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The benefits of pandemic-resistant investments

My strategy for solid investing.

Where am I currently invested?

Most of my investments are in equity. I own my home, it’s paid off. I have shares, unit trusts and index funds. And about 40% of my equities are rand hedged.

The wild fluctuations, volatility in markets and the self-destruction of the rand has been terrifying. I am 52 and have only eight years to retirement. The value of my portfolio is down 32%. Share prices of household companies have plunged. My financial planning goals have been derailed!

These are the sentiments being expressed by investors.

My pandemic-resistant financial planning goals?

I am revisiting my financial plan as I want it to be resistant to market fluctuations, volatility, and the issues of an emerging country like South Africa – such as political feebleness, corruption, unemployment, evaporating infrastructure, education, and healthcare standards.

I want to feel safe. Not only personal security but also that my financial freedom that I aspire to does not get derailed again. I want my personal and family security, as well as my financial planning to be as robust as possible.

What financial freedom means to me:

To work or not work as I desire.

Passive income

I will achieve financial freedom and independence when my hard currency passive income exceeds my daily living expenses and there is sufficient money available for my hobbies and special interests. I love travelling and exploring different cultures and customs.

My strategy for the future

I will be future ready as I move closer to my goals by reducing disruption and uncertainty through my financial freedom strategy:

  • by protecting my standard of living;
  • by protecting my retirement goals;
  • by protecting my purchasing power;
  • by investing in hard currency assets;
  • by investing in hard currency passive/annuity income;
  • by maximising returns after costs; and
  • by maximising passive income via a low tax jurisdiction.

My investment strategy for pandemic-resistant results

Passive income via property has the following characteristics:

  • Property is the asset class that generates income most consistently;
  • It is the oldest asset class after gold that has experienced the least disruption;
  • Shelter may change shape and colour, but after food, we all need shelter to survive;
  • Property has proven to be least affected by political, economic ‘pandemic’ shocks;
  • Hard currency economies and property are subject to fewer fluctuations;
  • Pound, dollar and euro passive income protects purchasing power as the local currency self-destructs; and
  • Certain sectors of property are more resistant to disruption. 

Property sectors resistant to disruption

Healthcare

If one is ill or sick medical attention is required. It is not a choice but a matter of survival and the providers of healthcare services in “good times and bad times” are earning and can pay rent to the landlord.

I have control and influence as I own the property and passive income stream. If I wish to sell, it is on the willing buyer and willing seller principle. 

Commercial property is often unattainable for smaller investors like me. The traditional solution is to invest via an equity property fund. Even though the assets of the fund are in property, the fund still suffers from market sentiment and volatility.

Dividends from funds dry up in difficult times and the investor has no control or influence on the outcome. Reits (real Estate investment trusts) invest in property but the property management decisions are made by the fund manager and if the fund loses investor confidence and there is panic selling causing a run on the fund, it can collapse and be liquidated.

My property investment strategy directs me to invest directly in property giving me direct ownership. I choose to invest in the US, the largest economy in the world with a highly-developed and specialised medical sector.

The USA private healthcare industry is robust and driven by:

  • An ageing US population. Every day 10 000 people turn 65;
  • The ageing population can live longer through medical technological advances.

Locations targeted to invest in:

  • The demographic spread is middle to upper-income groups;
  • There is a wide spread of ages with a focus on the middle-aged;
  • Location accessibility is good, little traffic congestion, with parking;
  • Patients can afford to pay for medical services;
  • Building leases must be long term i.e. 10 years plus

Investments in commercial buildings in the medical sector offer ±USD 6-8% net dividend returns before tax, payable quarterly in arrears. On resale, the capital growth pushes up the return to 11-17% pa.

Education

It is the desire of parents to give their children the best start in life. Some dish out money, the wiser educate their children first. The principle being “teach one’s child to fish, and they can fish for the rest of their lives, as opposed to giving them the fish!”. 

My strategy directs that I invest in tier 1 educational institutions in first-world Western economies with a stable democratic government. 

British university student accommodation in Cyprus

Around the world, in all countries; on-campus student accommodation is in short supply and is usually awarded to first-year and top academic students. On-campus student accommodation is 100% occupied. The formula for student on-campus accommodation is to provide for residences for only 20-25% of the total student population. Thus, the administrators of the educational institution will always have demand exceeding supply. 

Investors in student accommodation receive the title deed and can resell at any point. The rental return is net before taxes. All letting, management and maintenance are undertaken by the institution. There is no personal use.

These type of investments enjoy rental guarantees of 6% net in euro for three to five years thereafter participating in pooled income. On resale, the capital growth pushes up the return to ±8-10% in euro p.a. 

Diversification and tax

I will diversify into US dollars and euro passive income and invest through a low tax jurisdiction; tax can range from zero to 12.5% on bigger structured portfolios.

A final word on the exchange rate

Returns are in US dollars and euro backed by the largest and third-largest economic groupings in the world. If returns are measured in rand, then I can add 5-7% pa which is the rand history of depreciation over the last 40 years (USD).

Some say I must wait for the rand to revalue. The stats indicate that ignoring abnormal shocks to the currency it will depreciate at 7% p.a. That means at currently R19/$1 the future exchange rate in 10 years will be R38/$1. In the unlikely scenario that the rand resets to R15/$1 then in 10 years it will be R30/$1.

Over five to 10 years hoping for a possible revaluation becomes irrelevant. If I wait, my downside risk is much higher in an emerging market economy and currency.

And I am earning similar returns to RSA bank deposit rates and property rentals but in US dollars and euro. Which means, if I purchase goods and services in soft currency, every time there is depreciation in the soft currency, I can afford the price increases driven by the fact that emerging market economies import many of their goods and services.

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Costas Souris

Quality Group SA

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