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The Money Whisperer

Author: Magnus Heystek*|

14 March 2013 10:55

Why Magnus Heystek chooses Sun City sages over Buffett

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Advice from some of the best local investment brains.

Every year I get asked the following question: are you going to the annual general meeting of Berkshire Hathaway and listen to the sage of Omaha, billionaire Warren Buffett?

This year is no exception and once again my response is the same: I cannot see myself flying halfway around the world to a little town in the middle of Nebraska which, I am told, looks very similar to Potchefstroom in the middle of a long drought.

One of my biggest fears is arriving for the big occasion, only to fall asleep due to jet-lag just as Buffett or his equally well-known sidekick Charlie Munger starts speaking.

What, I ask myself, do those investment groupies learn from Buffett and Munger and what difference does it make to their investment advice when they return back to local shores? If they have been preaching and applying the value-investing style over the last couple of years, they certainly have taken a bath for themselves and their clients in the South African market.

It’s like the perennial question when a group of golfers sit at the 19th hole after a round of golf when someone, usually the one who has just returned from golfing’s Mecca, drops the inevitable “When are you guys going to play at St. Andrews in Scotland?” into the conversation.

If you haven’t been to St. Andrews you cannot dare call yourself a true golfer; you haven’t been blessed or seen the light or whatever…..

The same goes for the annual pilgrimage to Omaha, Nebraska to listen to Warren Buffett at the AGM of Berkshire Hathaway.

Far easier for me to sit and watch any of the all-day financial television channels like CNBC or Bloomberg to provide me with the pearls of wisdom from the Sages of Omaha. Not only will it save me about R50 000 for the round trip but also a week of jet-lag.

Best investment brains

A far better option for local investment advisors is the annual Investment Forum held on Monday and Tuesday this week at Sun City. The event, in only its third year, was a full-house event with more than 700 of the country’s top financial advisors and fund managers crammed into the conference centre listening the fund managers from nine of SA’s leading investment houses which included Sanlam, Old Mutual, Allan Gray, RE:CM, Prescient, Coronation, Prudential, Stanlib and Momentum.

And as a guest attendant there was also a speaker from BlackRock, the largest equity investment company in the world.

Speakers included the likes of Piet Viljoen (RE:CM), Herman Steyn (Prescient), Duncan Artus (Allan Gray), Mark le Roux and Neville Chester ( Coronation), Henk Viljoen (Stanlib) and John Kinsley (Prudential) and Peter Brooke from Old Mutual.

The highlight of the event for me was listening to hugely successful Simon Marais who now heads up Allan Gray in Australia.

To me this event makes so much more sense. Over two days you could listen to probably the best investment brains in the business. The only exception was Investec which, for some reason, declined to be part of this investment carnival. And just to make things clear in terms of Fais and conflict of interest: this was not a freebie and all the attendees paid for their own admission as well as any hotel costs.

The debates and presentations covered an extremely wide range of topics, including the outlook for markets (SA versus the rest of the world), macro- economics, active versus passive investing, regulation 28, regulations ( current and future) and how the investment industry in the UK and Australia is evolving under an avalanche of customer- orientated legislation.

Shocking view: 100% offshore

It took less than an hour before the first mortar- bomb was launched into an almost disbelieving audience. When asked about current valuations of the SA equity market versus the rest of the world, Duncan Artus, fund manager from investment giant Allan Gray said he was 100% offshore in terms of his offshore allowance.

This is not surprising as most local fund managers are at their maximum offshore allowance of 25% of assets under management.

When pressed on this, Artus said that if he could - in an ideal world - he would take 100% of the money that he manages offshore. His own money, he added, was 100% offshore in foreign equity, property and even cash.

Artus was quite adamant that it was not necessarily a bearish view on the rand, but a view based on investment fundamentals. “SA equities have had a fantastic ten years of outperformance. It would be illogical to expect this trend to continue.”

This set the tone for the rest of the investment forum and fund manager after fund manager was asked the same question. Neville Chester from Coronation basically had the same view and warned that growth from SA equities and property would be tepid going forward. Now is not the time to be using past performance as a guide to expected future returns, he warned.

Local listed property was also expected to come under pressure and growth prospects would largely be determined by rental growth, not a rerating on the back of a decline in bond yields. In fact, any further downgrades to SA’s credit rating could lead to a blow-out of bond yields and hence also listed property values.

The elephant in the room

Kevin Lings, economist from Stanlib, tried to offer a balanced perspective the next day adding that SA does still offer investment opportunity, but only if the proposed expenditure on infra-structure of about R700bn eventually gets underway.

The one graph that I found illuminating, if not scary, was that since 1995 (seventeen years) about $90bn of net inflows have been attracted into SA’s equity and bond markets. This is about the same amount of foreign capital SA requires over the next three years, as was disclosed by Finance Minister Pravin Gordhan less than two weeks ago.

This was the elephant in the room; much bigger than Nkandla, Marikana or De Doorns. As someone said (I think it was Herman Steyn from Prescient):”watch out when the elephants want to leave the room and there is only a cat-flap…”

The message was very clear: if the foreigners start heading for the exit, for whatever reason, it could get very ugly. Bond yields cold spike, property values drop and the rand could come under severe pressure.

There was even talk about a ten-year period of rand weakness, depending on what happens on the global economic scene. An upturn in the US economy could over time lead to a cessation of quantitive- easing in the US and a return to normal interest rates in the US and the world. This could affect the flow of foreign capital to SA at a time when it is most needed.

Active vs passive

The debate about passive versus active management was a bit of a damp squib. I thought the comment from Peter Brooke from Old Mutual in this regard was quite telling: “In many respects the debate is a hugely academic. Investment advisors’ biggest function is to convince their clients to invest more money and remain invested over the full investment cycle.”

This was also the theme of the talk by the Brit Stuart Reeve, head of BlackRock in SA. “Ever rising longevity is forcing a drastic revision to the way people at or even in retirement need to invest. Historically you would reduce your exposure to equities the closer you get to retirement. Now we are seeing that people need to increase their exposure to dividend-paying equities as they could be retired for 30 years or more.”

To which some wise-guy in the audience quipped: “Retirement has been postponed due to a lack of interest.” Too true.

To me the highlight of the conference was listening to Simon Marais, who previously headed up Allan Gray in SA before he immigrated to Australia. I’m sure that AG will be putting something up on their website but the two facts that stood out for me in his presentation were:

*Over the very long term (going back 100 years and more) the average real return on investments are barely 1% per annum. Anyone expecting a 3-5% real return, as promised by certain fund managers, is unrealistic.

*The best real returns earned during this period came from countries (Sweden, Australia, Denmark) where there was a huge emphasis on the rule of law as well as law and order. Go figure.

*Magnus Heystek is a director at Brenthurst Wealth.

Topics: Warren Buffett, annual Investment Forum, Sanlam, Old Mutual, Allan Gray, RE:CM, Prescient, Coronation, Prudential, Stanlib, Momentum, Magnus Heystek



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