South African investors now have more money invested offshore than foreign investors have in SA, according to some of the last research conducted by the late Mike Schussler for Brenthurst Wealth. If that makes you pause for thought, read the article below to get an idea of how property is faring as an investment. – Sandra Laurence
By Magnus Heystek*
The last 10 years or so in investment markets have been characterised by an ever increasing outflow of money from the local asset management industry to pastures elsewhere. At first the outflow was a trickle, as offshore markets started showing the local market its heels year after year, but it has since turned into a torrent of money flowing out – legally – via the Single Discretionary Allowance of R1m or the larger Foreign Investment Allowance of R10m per year.
Many High-Net-Worth individuals have also received approval from the SA Reserve Bank to legally take out billions of rands from the country, albeit under the watchful eye of SARB.
It would be surprising to me if most, if not all, of SAās so called HNWs with assets exceeding $10 million (R170 million) havenāt legally taken out most of their money over the past 10 years or more. The main reason for such a move would be to diversify and seek investment opportunities elsewhere for their generational wealth.
And itās wise too, as offshore equities and property have vastly outperformed the local market, despite the desperate cacophony from certain sections of the media who still try and beat the tired old drum of ālocal is lekkerā. The self-interest of this type of campaign is nauseating, to say the least, based as they mostly are on a misplaced sense of patriotism and loyalty to a failing state.
This article deals with the outperformance of offshore equities versus local equities. I have previously shown how the collapse of the local property market – both residential and commercial – is a disaster which adds up to losses in the trillions of rands. Yet, very few analysts and commentators breathe a word about this.
The property market industry in SA, which includes developers, banks, conveyancers and estate agents, is still trying its best to present a picture of an industry in robust health, where you are virtually guaranteed to make money – but this hasnāt been the case since may 2008, when the local residential property market officially cracked.
Some years ago when I wrote an article titled: When rent to buy becomes buy to regret, in which I advised investors to sell their investment properties, I found myself in the ENCA studio being confronted by a barrage of attacks from people in property, all calling my advice stupid and ill-informed.
In the meantime, most residential property markets all over the world – Canada,Ā the US, Australia, New Zealand, UK and most parts of Europe – have seen returns in excess of 100% over the past year in US dollar terms. There are still some small pockets in the Western Cape, such as Paarl, Franschhoek and Stellenbosch, for instance, where there is still growth driven by the enormous movement of people escaping the collapse in the north, thereby driving up demand and prices.
As a small example: 10 years or so ago Brenthurst had two offices: one in Pretoria and the other in Fourways. Today we have 3 offices in the north, having added another in Sandton, while we have five offices in the Cape, with a sixth opening in George in the near future. This was driven by organic growth and the move of our clients down to the Western Cape.
Actual numbers are hard to obtain but the late Mike Schussler, in one of his last pieces of research for Brenthurst Wealth, showed that SA investors now have more money invested offshore than foreign investors have in SA.
Even Allan Gray was forced to admit in a commentary over the festive season that the returns on offshore markets have been way better than returns on the local one, when measured over the past 10 years. An equity investor from abroad would have earned almost zero in USD terms over the past 10 years. The only sector that has managed some growth in USD terms was commodities, a notoriously fickle and volatile sector.
Outflow of money
The asset management industry is feeling the pinch and there has been a decline in Assets Under Management over this period, while the smaller asset managers, by and large, are treading sideways and showing very little growth in assets.
One or two medium sized asset managers have been taking away assets and mandates from the larger ones, such as Truffle, Fairtree and 36One, but for the rest it has been a sideways trickle of very little growth and net- net, an outflow of capital.
Coronationās assets under management, for instance, have declined from R640 billion in 2017 to current levels of around R580 billion, according to the latest numbers. Compare this to the growth in assets under management of Fundsmith Global Equity, one of the funds which I use in the article later on – which has grown from Ā£4,1 bn in assets in 2014 to Ā£22bn today, even after the downturn of 2022.
Likewise, the Assets Under Management of Dodge and Cox which since 2016 has grown from $160bn to $371bn.
The financial website Citiwire published a piece some 10 days ago which showed that offshore investment returns were superior to local returns when locally managed funds are compared.
For the purposes of this article I chose a different method. I used the 3 largest local equity funds and compared them to the 3 largest offshore funds available and registered on local investment platforms. The reasoning is quite simple: these are the funds where the bulk of local investors put their money and I wanted to see what the outcome in rands in cents was. In each case, R10,000 was invested in these 6 funds 10 years ago and the current rand values last week were obtained. The outcome over a 10-year period couldnāt be more stark. My methodology was quite simple:
I took the top 3 largest local equity funds and compared them to 3 large offshore equity funds popular in SA, plus a local-listed offshore fund. I also assumed a R10,000 investment 10 years ago in each of them to see what the rand value would be today: Plain and simple.
What your R10,000 is worth today in each of the funds over 10 years
Fundsmith Global Equity R56,866
Franklin US Opportunity R51,180
Old Mutual Global Equity R45,404
Dodge and Cox R42,392
Ninety-one Global Equity R26,943
Allan Gray Equity R23,215
Old Mutual Investors R19,403
Hah, I can almost hear the ālocal is lekkerā crowd exclaim! What about the past 3 years or so, which included the Covid crisis, as well as the Russian invasion of Ukraine. Letās have a look, with the same funds and the same amount invested from February 2020 (when the Covid crisis hit the world, to the Russian war which started in February last year).
R10,000 invested when Covid broke out (February 2020)
Ninetyone Equity R14 367
Dodge and Cox R14,176
OM Global Equity R13,232
Old Mutual Investors R13,191
Fundsmith GE R12,707
Franklin US Opportunities R11,604
Not much of a difference, with the exception of the tech-heavy Franklin US Opportunities fund struggling to keep apace. But itās notable that the second and third spot are still taken by global equity funds.
The JSE was heavily boosted by the rise in the commodity sector players. For two years in a row, commodities were the top performing asset class in the world, including last year, being the only asset class apart from USD cash which showed a positive return.
This was driven by an extraordinary set of circumstances created by the Covid pandemic, at first, and then soon thereafter the Russian/Ukranian conflict.
It’s almost impossible to say whether this will be the case again in future. But it would be surprising if commodities are again the top asset class in the world. Itās a notoriously fickle and unpredictable sector, to which the JSE is greatly exposed.
Most of the top 10 performing stocks on the JSE Top 40 last year were global commodity players (Exxaro, Glencore) plus some heavyweight offshore listed stocks such as BAT, Sasol and ABInBev. A pullback in the commodity plays could leave the JSE very exposed to the current economic havoc created by the Eskom disaster.
The domestic economy is being crushed by the recurring blackouts and with a global recession almost a certainty, it would be prudent to consider more offshore exposure. It must be very difficult for Old Mutual to explain to their investors the massive difference in returns between the Global Equity fund and the locally focused Investorsās Fund, its flagship fund. I have yet to see an article or publication of local asset managers comparing the returns of its local funds versus its own offshore fund.
Itās worth remembering that asset managers still operate under strict offshore allowance and Reserve Bank guidelines and by attracting large inflows into their offshore funds, they will end up with capacity problems. But the biggest danger of highlighting the difference in returns is that investors in the Investorās Fund, for instance, will end up withdrawing their capital and moving it offshore, where it might not end up in an Old Mutual fund.
So whenever you read an article or listen to an offshore/onshore discussion, ask yourself who gets paid by whom.
Independent advisors only get paid by one source: their clients, who expect them to give independent and objective advice.
- Magnus Heystek is a director at Brenthurst Wealth. Follow him on Twitter @magnusheystek
Read more:
- Magnus Heystek: Reality and the art of investment
- Foreign investors are heading for the hills ā Magnus Heystek
- Best of 2022: Magnus Heystek: Implement Plan B to avoid Vicennium Horribilis
