrote about investments and investment returns.

Over the past 5 years I wrote many articles about the widening investment-return gap between local and offshore investments. At first the difference was marginal but over time it became this widening chasm in investment returns – as wide as the Grand Canyon and getting wider almost every month. I could understand that the large asset managers were not too impressed with my focus on the relative returns, but even more vicious was the reaction from other financial advisors and even the investing public.

It was like I was shining a  torch into areas that many would have preferred to keep in the dark.

Advising people to invest some money offshore was considered (and still is, it seems) to be a despicable act of heresy and betrayal. Unpatriotic in the extreme and for my sins I was told, more than once, to “f*ck off and go back where I came from”. This would be difficult, as I only have one passport, consider SA to be my home and also consider myself extremely lucky that not one of my 6 children and 3 grandchildren have emigrated. And did I say, our family has been in SA for almost 170 years?

At first I recommended offshore exposure purely for the diversification benefits it offered into innovative industries such as technology, biotechnology and health care. It was also the start of the FAANG* – explosion of extraordinary growth – which was hard to ignore – and I made it clear that investors who wished to participate in this generational boom of explosive wealth could only do so via offshore funds or asset swap funds. Where SA had one Naspers the US could offer 10-20 companies offering the same or better returns.

For the record: over the decade from 2010 to 2020 the rand returns of the Nasdaq was in excess of 1,000%. The rand returns  of the JSE over the same period a mere 200%.

But as the years went on and particularly from 2015 onwards it became clear to me that the under-performance of the JSE relative to the world was not a short-term aberration of underperformance against the S&P500, the MSCI World Index and also the MSCI Emerging market index, but that it was becoming entrenched and more pronounced.

I started tracking and reporting on this ever-widening trend in relative performance  which increased the shrieking from the peanut gallery.

After the sacking of  finance minister Nhlanhla Nene by former pres. Jacob Zuma in 2015 this trend accelerated and the widening gap between local and offshore performance became even more pronounced and acute. It was not cyclical anymore (as many fund managers had suggested); it now became structural, which was far more damaging and far more difficult to reverse. I became quite vocal about these structural issues in print, on radio and the many seminars my company hosted in 2015, 2016 and 2017.

There was a vicious spiral at play which included, amongst others, state capture, collapse of the state owned enterprises, increased regulation and interference, BEE-issues and a collapse of infrastructure as can be witnessed at Eskom, Prasa, water boards and municipalities. Throw all these issues into one pot against a collapse of the mining and manufacturing sector and you had a recipe for disaster. At the same time SA’s government debt started spiralling out of control-mainly under Pravin Gordhan – from around 24% to 55% of GDP even before the Covid-19 crisis hit earlier this year. It could now even reach 75-80% of GDP, based on current information leaking out of Treasury.

Investment message: Financial tsunami on its way

You see, I became so determined to get  this message across that I personally paid more than a million rands to finance a series of seminars – called SA Quo Vadis over three years which were held in the major centres of the country in 2016, 2017 and 2018. At first, my warnings about the “financial tsunami” were greeted with disdain and derision. “It’s just a short term trend which will soon reverse,” I was often told.

Speakers included Ryk van Niekerk from MW, Dr Frans Cronje from the Institute of Race Relations, Magda Wierzycka from Sygnia, Clem Sunter, Mike Schussler and Ralph Mathekga, amongst others. I tried to offer the widest range of speakers so as not be accused of cherry-picking my speakers.

For a short while, in the run up to ANC-leadership contest in December 2017 it looked that as if my fears were unfounded. For several months pre and post the elective conference – foreign capital flowed into the country, the rand strengthened and the stock market rose to new record levels.

But my analysis about the true state of the economy did not seem to quite pick up the same positive mood that prevailed in the country, and I said as much, which enraged the commentariat even more.

Our large asset managers kept on with the pretence that all is well. In March 2019 Old Mutual went round the country speaking to its thousands of advisors, telling them the “The JSE is set to be the best investment market over the next 5 years”. That was reported in the Business Day at the time. I still have the article for my records. Another investment giant PSG was in my office at around the same time, basically saying the same thing.

If  any other company was trying to sell another product with the same outrageous claims, they would have been accused of selling snake-oil at a wild west rodeo show.

Underperformance spreading wider

But here we are 5 years later, and the results are in.

The SA economy and financial markets (rand, JSE) have experienced a decade of underperformance relative to the rest of the world, and over the past 5 years, a total collapse of growth, which is now being felt across all portfolios linked to the JSE. The three pillars of traditional wealth creation (property, equity and interest rates have all collapsed), and there has been no place to hide, apart from the much hated cash/bonds-combo as well as offshore equities.

SA residential property prices (before the Covid-19 collapse currently underway) had already dropped in real terms over 12 years by more than 24%. Another 10-20% decline is not out of the question, even from these depressed levels, by the time the property market recovers from the current crash.

Equity portfolios on the JSE  too have, on average, not produced any growth over the past 5 years. Strip out Naspers – basically a foreign company – and the rest of the JSE has given you a negative return of between 10-25% over this 5 year period.

In print, on radio and at seminars I kept on repeating that the JSE is in real trouble and that our financial media, for a variety of reasons, are not reporting this accurately. For my sins I was labelled as an “idiot”, or worse, by a fund manager from Coronation at an investment seminar in Cape Town, who did not realise I was in the audience. My sin: for telling radio listeners that I prefer offshore investments.

I was often asked to name some companies and asset classes when I was on RSG. And I gave this advice away for free – I even often mentioned names such as Franklin Templeton Biotechnology fund, Investec Global Franchise and the MI Plan Opportunity fund amongst others.

MI-what? would often be the reaction from potential investors, preferring instead to stick with the big brand names to hold their money.

I know it was impossible to forecast at the time, but I was very impressed by the way Tony Bell from MI plan was managing offshore 5 years ago and said so, many times. For his rewards he has won the Raging Bull award four years in a row, yet fails to attract the billions of the rands the large brand names still attract irrespective of poorer performance and much higher fees.

As an aside, the MI Plan Opportunity fund, which is a flexible asset swap fund – is the single largest fund exposure in the Brenthurst range of portfolios, with annual average return of in excess of 15% per annum net of fees. It mirrors the performance of the MI Plan Global Macro fund which is available to retail investors.

Time and space does not permit me produce charts and tables about how poorly the JSE has been performing, lagging developed markets by a country mile, and even against its own peers, the countries in the MSCI-Emerging markets universe. Historically the JSE has been by far the outstanding emerging market to invest in, largely due to its treasure trove of gold, diamonds, silver, manganese and platinum. The latter still brings in much-needed foreign exchange and foreign investment, but for the rest, the glory days are  mostly over. And the results show.

Over 10 years the MSCI Emerging Market index returned 11.8%pa versus the JSE which returned 10.1%pa. Over 5 years the situation changes dramatically, with the EM returning 8.03%pa versus the JSE at 3.03%pa and over 3 years 8.99% pa versus 3.09%pa.

So even if there is a massive switch of capital back to emerging markets, is there a valid argument that the EM market will probably be a better choice than the JSE.

The Difference: A house and a car

So let’s end up with a real-life example, which will bring home the enormous wealth destruction which has taken place for South Africans who kept their money at home and did not feast at the table of offshore diversification.

In this example I’ve calculated the rand value of R1m invested in (a) the MI Plan Global Macro fund versus the rand value of the PSG Equity fund. I chose the PSG fund as it’s the only fund in the top 10 of the largest equity fund in SA which does not have any Naspers in its portfolio. It therefore, represents the performance of SA Inc.

Last week the rand value in the MI Plan was R2,036,000 and the PSG values a mere R769,000.

In a mere 5 years an investment of R1m the difference of more than R1,267,000 equates to a modest house and brand new but also smallish car, and you are still left with the same capital as in the PSG account.

I’m not picking on PSG and I could have used a number of other pure equity funds and even balanced funds over the same period of time, and  the results would have been broadly the same. The Old Mutual Investors fund – the largest and oldest fund in the OM stable – equally destroyed value over the 5 year period in question and ended with a value of R810,000, not much better and still a massive destruction in nominal terms and also in real terms.

So I am an equal offender here: no discrimination.

I don’t know what the next year and even 10 years holds. But do I see the JSE suddenly bolt forward like a racehorse from the rear of the field burning its way past the leaders and ending first over the winning line? No, I don’t. I can see some recovery in bombed out sections such as listed property, but on the whole I don’t see the JSE offering the wealth-generating opportunities it used over more than a century.

It comes down to two very important words: cyclical or structural. If it is structural (which I think it is), we are all in trouble. If its cyclical (which I hope it is) we still have a chance.

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  • Magnus Heystek is investment strategist at Brenthurst Wealth. Follow him on Twitter at @magnusheystek.
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