How, Where, What and Why?
With so much market uncertainty locally and abroad most of the Asset Managers and Financial Planners are advising their clients to diversify, diversify, diversify. That’s all very well, but when you look at the hundreds of possible scenarios – what exactly do you do?
Unit Trusts (UT)/Collective investments and ETFs. This is a popular way to diversify especially if you don’t have the ‘critical mass’ (enough money – say R3.5m or more) to have an appropriately designed and diversified bespoke portfolio. Be careful of unintended concentration in one or more shares. In other words, if you are buying into the top 20/40 shares in an index – locally or offshore – you could be buying a disproportionately large chunk of a ‘large-cap’ shares (Very big companies in the stock exchange like Naspers (locally) or any of the FANGS (Facebook, Amazon etc) offshore). When choosing a Unit Trust, don’t just look at performance or popularity, check the fees and the concentration of shares. We’re in a low growth environment, high-fee investments have eroded that growth even more (and performance fees exacerbate that even more). Try and keep the cost of the fund below 1%. Rather than pay an upfront fee to your advisor as a percentage of the Assets, rather pay for a ‘fee for plan’ which ranges in the R15k-R30k. Unless you know how asset allocation works and when to change it, don’t try and balance your own unit Trusts, rather use an investment that has been balanced for you. The JSE already has extensive exposure to offshore via Naspers, Billiton, Anglo, BAT, Richemond etc, but a pure offshore UT is also a good idea (more about this later).
Offshore/Onshore: This is probably the hottest topic at the moment because it is a good way to hedge the depreciating Rand. The Rand is one of the most volatile currencies in the world, and as such is much loved by ‘day traders’. The value of the Rand is the accumulation of thousands of opinions on the state of our nation and where it is going. That is very touchy-feely, I know, but when you see how it can move violently in response to political nonsense, you can understand why it is very difficult to predict the direction. Until our inflation rate (around 4.5-5%) approaches the inflation rate in the West (below 2%) we will continue to see Rand depreciation over time (that’s a result of simple purchasing parity). How much you take offshore depends on your objective for that investment. At the moment you can take R10m a year (subject to SARS clearance). If your objective is because you intend to emigrate at some time in the future, the advice will be different from someone who just wants some diversification or a nest-egg in case everything goes pear-shaped Zimbabwe-style. The age of the person, or more accurately, how far away they are from retirement or emigration will also change the advice. Your financial planner should be able to guide you in that decision.
So, having decided what portion to invest offshore, should you use Unit Trusts (most of the platforms locally have a range of Unit Trust and ETFs that are fully invested offshore) or physically ship the currency offshore? One thing to look at is fees, and also the diversification in the fund (in other words what is the split between the various asset classes). At the moment offshore stocks are very expensive (measured by the Price/Earnings ratio), especially compared to the local stocks. The US is in the longest bull market in history, and the FED (equivalent to our Reserve Bank) appears to be hell-bent on keeping it going. Has the normal cycle of growth followed by a recession – that has been happening like clockwork for a century – been broken for good? Personally, I don’t think so. Those ‘PE’ ratios have been kept artificially high by US companies who have been using very low-interest rates to issue bonds and buy back stock. As a result, corporate debt is at unprecedented levels, and with an economic slow-down, the repayment of that debt starts to bite and we could start to see those bonds turning to ‘junk’ (not investment grade). Offshore and local portfolios need to be flexible enough to move when there is clarity in the market – not really the kind of stuff you want to DIY unless that’s your day job.
Offshore interest rates can, and do, go negative. We have seen this across Europe, but the US has never gone there – but there is always a first time. Usually, interest rates are used to keep inflation under control, but offshore they have had the problem for the last 10 years of not enough inflation, and even deflation. (Yes, deflation is a problem). The FED looks like it is going to cut interest rates by as much as 1% over the next year. This gives them zero wriggle room if the country goes into recession – except by way of negative interest rates (where you pay the bank for saving and holding your money, not visa versa.) If you have traditional fixed income in your offshore portfolio (cash, bonds) this is going to be a problem and then the ‘search for yield’ is on. That search for yield is already happening, and our government bonds at 8% or so are very popular for offshore investors for exactly that reason.
The government needs to keep their bonds attractive to foreign investors because it has a positive impact on the “current account” of the balance of payments. This is one of the reasons you probably aren’t going to see the much needed 1-2% drop in interest rates in the repo rate.
Other sources of ‘Yield’: REITS (Real Estate Investment Trusts) are starting to look attractive again, but pick and choose carefully and diversify. Corporate bonds are another good source of yield, but again, pick carefully and be diversified (Again, the minimums required are high – this really needs someone who knows what they are doing).
Gold: This is the ‘safe haven’ when global economies go pear-shaped and ‘Fiat’ currencies (currencies not backed by Gold – like all of them since Nixon abolished the Gold Standard). There are a couple of countries that have large gold holdings – Lebanon and Mongolia – not exactly safe-haven currencies. The Gold price has been inching up, and could well be an indication of a future downturn. Gold is an odd investment option. It is not a currency, it is a commodity but its value is not linked to its commercial uses (like Platinum for example). An uptick in gold will be good for our Gold mines – if the Trade Unions don’t use it to strike for higher wages. If you want Gold exposure without the hassle and expense of physically holding it, look at Gold trackers/ETFs.
There have been years, where no matter how or where you invested you made great returns, and maybe those days will come back to RSA Inc. To preserve or grow your investments right now needs a more active and nuanced approach.
Action: Make sure your investments are held across a broad spectrum of asset classes, as well as giving them onshore/offshore exposure. Keep them flexible so they can move as there is more clarity on the direction of the global economy.