Magnus Heystek: Reality and the art of investment

Magnus Heystek recalls his challenge with independent money manager Piet Viljoen, which started a year ago when a Biznews member put up R500,000 to be invested over a period of 5 years. There were very few preconditions: Piet was to invest in his Value fund, which is a 100% SA equity fund, while I had to invest offshore, in any asset class funds of my choice. That was in November last year and I chose a portfolio of mostly tech-heavy funds on the Momentum platform (Momentum Wealth International) in Guernsey. Heystek believes timing is the crucial factor in many things, not least in asset management. Read his thoughts on the matter below. – Sandra Laurence

Timing in the market and the luck of the investment draw…

By Magnus Heystek

Timing, as in markets, sport and love, is everything, they say. A split second in a football match could mean a well-placed cross to Ronaldo or Messi that lands in the back of the net or floats agonisingly by, as we have seen many times so far during the current matches of the Soccer World Cup in Qatar. Or the perfectly timed- pass from Willie le Roux into the safe hands of winger Kurt Lee Arendse during the Springbok’s drubbing of the pride of England at Twickenham on Saturday. Or you pass on a date with someone who could turn out to be the love of your life.

The difference between hero and zero is so vast. Heroes are remembered and lauded, zeroes are forgotten very quickly. Such was my feeling last week during the 1- year anniversary of the so-called 5-year challenge between Piet Viljoen from Counterpoint Asset Management and myself: timing. If only. If only this competition had started six months later or better still, 10 years earlier.

But it didn’t. It started a year ago when a Biznews member put up some real money, offering Piet and I each R500,000, to be invested over a period of 5 years. There were very few preconditions: Piet to invest in his Value fund, which is a 100% SA equity fund, while I had to invest offshore, in any asset class funds of my choice. That was in November last year and I chose a portfolio of mostly tech-heavy funds on the Momentum platform (Momentum Wealth International) in Guernsey. It reflected all transaction costs that would befall a retail investor, including an advisory fee, as well as currency exchange fees. I wanted it to reflect the actual experience of a retail client.

Those were the cards I was dealt. No one was to know that global markets were about to enter a catastrophic collapse in almost every asset class, ranging from technology stocks through to Bitcoin, bonds, property and even precious metals. It is now recognised as one the three largest financial collapses in over 100 years, with global losses equalling those of the Great Financial Crash of 1929 as well as the Great Crash of 1969.

Even the drop in markets in March/April 2020 does not come even close. Unlike Kenny Rogers, I couldn’t  “fold” my cards and walk away. I had to keep on playing the cards I was dealt.

The markets started a downturn in December last year already, as it became clear that the days of easy money from the US Federal Reserve were over and that interest rates were set to increase. All good and well as that scenario was generally forecast. But the markets could not foresee what was to happen very soon thereafter: the Russian invasion of Ukraine set in motion a chain of events which sparked an inflationary rally in everything from food, to gas, oil and industrial materials. What was going to be a mild reset in markets became a full- blown recession as inflation spiked to above 10% in more all around the world. Not one developed equity market has made any money so far this year, with losses ranging from  -10% (in USD terms) to as much as -40% for Austria.

Some smaller developing markets made some money, mainly oil and resource overweight countries. For the rest, it has been a sea of red.

Nowhere to hide

So far this year only two global asset classes have made any money. The one was USD cash, which gave a return of 2%, and the other was resources. Hardest hit was Bitcoin and cryptocurrencies, with losses of more than 65% followed by technology stocks.

At the same time the rand actually strengthened from around R16,50 at the beginning of the year to around R14,40 mid-April, further thrashing the returns on my offshore portfolio. Mid-year Piet’s Value fund was showing a value of R565,000 while my MWI portfolio was worth R385,000. I was left behind in the stalls as Piet’s purebred racehorse shot out of the starting stalls as if it had a cracker under its tail…

Already by the half-year mark it was clear that I was being left in the dust by an in-form Piet, who was riding the crest of a wave, being top-performing fund manager in SA over 5 years mainly due to his heavy exposure to resources. As technology went down, resources went up…spectacularly so. After one year Piet’s portfolio was up by 17% while mine was down by 18%. Is it a case of pay-pay at this early stage or is there some more drama to come? Tech stocks seem to have found a bottom around mid-June plus there was a sharp drop in the ZAR/USD exchange rate which helped the offshore side of things, while resources took a bit of a breather. The past six months the returns are as follows: Maggie’s MWI portfolio is plus 4,4% while Piet is down almost 2%.

Is this the first sign of a shift in fortunes?

I have noticed that Terry Smith now has 25% of his huge Fundsmith Global Equity fund in technology stocks while Tony Bell from Thinkcell, who now runs the Brenthurst range of funds, has also upped his allocation of technology shares in the IP Global Opportunity fund.

Only time will tell. Many technology companies have been forced to lay off thousands of staff, something that hasn’t happened in many years. I see that as a good sign and that tech-heavy companies are now being run along normal commercial lines and not pie-in-the sky stuff, where endless funding was almost guaranteed. I have made some changes to the portfolio and have now included the Ranmore Global Equity fund to give it some more of a broader asset diversification but it is still heavily exposed to technology stocks, including Anthony Ginsburg’s Megatrend ETF.

Ten years ago

Had this cash-flush sponsor of the 5-year challenge challenged us 10 years ago, when I first started recommending offshore equities – and in particular technology stocks – he would have been a very happy man today. His R500,000 investment would have grown at an annual rate of 25,3% per annum to be worth an astounding R5,165 000 today, even after the big drop in values this year.

The same investment in Piet’s fund would be worth R1,422 550 at an annual return of 11,82% per annum, one of the best equity funds over 10 years in SA. Over 7 years the numbers were as follows: 

Nasdaq R1 668 800 versus Value fund

R 1 017 300.

Over 5 years: Nasdaq  R1 261 450 versus Value fund R948 750

Over 3 years : Nasdaq  R 826 000 versus Value fund R955 800.

Over 6 months : Nasdaq R516 400 versus Value fund R494 000.

Predicting the future

No one knows what the future holds and what could happen. Peace/war could break out with two totally different outcomes. The US Fed could pivot and not increase interest rates as much as the market thinks, Russia could drop a nuclear bomb or maybe not. All these imponderables are factors that could determine the eventual outcome. After more than 45 years in the investment business, I do know one thing: resource cycles do not last forever. And when they dive they take deep dives. The global economic growth rate is fast reducing and some forecasts are foretelling a recession, which will not be good for resources. 

The five-year challenge should also not be seen as a “race”. It should rather illustrate that the investment world is a collage of fast-moving parts, sometimes at the speed of light, the consequences of which will only be truly understood much later. You can never bet your all on one stock, market or asset class, tempting as it might be. Nothing beats a well-diversified portfolio, with investors needing both offshore and onshore investments.

As much as an investor should not have all his eggs in one basket, be it technology or resources, it must also be understood that unforeseen events can completely change well analysed and thoughtful scenarios. This is part of the challenge of creating long-term real wealth for South African investors. Many local assets have not beaten inflation (residential property or listed property) for more than 10 years and more, while there are certain industries not present in SA that could boom in other parts of the world, such as global technology, biotechnology and healthcare stocks.

As the famous writer Kurt Vonnegut said in his famous commencement address in 1997: “Don’t waste your time on jealousy. Sometimes you are ahead, sometimes you are behind. The race is long and, in the end, it’s only with yourself.” Or even better still, if I may slightly alter something else he said, “Throw away your old investment statements, but keep your old love letters.”

Over 3 years : Nasdaq  R 826 000 versus Value fund R955 800.

Over 6 months : Nasdaq R516 400   versus Value fund R494 000.

Predicting the investment future

No-one knows what the future holds and what could happen. Peace/war can break out with two totally different outcomes. The US Fed could pivot and not increase interest rates as much as the market thinks, Russia could drop a nuclear bomb or maybe not. All these imponderables are factors that could determine the eventual outcome. After more than 45 years in the investment business do I know one thing: resource cycles do not last forever. And when they dive they take deep dives. The globe’s economic growth rate is fast reducing and some forecasts are foretelling a  recession, which will not be good for resources.

The 5 -year challenge should also not be seen as a “race”. It should rather illustrate that  the investment world is a collage of fast-moving parts—sometimes at the speed of light and of which the consequences will only be truly understood much later. You can never bet your all on one stock, market or asset class, tempting as it might be.

Nothing beats a well-diversified portfolio, with investors needing both offshore and onshore investments.

As much as an investor cannot have all his eggs in once basket, be it technology or resources, must it also be understood that unforeseen events can completely change well-analysed and thoughtful scenarios.

This is part of the challenge of creating long-term real wealth for South African investors. Many local asets have not beaten inflation (residential property/Listed property) for more than 10 years and more, while there are certain industries not present in SA that can boom in other parts of the world, such as global technology, biotechnology and health care stocks.

As  famous writer/hellraiser Kurt Vonnegut says in his famous commencement address in 1997: “Don’t waste your time on jealousy. Sometimes you are ahead, sometimes you are behind. The race is long and, in the end, its only with yourself.”

Or even better still, if I may slightly alter something else he said, ‘throw away your old investment statements, but keep your old love letters.”

  • Magnus Heystek is an investment strategist at Brenthurst Wealth

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