Inside Covid-19: Discount exchange rate for offshore investors; Lockdown’s US Day Trading boom for Sasol. Ep 50

In Episode 50 of Inside Covid-19, coronavirus-inspired South Africans seeking diversification abroad can now buy into portfolios run by the world’s biggest investment houses at a discounted exchange rate; we have a look at the lockdown inspired day trading boom in the US, and then consider its local implications with David Shapiro – including a five-fold surge in the Sasol share price; and end up going to Germany to discover how to spot a fake or shoddy Covid-19 protective mask. – Alec Hogg

In today’s Covid-19 headlines:

  • South Africa’s confirmed new daily coronavirus infections are continuing to rise exponentially with a new peak of almost 5,000 reported on Saturday and 4,600 on Sunday. The total is set to exceed 100,000 when today’s numbers are released, with deaths at around 2,000. South Africa’s new daily cases are consistently in the top ten of all countries, with Sunday’s increase was 8th behind the USA, Brazil, India, Russia, Chile, Pakistan and Mexico. The country’s late start and relatively low mortality rate, however, accounts for a more modest ranking of 26th in mortalities while on total cases, it lies 19th. Globally, total coronavirus cases rose above 9m on Sunday with deaths at 471,000.
  • In an update issued this afternoon South Africa’s Solidarity Fund said it had approved more than R1.2bn towards health interventions, including 200 ventilators costing R19.5m; R137m to humanitarian relief efforts with food reaching 280,000 families; and R36m for education and awareness programmes. The fund has received R2.9bn in pledges with R2.6bn deposited through 264,000 donations from individuals and 1,800 corporates.
  • Capitec Bank delivered a gift to thousands of customers today with the announcement that it will refund 100% of the interest to those who took advantage of a three month repayment holiday. CEO Gerrie Fourie says around 20% of the bank’s credit clients have taken advantage of the repayment holiday between when the lockdown began on 27 March and June 30. The interest rebate will be applied provided customers honour their loan repayments for the next six months.
  • New Yorkers today celebrate the second phase of re-opening at the city which was the US’s coronavirus epicentre. Up to 300,000 people will go back to work, including barber shops and hair salons, although occupancy has been capped at half the pre-Covid-19 level, reading material has been removed and stylists have to wear a face shield or safety goggles. Also allowed from this week is outdoor dining at restaurants and the reopening of city playgrounds and in-store retail. But while New York is re-opening, President Donald Trump’s trade advisor Peter Navarro said the White House is preparing for a second wave of coronavirus infections. The American death toll is already at 120,000, by far the highest in the world.

Craig Sher is the general manager and head of research and development at Discovery. It’s interesting to see that you’re an actuary and you’ve been with Discovery for nearly 20 years. You guys have been having a look at the trends of South Africans wanting to diversify their portfolios globally and launched a new product today, which is on the back of something that Discovery Invest has been up to. Just by way of background, the thrust that you’ve gone into here, is this market-driven?

The idea behind Discovery Invest International, let me just say at the outset is it wasn’t something that we built in response to Covid or market conditions at the time. In fact, we’ve been looking at building this particular part of the company for over a year now. I guess it’s a bit fortuitous that it came about at a time when a lot of people are looking at moving their money offshore. The reason for offshore investing is something that’s always been there, something that people should always focus on. It’s very important from diversifying currency, from getting access to opportunities and just general geographical diversification. Although, it’s something that’s really a hot topic at the moment, and it’s something that we wanted to do for a little while.

The psychology of investors, though, surely has changed with Covid-19?

That’s true. We think there is definitely a lot more appetite for offshore investing and there also happens to be a lot more fear in the market. A lot of people are moving into more conservative investments, moving their money into cash. In many cases, probably wrongly changing their financial plans into something that is more conservative instead of sticking to their long term plan. This definitely does have an effect on investor psychology.

The product that you launched today, Discovery Global Endowment, has got a couple of really big name international partners, BlackRock and Goldman Sachs. How do open the doors to these huge organisations?

It just talks to the negotiating power of Discovery. As the company has grown, it’s been able to bring on really, really big partners. You’ll know through Vitality’s strong partnership with Apple globally. We’ve got BlackRock, we’ve got Goldman Sachs. BlackRock, the biggest investment manager in the world. They have assets under management of almost $7trn, 13,000 investment professionals, it is a powerhouse of investing. We’re very glad and very proud to have them as our partner.

It’s interesting that if you bring it back to South Africa’s GDP pre-Covid, before the -10%, that’s 20 times South Africa’s economy. It just shows you the size of BlackRock is quite staggering. How are you leveraging those partnerships then, for people in South Africa to take advantage of?

What we’ve got through BlackRock is an advised set of portfolios of funds. Something that is very easy for an investor to navigate. Essentially, we just look at the risk profile, conservative, moderate or aggressive. We’re able to channel those investors into portfolios that are managed by BlackRock. We have Discovery conservative portfolio, a moderate and an aggressive. These portfolios are made out of active funds, passive funds, its got BlackRock funds. It’s got a whole lot of other funds in it, really a diversified basket that our investors are able to invest in. These are portfolios that have been managed by BlackRock in the way that they’ve been doing it over many, many decades. Just know that BlackRock manages money for some of the biggest institutions across the world. Being able to bring this to the retail investor in South Africa, we think is very powerful.

And the partnership with Goldman Sachs.

Yes, it’s a very similar story. Goldman Sachs, they have almost $2trn in assets under management dollars, again, 58 countries around the world. Through Goldman Sachs, we’ve set up a set of share portfolios. Investors can go in, have access to offshore shares. Some of the big names, Coca-Cola, McDonald’s, Nike, etc., and have a portfolio of these that are managed again by Goldman Sachs. They are one of the best in the world at doing this.

Now, you have described this as a world first, and I read through the documentation that there is an enhanced exchange rate. So I wasn’t too sure how all of this works, but maybe you can unpack that for us?

Sure. One of the focus areas of Discovery, as you know, is around this idea of shared value. That if we can get people to have the right type of behaviour that is good for Discovery and good for them, then Discovery will make more profit, and then we will share that profitability with the clients who made that profit. This works in exactly the same way. What we’ve done is we’ve calculated through various actuarial techniques, we’ve calculated the total profitability that somebody who invests with us in an offshore platform is going to make for us. Then what we do is we take some of their profitability over the 10-year term, and we channel it upfront into a currency discount. What this means is if the Rand Dollar, I think this morning, it is about R17.34 or around there, if you were to invest in the Global Endowment today, in one of these funds, you would buy in at about R16.10 or R16.13. So effectively a Rand and a bit below the current exchange rate. That applies whether investing in dollars, in pounds, in euros. I think that the Euro is about R19.30 and here you’d get in at under R18. And that’s the idea behind it, that you can invest offshore at a better exchange rate no matter when you invest.

That’s revolutionary. How do you manage to do this? If I understand correctly, you are calculating what the profit that will be generated on that investment will be for Discovery. Then you kick back part of that to give the person a lower exchange rate entry point.

Absolutely. That’s right.

Has anybody done this before or where did the idea come from?

The idea came from us. That’s why we did call it a world first. We couldn’t find anybody who had done it.

With the other parts that are associated with this, that’s quite easy to understand. It’s a shared value, you’re going to be buying your offshore assets at a lower price than you would be if you went through any of the banks today or even the foreign exchange market. Things like administration, do those costs make up for the benefit that you would be getting here?

No, we don’t charge anything extra for this. The idea behind shared value is really that we charge the same as any other competitive platform in South Africa, but because we have people investing, hopefully for a longer period as a result of it, that’s actually what generates the additional revenue. We do know that the structure has to stand on its own two feet, you can’t have one key product and then the rest of it is uncompetitive. The structure, whether you take advantage of the exchange rate benefit or not, is flexible, it’s efficient, it’s competitively priced. It’s structured for liquidity and tax planning and estate planning and all that type of thing. Then we’ve got this state of the art digital experience and onboarding. You don’t need any paper or to send any of that stuff in. It can all be done online, no wet signatures. The base, the chassis is very competitive, and then on top of that, you get the better exchange rate. You get access to the world’s best asset managers, etc.

With Covid-19, you mentioned the digital platform, you can carry on with business as usual?

Yes, that is the thinking. We’re still trying to understand exactly what business as usual really means, as is, I guess, every company in South Africa. The idea is to make it as simple and seamless as possible and that you are able to do everything online, that you’d be able to interact online, sign documents online. Really trying to build everything with this all in mind, that the world has changed and some things will stay. A lot more of the world, I think will be digital in the future.

Craig, I know it’s early days because you’ve only just launched this, but have you had any feedback yet from intermediaries from the marketplace?

A lot of excitement, a lot of questions in line with your question – how do you do that currency discount, etc. Generally very strong sentiment of positivity around it. But like anything, it’s a complicated investment, and so we’ll see in the numbers when they come through.

To encapsulate in a nutshell, you can invest in share portfolios with Goldman Sachs or in BlackRock assets, which are primarily the index funds, I suppose, by going through this Discovery Global Endowment today at a discount to the current exchange rate because Discovery is sharing its profits with you.

Correct. Those are two of the solutions, but it has an open architecture. So if you want, you can choose from other funds. If you prefer to invest with some other asset manager, we also have them on our platform. We also have a curated list of funds from a company called Allfunds. Allfunds, as you might know, is the largest distribution network of funds in the world. They have 40,000 investment choices. Then what they’ve done is they’ve done some screening to get it down to 7,000, other screening gets it down to 1,200, they get all the way down to a defined list of 73 investment choices. Besides BlackRock and Goldman Sachs, you can also have almost any asset manager that you want on our platform or our bespoke list that is built on the strength of the conviction of the Allfunds research.

What is the minimum investment, into this new product?

So the minimums again are in line with the market. In dollars, it’s $25,000 or currency equivalent, in Rands, it’s about R375,000.

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