Right of Reply: Setting the record straight on Magnus Heystek and offshore exposure

Key topics:Heystek accused of misrepresenting investment argumentsRisks of bias and conflict in financial adviceBalancing offshore vs domestic investment strategies.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa’s bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here..By Stuart Theobald.In ancient times, soldiers would practice their combat techniques on dummies made of straw, targets that roughly resembled real combatants but were much easier to defeat. Philosophers made a metaphor of these with the term "straw man argument", where a writer misrepresents an argument to create a version that's easy to attack.Magnus Heystek has on several occasions attacked a straw man version of some of my columns, including in his piece in BizNews this week, “I love my country but I love my financial freedom more”. I have watched Heystek repeatedly thrust his argumentative bayonets into his dummy version from the sidelines, knowing that sensible readers understand my position is nothing like what he purports it to be. I am not sure why Heystek protests so much. I have never mentioned him in my columns. Either way, I think your readers are poorly served, both in the misrepresentation of my argument and in the techniques that Heystek deploys against it.Let me state my position plainly. Investors are best served when their investment strategy minimises the risks and maximises the returns. Risk can be managed using an asset allocation strategy that limits volatility so that investors are not overly exposed to short-term downsides relative to their time horizons. Liquidity is also an important risk to manage, given that we will want to spend our savings at some point and want it to be available when we do. Costs must also be kept to a minimum. The task of determining an investment policy that meets these needs of investors often falls on investment advisors. Foreign exposure contributes two things to a portfolio: assets that are less correlated to a domestic portfolio, and foreign currency risk. Most investors are well served by having foreign exposure in their portfolios. There is a big world of assets that are less correlated to available domestic assets.Most South African clients will eventually be using their savings to fund their lifestyles, though some may well emigrate. This will include rand-based costs. As a client gets closer to retirement and needs to draw down on their savings, they must not be overly exposed to exchange rate risk. So far, I suspect, Heystek will agree.But here is the rub. I need not tell you that there is a risk of conflict of interest between investment advisors and their clients. Your pages have often contained stories of this conflict gone wrong, resulting in clients losing money while advisors profit handsomely. To mitigate that risk, we expect financial advisors to exercise fiduciary duty, the highest standard of professional conduct that prioritises client interests above their own.My concern is how this conflict can manifest in the foreign exposure that is appropriate for a client.Unfortunately, the objectively best portfolio may not fit the beliefs of a client. For example, some clients are far too risk-loving for their own good, wanting to go 100% into bitcoin, while others are too risk-averse, wanting to stay entirely in cash. The field of behavioural finance has emerged to study psychological biases that lead to poor financial decisions, including how financial advisors should manage them.One form of conflict arises when a client's beliefs and biases work for the interests of the advisor, but not the interests of the client. There is a segment of the South African market where I see that happening. All of us tend to give disproportionate weight to recent events in calculating probabilities. We are also often guilty of confirmation bias, of unconsciously seeking and believing information that confirms our worldviews. If you perceive the government to be failing, the tendency is to seek information that confirms this view. When that is handed to you by a financial advisor and wrapped up in an investment strategy, it amounts to exploitation. The adage that markets revert to the mean is not even entertained. When inevitably markets don't behave in line with the bias, such as the year-to-date with the 30% appreciation in the JSE and 10% appreciation in the rand, investors face the downside.Some advisors have offshore financial products to sell, often at higher margins than domestic portfolios. But part of the professional responsibility of an advisor is to ensure they have an adequate basis for their advice. This means being well-informed and well-researched. Some advisors certainly are. But some advisors share the biases of their clients and cannot properly assess the evidence for the domestic outlook, or more cynically are aware of the bias but exploit it. I have met some who cannot even name the key ministers responsible for economic policy, let alone assess the work being done and the implications for the economic outlook.This is what I mean in the one quote Heystek quotes of mine from a four-year-old column: "So next time the 'anywhere but SA' bandwagon comes charging past, see if for it as it is: a creaking wreck filled with those who make a living selling the negative story".Heystek's straw man is one in which I apparently believe clients should be completely domestic and that anything else is "disloyal to the flag". Nonsense.Unfortunately, Heystek's piece includes much petty ad hominem. He points to the fact that the JSE is a client of my company Krutham, which he alleges creates a conflict of interest on my part, and he points to me being resident in the UK, as if that is somehow relevant to a discussion on optimal portfolio strategy for South African clients. Krutham is a research and consulting firm specialising in the financial sector. My role in that firm is disclosed in every column I write. Most large financial services firms are clients, including, at times, Heystek's own firm, Brenthurst. That is because our analysis of the macroeconomic outlook and political developments is respected by both onshore and offshore clients. Our team of analysts aims to cut through the biases to focus on the facts.I think it is time Heystek retired his straw man. I suspect there is much we can agree on. We may have genuine disagreement on the technical question of how offshore exposure should be balanced with domestic exposure, and what the rational outlook for South Africa's economic performance is. It would be more sensible to focus on that..*Stuart Theobald is chairman of Krutham

Right of Reply: Setting the record straight on Magnus Heystek and offshore exposure

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