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Retirement annuities have decimated your savings – Magnus Heystek #BestofBizNews
Magnus Heystek runs a successful and burgeoning investment boutique Brenthurst Wealth Management – which recently won the Boutique Wealth Manager of the Year Award at the Intellidex Annual Wealth Manager Awards, the ‘Oscars of the investment world’. In this excerpt from the Finance Friday webinar, BizNews editor Jackie Cameron discusses retirement annuities with Heystek, who stresses that there is a crisis developing for people who rely on the traditional methods to fund their retirement – because the instrument that they’re using is busy failing them. To address this crisis, Heystek recommends that, the minute you are over 55, seriously consider getting your money into a living annuity where you can get a 100% offshore allocation. Also of interest, Heystek notes that if he had some spare cash, he’d be buying physical gold. These and a host of other financial issues are picked up on in the BizNews Finance Friday webinar. – Nadya Swart
Hello everybody, welcome to the BizNews Finance Friday webinar. With me today, I’ve got Magnus Heystek, an independent financial advisor. Magnus, I see you’ve won another award this week.
Well, thank you very much for mentioning that Jackie. Yes, it’s just like the Oscars in the investment world – the Intellidex Annual Wealth Manager Awards of the Year. And you’ve got two categories: one for the big guys and one for the boutique guys, where we play in, and I’m glad to say we won the best Boutique Wealth Manager of the Year Award. Thank you very much.
Well, congratulations. We’ve had a lot of questions on retirement annuities over the last couple of weeks, and you’ve produced some very interesting graphs here. I wonder if we can just quickly talk through those before we kick off with some of the questions?
Well, just some background there: retirement annuities and pension funds, preservation funds are bound by Regulation 28 of the Pensions Act – so they can only get 30% offshore. The balance has to be in the local market, and that’s been the case since 2011. As a result of the poor performance of our local equity market, that has been having a major impact on the growth rates of the traditional retirement annuities or, in fact, all retirement annuities.
And I just took this out as an example – I’m not picking on anybody, that’s why I’m not publishing the name. But there is a retirement annuity fund of one of the insurance companies where – after five years – relative to inflation, you’re down 50%. You’ve made no money in five years. In fact, you’ve lost 5% of your money over a five year period. And you can go through all of the returns – some are better. This is probably the worst one I’ve seen.
So, there’s a little bit of a crisis developing in people who rely on the traditional methods to fund their retirement – that graph shows it very clearly. So, there has been no growth, and in fact, you’re down 30%. And that is starting to become a major talking point. People are questioning their RAs. They’re demanding answers and they’re demanding returns. And this is affecting a lot of people in their retirement.
Their retirement projections from five or 10 years ago are out by about 30 to 40% in real terms. And that – combined with the Covid collapse and the bad property market – means that most people are now severely underfunded – not because they haven’t been putting money in. It is because the instrument that they’re using is busy failing them and you can clearly see that.
Really frightening because we’ve been encouraged to invest in RAs, you know, from the day we start working – we’re encouraged to set aside money because there’s a tax incentive. What do people do with their money in an RA? Isn’t it stuck?
They can change the asset allocation. And when I say this, and I’ve been saying this for a while, if this doesn’t change, cash is not a bad way to protect your money or even bonds. But we need to change Regulation 28. We need more offshore.
And if you’re over 55, there are other ways to get more offshore exposure by actually pulling out your money, getting your tax free portion into your pocket and then reallocating your funds into more offshore or better performing funds.
But this is quite severe: if you look at the performance of the large pension funds (not as bad as this), but I get guys who send me their pension fund statements – and they haven’t made money in five years. And the media doesn’t talk about it: they are either under-resourced or they’re too scared to talk about it. But we need to talk about it. There’s a massive crisis in retirement funding developing for the middle class to upper class in our society.
It’s been suggested that we should look for a nimble asset manager. I don’t see too many of those at the moment, but perhaps you could name some.
The decision as to the asset allocation depends on the financial advisor – that has to be more nimble – or the owner of the product. When you’re in a fund and it’s not performing, the fund manager has got no responsibility towards you. That fund manager must merely stick to the mandate of the fund, and a lot of clients don’t fully understand this. They often say: ‘But why don’t the fund managers change their investment strategy?’ You have to explain to them that the fund manager is beholden to a specific mandate, which is in the fun fact sheets or the document, and they will invest according to their mandate.
You, as an investor – and more importantly, your advisor – is the one that needs to be nimble and is going to find those funds. There are a number of smaller funds that have done very well. You’ve got to go and find them and then put your clients into that if you’re allowed to do that. So, it’s more a reflection on the advisory industry – that they just tell their clients: ‘Oh, don’t worry. It’s long term, don’t panic. It’ll come right.’ The more independent advisors, I would suggest, are the ones who get involved and say: ‘No, no, no – let’s change it because it’s not going anywhere.’
Thank you. So we’ve got a question here from James who asks if it is possible to transfer a closed RA from provider to provider? He says: ‘I have two from a previous employer, which I would like to move and merge.’ Is that possible, Magnus?
Yes, it is. It’s a bit of a cumbersome process, and I think it’s called a Section 37 transfer – a lot of paperwork, there might be some slight penalties involved. But yes, you can move it. I’ve done it with my own RA’s, for instance, moving it from the big ones to a much smaller and nimble fund. And then I can choose my own funds, and I’ve done far better than with the old style.
And that’s what I’ll also be recommending to our clients: that the minute you are over 55 – seriously consider getting your money into a living annuity where you can get a 100% offshore allocation. As an example, my living annuity returned 37% in the last year. Our stock market has given you zero.
So, people need to get involved in their pension funds, retirement annuity funds and speak to an independent financial advisor.
Great, thank you, and then Zukiso says: ‘Why are advisors reluctant to recommend ETFs and index tracking unit trusts? Magnus, what is your view on ETFs and unit trusts?
We use increasingly more and more ETFs, especially on the offshore side. I mean, our Global Equity Fund is 100% ETFs – using Vanguard and BlackRock – and you can get them very, very cheaply. My stress is on the world independent. I think a lot of the tied agents, the embedded agents, are forced to recommend their high cost products to their clients – for obvious reasons.
And, as independents, we get paid by our clients, we don’t get paid by anybody else but our clients. And they are very much sensitive about pricing and costs, and they’re not stupid. And then you try and sell them a very expensive product – they will walk away. So, we’ve been using it for a very long time.
A lot of questions coming through are about what an independent financial adviser is. So, how do you actually know if you’re in the hands of an independent financial advisor? What are the questions you ask?
I think the regulatory bodies are also trying to define clearly who is a tied agent – when they work for a certain company and they have to now declare: I work for X, Y, Z company and I can only give you advice on that company’s products. And there’s nothing wrong with that, but you have to declare it.
The second one is the independent agents who are not in that restricted space. They can go out and they can offer virtually any product on the market. And they are then allowed to say: I am an independent financial advisor, which is a really good thing because a lot of people have been walking around saying: ‘I’m independent, independent!’ But you end up placing all of your business with one company, which is dishonest in many ways.
Jonathan says financial advisors charge a fee, whether you make a gain or not and he has a large problem with this. However, he says he would rather pay an extra percentage on performance. This is a win-win agreement, he says. What do you think, Magnus, about performance fees?
There’s no real merit in that argument, and we get people from time to time saying: ‘Well, the funds have gone down, but you’re still taking a fee.’ I mean, yeah, you even have it with asset managers, who will take a performance fee, although they’ve lost money, but they have outperformed the benchmark which determines whether they can take fees or not. So, it’s a slightly tricky question.
You can agree with your advisors. Say: ‘Listen, I’ll pay you a higher percentage performance fee, we’ll set the benchmark and a year or two later – you two will sit down and work it out.’ And if we had done it in our practice, we would have made far more money, but it’s a very complex calculation to do for every single client. To work out: what was the benchmark, what was the out-performance, what was the percentage fee.
Worldwide, most people – 90% to 95% of IFA practices are very happy for you to pay a fee based on the growth of the assets. They realise that markets can go down and they’re not going to blame the advisor and say: ‘I’m not going to pay you, because there was a Covid-market crash or there was a 2008 crash. Most advisors or most clients understand that and they’re willing to pay for that.
You often get people that say: ‘Just do an assessment of all my stuff, pay me an amount and I’ll pay you an amount of money.’ And we do that: we send them a bill like a lawyer – and they’ll either go away or come back.
It’s quite interesting because you obviously do a lot of work behind the scenes and people don’t necessarily think about that when they pay for their advice. Julian has this question, which touches on the first slide that you showed us. He wants to know why the local equity markets have performed so badly when the top 40 companies seem to earn the bulk of their earnings from offshore assets?
That’s a little bit of a fallacy – that they earn the bulk. It’s true to a certain extent, there’s about 30% of companies who earn most of their assets or their earnings offshore. But remember, they are still bound or exposed to local market conditions.
I’ll give you a mine as an example, a gold mine: it produces gold, sends it offshore and it gets paid. But – it has electricity issues, it has labour issues, it has infrastructure issues. And that is a long, long argument, but in a nutshell – the macro-economic environment in South Africa in the last five years has been horrendous.
So whether you export stuff and get paid in dollars, your costs relative to your competitor in the United States and in Canada is much higher in many cases. So, you might be competing in the same space, but your competitor is making R10 profit per unit, but you’re only making R5 profit per unit – because of electricity or labour or water or whatever the issue is.
So, the investment industry has gone out selling the idea that the top 40 is mostly offshore. It’s simply not true. You can look at the performance of the top 40 relative to the MSCI world index (or any index). Our local macroeconomic situation has pulled us quite down, and if you strip Naspers, for instance, out of our market performance and you look at the mid caps and the small caps – I mean, that’s been a bloodbath as far as profitability is concerned.
So, our market has been driven downwards by two things, in my view. First of all, there’s been a flood of foreign capital flowing out of the market since 2013 and the graph shows it. And secondly, our profitability of listed companies on the JSE as a percentage of GDP has been declining from about 11 to 12%, down to about 6%.
Now, that’s a horrible decline and that’s why our companies are where they are on the market. It’s been driven downwards by real things, profitability and the foreign money, which has been boosting our market for a long time, has just gone elsewhere. And correctly, they’ve gone elsewhere because they’ve made phenomenal money in the US and technology and in other parts of the world. So, that’s why our market is so down and hence our performance is so poor.
Henry asks: ‘How can I get access to the Vanguard ETFs without transferring my funds overseas first? Is there a way?’
The Vanguard is just not listed on the local market, but you can get equivalent funds via Sygnia, which launched a couple of very exciting and low cost funds that are doing exceptionally well in the fourth industrial revolution. The fans of the S&P 500, and they’ve launched that OSI fund, which is quite exciting.
So, I think you’ve got enough equivalent products with Satrix, with Sygnia, with Easy Equities. You will find them in here. If you want Vanguard, specifically, you need to remit your money into dollars and go and buy on an offshore platform.
Which brings us to Hein’s question or observation. He says that direct overseas investments tend to be prohibitively expensive. What do you think the minimum amount of money is that you need to have to make offshore investing viable from a cost perspective?
It’s a function of two things. First of all, the offshore investment companies and platforms in particular have always demanded a certain minimum dollar amount, whether it’s $10,000 or $15,000. But because the rand has dropped so much – I mean, 10 years ago you could buy $10,000 with R60,000 – now it’s going to cost you R180,000.
So, it’s a function of the rand that has dropped and the offshore companies – because of the fairly large amount of admin to do (money laundering checking and all that kind of stuff) – do not deal with small amounts of money. And they also don’t deal with debit order stuff like we’re used to in South Africa.
So that seems to make it more expensive, but it’s not if you actually analyse the cost structures of offshore funds, especially ETFs. It’s actually on par, if not cheaper than in South Africa.
Thank you. Now, Peter is asking you to look into your crystal ball and he wants to know if you think there is a global market correction in the near future when earnings are declared post-Covid? You don’t have a crystal ball, Magnus, but what are you sort of reading from trends?
There’s no point wasting your time trying to predict markets, because you will get it wrong. And all around the world, you’ve been very, very smart guys – much smarter than myself – also trying to predict market crashes every day. And you get these things in your inbox every day: markets are crashing, markets are crashing. You just ignore them, because you do not know.
Who would have said that in the middle of April this year – with this Covid pandemic exploding on the front pages and people are dying and companies are being shut down – that that would be the turning point of a fantastic bull market since the beginning of April. Some sectors are up 50%. Some are up 100%. It made fools of most analysts and predictions.
I look at valuations and I look at trends, and there are certain sectors of the world economy making buckets of money at the moment, including biotech. You have seen all the big tech companies reporting their results: Facebook has come through, Amazon has come through. So, make sure that you’re exposed to that market. Avoid sectors that are being punished like property and shipping and tourism and airlines and that kind of stuff. But to these markets is an absolute waste of time.
Thank you. Bruce says he knows your view on Allan Gray and Orbis funds and wants to know if he should hang on after ten years of underperformance. Maybe you could just update our attendees on your view on those funds, because not everybody knows your previous points about those funds. And, of course, your view might have changed.
You know, my views are just commentary that, you know, here is a fund that is highly rated – no doubt. It has been around for a very long time. It is humungously big. But for 10 years, it has not beaten it’s benchmark. And in the last five years, substantially so.
Yet, and I sense this is a South African thing, South African advisors are just chucking money at Allan Gray / Orbis on the basis that it’s a brand name company, so people or the investors don’t really question the merits. They go: ‘That’s fine, Allan Gray is fantastic.’ As opposed to me coming to them with a company called Table Top Investments, and it’s got a great record, but it doesn’t have that public appeal and people don’t talk about it.
It’s just a commentary on the investment industry itself, where sometimes investors fall into the trap of brand name investing and not worrying about the returns. Whereas, when you come to a client and say you’ve got this other fund, it might be a smaller fund, it is doing fantastically well – which one do you want? They’ll take the Allan Gray fund. It’s just great marketing on the part of Allan Gray.
If you have money in it, I don’t think I’ll pull it out, but I will also build other funds around it: more specialist funds, more momentum-driven funds. It’s a value style investing and value style has been out of favour since 2010 – around about there – and quite badly so. But the momentum-driven stocks have just outperformed everything in sight.
So, what I then sit down and have to analyse and question on behalf of my clients: can you commit money to a fund manager that has a very specific mandate and doesn’t change when the market has changed? And we’ve seen lots of experience over time where fund managers don’t want to change, they keep on saying the market is wrong – we are right.
We saw it with Neil Woodford in the UK, where he was a superstar investor for many years, and then – when his style went out of favour – he kept on saying the market’s wrong, I’m right, and eventually it led to the closure of a very large investment company. So, it’s just little funny things about the investment industry, and it’s got very little to do with investment returns.
Thank you. Rodney wants to know if he should cash in his local equity unit trusts and reinvest in rand denominated global equity unit trusts or if he should move the funds offshore and invest directly there? So, quite a broad question. We were chatting earlier this week and you said there are ways that people can diversify without putting more money on the table. So, would this be one of those situations?
Yes, it would be. Let’s assume you’ve got a couple hundred thousand right in local equity funds and you’re not happy and you want to get into offshore funds or into offshore assets swap funds: you can make use of your capital tax exemption of 40,000 per tax year and make those changes. You can do some changes now, next change in March – in the next tax year – to minimise the pain.
But there’s not going to be a lot of pain – unless you’ve been in the market for a very long time. So capital gains tax is one issue that you need to consider, and if you don’t know how it works, you go and see a financial advisor that will work that out for you. Internal changes in your portfolio quite easily, and if you are making a loss, that’s even better because there’s no capital gains tax, you just switch it into offshore funds.
We’ve got some very good local asset swap funds. They take the money offshore on your behalf, and the returns have been very, very good – between 13 and 17% per annum. Then, as we previously discussed, you can make changes to your retirement annuities. You can make changes in your preservation funds, etc, but you need to understand a little bit about what is available in that product range and what other funds are there – and then you can make changes in there.
And then lastly, if you have money in RAs or a combination of RAs and you’re older than 55 and you haven’t pulled out any money: you can, and I strongly recommend that you consider, pulling your money out of these badly performing RAs, get your one third out into your hands. And the balance goes into a living annuity where you can go up to 100% offshore.
Those are all the variables that you can play with, and a lot of people don’t know how it works. You can combine three, four, five, six retirement annuities all into one – and have one living annuity. You could probably get costs down. You can go to a cheaper list. You can get ETF funds and you can get your money offshore. It all depends.
The investment rule has changed in the last 10 to 15 years – for the better – in the sense that there are many more fantastic products available for the local investor at lower fees.
Thank you. Pierre wants to know what cash options are best? What is your view on that? How can people boost their return in their retirement annuity if they’re stuck in there?
We’ve been using these hybrid enhanced income funds, we call them, which is a mixture of shorter dated instruments, and so on, and we normally choose three or four fund managers. We are good in that space, we’ve got a proven track record. And the returns have been between 8 and in one or two cases, closer to 10.
That’s come down and there’s a bit more volatility, which is not necessarily a risk, but it’s infinitely better – especially for larger amounts of money – to put it in there. The costs are low and you’ve got access to your money, because if you have large amounts of money and you want the really nice interest rates, you have to tie up your money for five years – and I don’t like that. Five years is a lifetime, in my view.
And so this enhanced income space is a very nice space and it has worked very successfully. You get access to your money, you could make regular withdrawals if you need the cash, but your returns are between eight and 10 percent. That’s where I would look for that kind of investment.
Graham says the panel is strongly advocating for investing offshore. Assuming you’re able to take R10m offshore – how would you invest: straight into equity or phased in over a number of months once the funds are transferred?
Right now, I would take the money offshore, I think the rand is under pressure a little bit. And once it’s there, I would put it into a multi-asset income fund, and there are a host of them. And then just do your research thoroughly and understand what your options are. Don’t rush into something that you don’t fully understand.
So, I’ll have a two step approach if I’ve got R10m (which I don’t have – my ex-wife has got it), but I would first get it into an instrument that gives me 2 or maybe 3%. And then I would thoroughly look at maybe then doing it in chunks. I’ll take R2m here and then wait a month or two, and then R2m there – until I’m familiar with the process.
And that’s the kind of approach that works over time, because you must know that if you take money offshore – it is not for short-term, it is a very long-term investment. And my experience has been – and I’ve been doing investment offshores for like 20 years, 25 years – people never bring their money back unless they really have to. So, it’s a very long-term investment. So, make sure you get into the right funds at the right time.
Thank you. And then we’ve got a lot of questions about gold and silver, and we’ve seen gold’s been on a bit of a run. What is your view on gold and how to get exposure to that?
The gold price and the gold industry has always been, you know, kind of like a conspiracy theory and the gold price is manipulated, and it’s only a fringe investment. But – what is very telling is that (I think a week ago) Goldman Sachs, which is really, you know, the vampire squid of investment companies, as someone called it… I mean, we’re talking about how a substantial financial institution is saying they reckon gold will go to $3,000. To me, that was a game changer.
It’s not these fringe guys trying to scare people and investing into their products or their gold products, but this is a serious financial institution saying there are some weaknesses structurally in the world economy. They are saying gold can go to $3,000. On that basis, I think people must consider gold.
The comment I’d like to make about gold and, more particularly, gold itself, bullion, Krugerrands is that here is an investment that, I mean we used to produce the most gold in the world until about 20 years ago. Our economy has been built on gold. But you’re not allowed to include physical gold in your retirement although it has been the best asset for 15 to 20 years.
So, we need to ask our regulators these questions: why can’t I put some of my money into gold, which has been fantastic! I mean, in Australia – where they have these super annuity stuff where you can select what you want into this fund – they’ve got a much more liberal approach to investing. They’re saying: ‘It’s your money, Jackie, do what you want!’ In South Africa, we’ve got this paternalistic approach. People tell you what to do and how to invest your money. And I always raise this point – what about gold? I want to buy gold. I can’t do it. So, I have to do it in my private capacity.
But to end my long rambling: yes. Physical gold, Krugerrands have been a great investment. If you can stomach the volatility of the gold share market itself – there’s been a great run in the market, it may be a pullback.
But my final point is, I mean, six months ago, there was a huge hullabaloo about Old Mutual who wanted to close down their gold fund for various reasons and take that asset into one of their general equity funds. Then a lot of people protested and so they kept it open. That has been the best performing fund in South Africa in the last year.
I mean, you have to ask questions. Why do they want to close it? So, I like gold. Timing is a little bit dicey at the moment, but if I had some spare cash, I’ll be buying physical gold. I’ll be buying some more Krugerrands or ETFs.
We are coming to a close. So, a final question for you. This is a theme in a number of questions and this is from Shirley. For parents who are over 80 years old, looking for increased income from their investments: would investing offshore be recommended? So, in other words, let’s get a bit of a turbocharger on our return so that we can enjoy our money while we still can.
You know, it depends on the view of the currency itself, and going forward. And then, of course, the fact that overseas – your income yields are not that great. In fact, they’re zero.
I’ve been listening to your webinars on Orbvest and that’s attracted my interest – and that might be an option – where you invest in physical building in the United States – which houses doctors and specialists – and that rate then pays your rent in South Africa. So that is an option.
Otherwise, you just invest in an offshore portfolio, and every year you bring back some money to spend your way in South Africa. What we have recommended in our company: we open a debit card in Mauritius for people. They just transfer $10,000 or whatever the amount into that card, which stays in dollars and they walk around SA paying with their debit card at Woolworths, Pick n Pay – and that’s a strategy that I’ve been using personally and a lot of my clients and they’ve done quite nicely out of that.
Thank you very much to Magnus Heystek of Brenthurst Wealth Management for joining us this week. And thank you to all the attendees for your questions. We’ll see you this time next week.
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