Magnus Heystek, the founder of boutique investment manager Brenthurst Wealth Management and a popular personal finance columnist, has stirred up controversy by setting out why South Africans should look beyond the country’s investment options for superior returns. In an article on how the JSE has destroyed wealth, recently published on BizNews.com, Heystek recounts how advising people to invest some money offshore has been considered by some to be a despicable act of heresy and betrayal. He sets out how the South African economy and Johannesburg stock market have experienced a decade of underperformance. Marius Fenwick, also a financial adviser, has responded to Heystek’s article, dissecting some of the details in order to put forward an argument for having a blend of offshore and South African assets. Fenwick cautions that some offshore opportunities look expensive, particularly Nasdaq-listed securities, which have a collective valuation suggesting that you might have to wait 60 years to get your money back if you make your first move now. – Jackie Cameron
By Marius Fenwick*
As a fellow financial adviser with a healthy client base, many of whom are retired, I find myself in the precarious position of answering client questions relating to articles published by yourselves of which Magnus Heystek was the author. At the outset I want to state that I have no intention to criticize or chastise Magnus as often happens.
All advisers are entitled to their opinions and may suggest specific funds or solutions for various reasons. Irrespective of what those reasons are, I feel that the public must be given sufficient information that is relevant to the topic that you cover. More importantly, if you intend to compare funds with one another this should be done in a fair and equitable manner and not manipulate figures to suit your message. Manipulating figures is skewing the truth which can lead to investors (readers) making bad decisions based on unfair comparisons.
I want to state that we are pro offshore investing. Very pro. However, offshore investing must take place in a structured manner where the exposure to whatever offshore solution you decide on fits into your investment objectives, your risk profile and how much income (if any) you draw from your investment.
Income bias investors cannot run the risk of taking too much offshore exposure since the sporadic recovery of the Rand after periods of depreciation wreaks havoc in portfolios that are offshore rich. Our current situation is a perfect example of what I am referring to. Those clients who expatriated their investment offshore in April when the Rand dropped to R19.35 would have lost 15% + of their capital if measured today.
Add income drawings to this and you will understand the point that I am trying to make. There are many such examples starting from 2001 that support my statement. The Rand is one of the most volatile currencies in the world due to it’s high levels of liquidity which allows investors/speculators to enter and exit the SA market very easily.
SA is often used as the proxy to emerging markets which heightens the rand volatility. The Rand often blows from the worst performing currency like we saw in February to May this year to the best performing currency like we are currently experiencing. Investors who rely on income from their investments simply cannot tolerate these levels of volatility. A blanket statement that promotes aggressive offshore investing is very dangerous even more so if the recommendation is to take your full living annuity offshore…
I am in no way predicting that the Rand is going to make an aggressive comeback and that we expect a huge rally. I am merely making the point that although long term depreciation of the Rand is a foregone conclusion, the path is not smooth and the massively volatile profile of the fluctuations adds a tremendous amount of volatility to an investment portfolio, and that can hurt income paying investments.
More to the point of comments made in your latest editions.
I would like to point out some questionable comparisons. The first is comparing the JSE to the NASDAQ. The NASDAQ is a tech heavy index. A fair comparison would be to compare the JSE to the S&P500 which represents the broader market like the JSE does.
Stripping out the FAANG stocks from the S&P500 like Magnus stripped out Naspers from the JSE, and suddenly the S&P500 (excluding FAANG) provided a return of 8.15% per year from 2013 to 2020. That is a far cry away from the 1000% return quoted in the article even if you add rand depreciation over the period.
In the article reference is made to the MiPlan Global Macro fund, which is now the largest holding in the Brenthurst suite of funds, and its stellar performance. This is measured against the PSG Equity fund which is a pure SA equity fund that once again was chosen because it does not hold Naspers.
Is it coincidental that it was chosen because it is currently one of the worst performing equity funds in the SA sector? In a similar manner to comparing the JSE with the NASDAQ, the MiPlan fund and the PSG Equity fund compete in totally different sectors.
PSG is a local SA fund manager with a suite of investment portfolios one of which is the PSG Global Flexible fund (which competes in the global sector similar to the MiPlan Global Macro fund) and with a year to date return of in excess of 19% has outperformed the MiPLan Global Macro fund this year.
This is not mentioned and I feel it is grossly unfair and unprofessional to criticize a fund by name (PSG Equity) but yet ignore solid returns of a different fund by the same fund manager (PSG Global Flexible fund). I just want to state that we are totally independent, we do not have our own funds and we do not at this point use any of the PSG funds in our investment solutions so my comments are completely unbiased. I referred to the PSG funds since they were referred to in the article.
Just by the way, one of the SA equity funds that we use has returned 16,9% over the last year just to put a cork in the comment that all funds linked to the JSE have provided poor returns…
I would also like to add some content and facts to other comments made.
I agree 100% with Magnus, SA is not in the best spot right now. The bad position that we are facing now is as a result of corruption and bad administration by the Zuma government. However, the progress that is being made in the SOE’s, the restructuring of Eskom and the vision of how to expand the economy and rebuild SA are well on their way.
The public unfortunately always only gets fed with bad news. The next 3 to 5 years are going to be challenging if we consider the debt trap currently evolving as SA government spending spirals upward. I don’t agree that we are in trouble if our reform is of structural nature. Our bonds offer the best yields in the world and they have attracted in excess of R6bn from foreign investors since our downgrade in March.
Agreed they do come with higher than normal risk but given the negative bond yields available in developed economies we can expect foreign inflows to continue. ESKOM who has been the main culprit holding industrialisation back is well on its way to reform. 3 Different boards of directors have been appointed for the 3 different business units, offshore investors are keen to fund Eskom projects (481 companies showed interest when 6,000 MW was added to the grid recently of which 42% were foreign companies).
The important message to investors should be that their investment decisions do not have to be an either or. As South Africans we are fortunate that we are global investors and that our choices are vast. Portfolios should be constructed based on your investment objectives. Assets/funds should be included based on fundamentals and most importantly at the right price.
The S&P 500 is currently at its most expensive level ever, even after the “meltdown” experienced earlier this year. The NASDAQ is trading at a forward PE of 60.4. In simple terms that means that if the forecasted earnings (E) are correct at the current price (P) then you will have to wait 60,4 years to get your money back.
This sounds a bit like the IT bubble when the NASDAQ inflated by 400% from 1995 to 2000 to crash by 78% in 2002 which led to negative returns on the S&P 500 and NASDAQ for almost a decade… It also led to the Rand recovering from R12.00 to R5.60 in 2001. The R12.00 mark was only breached again in 2015.
Interesting that 2001 was the period when the most funds left SA shores because of fears that the SA economy was collapsing and that the Rand was heading towards Zimbabwe status. It took 1,000’s of clients well in excess of 10 years to regain the value in Rands that they invested offshore in 2001. Let’s hope that history does not repeat itself…
The “offshore” story over the past 5 years has very much been an American story and more particularly a “tech” or FAANG story. All other markets performed poorly over the past 5 years. As such the EuroStoxx 50 provided a return of -(3,38%) per year over the last 5 years, Nikkei 225 Index provided a return of 2,3% per year over the past 5 years, The DAX returned 2,05% per year over 5 years, The CAC returned 0,76% per year over the past 5 years and the Hang Seng Composite Index is negative -(6,.2%) per year over 5 years. Considering all this then the SA JSE return of negative -(1.3%) per year over 5 years does not sound so bad…
In the article mention is also made of SA Balanced funds underperforming. Over the past 5 years SA Balanced funds returned 3.52% per year as an average over 133 funds. The best return was 11.2% per year over the 5 years. I am not sure where the information in the article was obtained from since the peer group average outperformed every global index except the US Indices… Returns achieved from global funds reported in Rands were purely as a result of Rand depreciation and not as a result of the underlying appreciation of the assets. Anticipated future Rand depreciation should not form more than 25% of your offshore investment motivation. As previously mentioned, one must invest in assets anywhere in the world that provide the best value for their potential returns within acceptable risk parameters and that suit your investment objectives.
It is our responsibility as financial planners to consult with our clients to determine what their objectives are, what their risk adversity is and what they expect their money to do for them. Once we know what our clients expect from life, chasing returns becomes less important. Creating the most appropriate portfolios to provide clients the best opportunity to reach those goals, even if it means sitting in SA cash, becomes our most important responsibility.
- Marius Fenwick, CFP® is the co-founder of Wealthup (Pty) Ltd. Wealthup is an independent fee based financial planning business and focuses on life planning principles that ultimately leads to objective driven financial planning. Wealthup is one of only 14 practices in South Africa that has been acknowledged by the FPI (Financial Planning Institute) as an “FPI Approved Professional Practise”. Marius has been involved in the financial planning industry since 1997 and he is a founding member of the Allan Gray Independent Adviser Forum. Wealthup’s lead advisers are all CFP® professionals.Â
- For more perspective on investing offshore, join the BizNews Finance Friday webinar this week (12 June) when independent financial advisers Magnus Heystek and Dawn Ridler will be on hand to answer your questions. Register here: https://attendee.gotowebinar.
com/register/ 6648903351154972941.
