I am retired, I have most of my pension money in unit trusts, I do not have a bond, and I have a small amount of (legal) cash overseas. The political situation frightens me, even though South Africa has become relatively stable.
I am thinking of selling my house and depositing the proceeds overseas as an insurance policy against further political upheaval. Is this a crazy idea?
I have lost faith in unit trusts since the Steinhoff debacle and the recent downgrade in the value of property mutual funds. I have no financial advisor as my relationship with advisors has been less than satisfactory. Is it better to switch to exchange-traded funds (ETFs)?
Big financial houses, such as Momentum and Sanlam, charge what I think are very high fees. If I decide to stay in unit trusts, is it better then to invest directly with institutions such as Coronation and Old Mutual?
Would it be crazy to sell my house and take the proceeds overseas?
Lisa Hudson-Peacock - Southwood Financial Planning
It certainly would be unconventional. I would not ordinarily advise a client to sell the home that he lives in unless he were emigrating or needed to raise capital and live off the proceeds. There are many people who rent rather than buy the home they live in — in itself, this is not unusual — but a decision to sell your home within a financial-planning framework would require unusual forethought.
Normally, a home is seen as a lifestyle asset rather than as an investment. Financial markets are inherently unpredictable environments — just the last month is evidence enough of currency and asset-class volatility — so consider the possibility of losing some of the capital you’ve invested and no longer being able to afford a house of the same value as you had before. In any case, your new rental payments would unavoidably erode the overall return from the invested proceeds. Realistically, it is unlikely to make financial sense.
I would rather look at your portfolio of discretionary and non-discretionary savings to manage your geopolitical diversification. Unless you want to downscale or realise capital, I would advise that you consider your home as an asset of last resort.
Do I move from unit trusts to ETFs?
A move to ETFs would not eliminate the risk of share-price volatility, but it could reduce the overall cost of taking market exposure. ETFs are usually portfolios of shares or other assets that track certain indices, rather than being portfolios that are actively managed in anticipation of outperforming such indices. There are no portfolio managers and research teams managing these products, so costs are lower and the fees they charge their investors are also lower.
Had you owned an ETF invested in the South African stock market last year, you would still have had exposures to Steinhoff and the property market, since both have significant weightings in the index. In the case of Steinhoff, few active asset managers had overweight positions in this company, so, bizarrely, you might have been worse off in an ETF than in a unit trust.
We regularly advise our clients to gain international exposure through passive funds (ETFs included), but we do not feel entirely comfortable doing so in the domestic market. At present, a few large international companies dominate the South African stock exchange. Naspers, in particular, is over 25% of the index, and we think this unusual level of stock-specific concentration is unhealthy. This problem can be mitigated — and portfolio diversification can be promoted — through the use of an actively-managed domestic equity fund. Further, the international exposure of a local passive fund can be better managed through a dedicated global fund.
Should I go directly to Coronation or Old Mutual?
If I have interpreted your question correctly, you are investing into unit trusts managed by, for example, Coronation and Old Mutual on “platforms” administered by, for example, Momentum or Sanlam. These platforms do indeed carry an administrative charge over and above the asset management fees charged by the underlying investment managers.
There are benefits to managing your investments through such platforms that may be worth paying for. You will be able to switch between different unit trusts across different management companies within your portfolio with administrative ease. Switching on some platforms will be free and on others at a negligible cost. The platform administrators are often able to negotiate lower management fees than would be charged to you as an individual investor. You also need to go through the Fica compliance and registration process just once, rather than with each unit trust provider you choose to use.
Given that the administrative fees for these “platforms” are usually based on a percentage of assets-under-management, the benefits are much more cost effective for smaller portfolios. My advice would be to work out the rand value of the fee and see whether you feel the benefits are worth it on your portfolio. There are several platforms to choose from and it would be worth your while to compare their respective costs and benefits.
A less-than-satisfactory relationship with financial advisors
Financial advisors and planners are for the most part highly professional people. It would be unwise, and unfair, to dismiss en masse their ability to add value to your financial affairs. I’m sure that the irony of your current uncertainty and call for advice has not entirely escaped you. Given what’s at stake, take the time to seek out an experienced, independent, certified financial planning professional in the same way as you would a lawyer or doctor.