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Do you have to invest offshore to get a proper return?

Not necessarily, but we believe that diversification and asset allocation are the only two free lunches in the investment world.

We all know that Consumer Price Inflation (CPI) as measured by Statistics South Africa aims to track the change in the price of a basket of goods (deemed to be the average goods and services consumed by South Africans). We also know that ‘individual CPI’ can be a lot higher than headline CPI if your personal basket of goods differs from the average basket.  

Two big costs for middle class South African families are the cost of medical scheme membership and the cost of education. The prices of these services/products have increased at or near double-digit inflation for years. This is a worldwide phenomenon and attributable to the fact that these sectors are both labour intensive and employ people with scarce skills. An article ‘The Great Affordability Crisis Breaking America’ published by The Atlantic, describes the hollowing out of the US middle class due to the increasing cost of healthcare, education and childcare.

The graph and tables below show that to keep up with inflation on medical insurance premiums and the cost of primary and secondary education, an after-tax return of between about 7.5% and 11.3% is required.  

Medical scheme premium increases between 2012 and 2018

Graph A. Source: CMS

Between 2012 and 2018 contribution increases ranged between 7.2% and 11.3% while inflation, as measured by CPI, ranged between 4.6% and 6.4%. Despite the fact that annual salary adjustments have not kept up with contribution increases, the number of medical scheme members has grown, showing that middle-class South Africans consider medical scheme membership a necessity.

Table A below shows the increase in the cost of education at selected schools around the country over the last two years. For the purposes of this article, we looked at a range of government and private primary and high schools in middle/ upper areas. Costs exclude uniforms, deposits, discounts for upfront discount payments, compulsory foundation contributions, E-learning devices, school lunches, registration fees, school outings and school transport. The important thing in the table below is not the absolute cost of education, but the rate of increase in the fees.

The table shows that between 2018 and 2019 fee increases ranged between 7.79% and 9.9% and between 2019 and 2020 increases ranged between 6.08% and 10.38%.

 

 

2018

2019

Increase

2020

Increase

Spark Schools (Primary)

R23 100

R25 500

10.38%

St John’s College (Gr 3 to 7)

R113 784

R122 659

7.79%

R131 122

6.89%

King Edward VII, Jhb

R47 500

R51 800

9%

R56 400

8.8%

Wynberg Boys’ High, CT

R42 800

R46 500

8.6%

R50 400

8.38%

Victoria Park High, PE

R22 341

R24 224

8.4%

R26 400 

8.98%

Jeppe Boys High, Jhb

R43 450

R47 150

8.5%

R50 700

7.52%

Spark Schools (High)

–           

R30 000 

–           

R33 000

10%

Marist Brothers Linmeyer, Jhb Gr 10 -11

R80 690

R88 700

9.9%

R94 100

6.08%

Ashton International College, Ballito Grade 12

R91 380

R99 900

9.32%

R108 900

9.00%

Table A. Source: School websites.

These figures are broadly in line with those of February 2018 statistics from Statistics South Africa which reported CPI of 3.8%, inflation at primary and secondary schools of 7.6%, inflation at tertiary institutions of 6.2% and the inflation of boarding expenses at universities at 8.5%. In February 2019, when CPI was 3.9%, primary and secondary education had increased by 7.7%, tertiary education costs had increased by 5.3% and the cost of boarding at universities was up by 8.3%. 

Table B below shows the average, annualised performance of selected South African unit trusts in rands over different time periods and the performance of the JSE All Share over the same period. It shows that South Africans invested in the Multi-Asset class of unit trusts have had returns lower than the desired 8% over the last five years.

 

3 years (%)

5 years (%)

10 years (%)

15 years (%)

MA Low

5.83

5.64

7.85

8.64

MA Medium

5.08

4.73

8.21

9.31

MA High

4.75

4.56

8.59

9.95

MA Flex

3.01

3.44

8.21

9.87

JSE All Share

6.12

5.11

11.27

13.59%

Table B. Source: Profile Data. Performance dates to February 4 2020

There is a ghastly gap between the recent performance of domestic investments and the relentless above-inflation increases in the two key expenses categories described above. South Africans invested in multi-asset unit trusts and seeking an 8% net investment return have not met this target in the last five years.

Are there any solutions?  

In the recent past, offshore equity markets have outperformed South African equity markets significantly. Table C below shows the annualised total return of a range of offshore indices, measured in rands.

 

3 years (%)

5 years (%)

10 years (%)

15 years (%)

FTSE 250

13.15

9.68

17.43

14.39

MSCI World

13.28

12.48

15.30

11.55

S&P 500

19.09

17.07

21.46

15.34

Table C: Source: Profile Data. Performance dates to February 11 2020

Clearly offshore markets have outperformed over similar time periods. At the same time, we know that (at the time of writing) South African equities offer good value and that they may well appreciate to at a higher rate (relative to offshore markets) over the next year or three. Most importantly, in our view, the returns in Table C above are unsustainable.

We believe that diversification and asset allocation are the only two free lunches in the investment world, domestically and globally. 

At Rosebank Wealth Group we have consistently promoted a policy of diversification, which has resulted in our clients’ portfolio geographic weightings being 60:40 in favour of offshore. Importantly, this is the net result of a strategic diversification strategy that has taken between 10 and 12 years to bed down and is specifically not a reactive decision.

Over the last few years, we have developed systems that assist in the monitoring of fees, tax structures, compliance and risks. We have also built expertise and capacity in assessing and evaluating investment strategies of many offshore-based fund managers.

ADVISOR PROFILE

Trevor Lee

Rosebank Wealth Group (Pty) Ltd

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