My comments last week about Regulation 28 and the stranglehold that it imposes on retirement fund managers and ultimately your investments drew the usual acerbic, in some cases nasty, reactions from the Moneyweb community. I don’t mind comments as long as they are reasoned and well-informed.
Over the many years that I have been writing this column, I have learnt a lot from some of these comments. Many readers also tell the same story: the comments sometimes are better and more entertaining than the column.
A small group of readers seem to think that some of my articles are unpatriotic and disloyal. Some have blatantly told me to “f**k off and leave the country” if I don’t like the way things are. I wouldn’t know where to go as our family has been in this country for almost 160 years. And I most certainly will not be joining robertinsydney in Australia as another has suggested.
Many readers don’t seem to understand that Regulation 28 is a direct consequence of capital controls, which were imposed on South African investors by the apartheid government in 1960 in the wake of the Sharpville massacre. Although they have been changed, and considerably relaxed in many instances, we do still, as individuals and institutions, invest and move money in and out the country under very strict guidelines and control of National Treasury and the Reserve Bank.
Any such controls are political in nature. It is undeniable that exchange controls have, by and large, served the political objectives of the ruling party of the day. This also, over time, tends to impoverish people and investors. It seems that many investors don’t fully realise this.
In 1970, for instance, you received $1.40 for a rand. By 1980, the rand had weakened to 1:1 and today you get 7 American cents for one rand… an astonishing weakening of the currency over time. Some years ago, Paul Hansen from Stanlib sent me some calculations which showed that your investment returns from 1980 to 2011 (or thereabouts) would have been double had you been able to invest your money fully offshore; in this case the US American market where he was a stock broker for many years.
Let me repeat that: double!
And then, as I said last week, Treasury (which decides on the foreign investment allowance for retirement and other SA-based investments), has the temerity to blame the high fees of fund managers as a major contribution to under-funding of future retirement.
Defenders of any form of control over the flow of money, which includes Regulation 28 insofar as it relates to trillions of rands in retirement funds, also tend to use pseudo-nationalistic arguments, the same kind of arguments I heard when growing up in this country, but in a slightly different context.
Patriotism, we used to joke during the so-called Border War in the mid-Seventies, was defined as your Nationalist member of Parliament who was ever-keen to sacrifice your life for his country… It seems as if defenders of Regulation 28 are quite willing to sacrifice your future pension for their short-term political objectives.
And so I spent some time over the weekend analysing the performance of the JSE All Share Index against similar indices representing the performances of investment markets in Europe, the USA, Asia, the world as well as its emerging market counterparts, just to compare like-for-like. I compared it in rands over five, three, one years and even six months and one month. I also did the same comparison in US dollars. The result was identical.
Great was my astonishment (see table and chart) to see the JSE lagging over every period in this comparative study, both in rands and in US dollars.
I knew that the JSE had been underperforming over longer periods but thought the recent strengthening of the rand might have boosted the comparative performance over shorter periods, but this was not to be. Even the stronger rand could not conceal the putrid performance of the JSE over the past 12 to 18 months while the rand was strengthening against foreign currencies.
What is concerning is that the JSE is now not only lagging the indices of the developed world but is also now lagging, by a far distance, the Emerging Markets Index, of which it is a major constituent.
This development is of great concern. It suggests to me that global institutional investors are massively underweight in SA relative to the other emerging markets, such as Turkey, Brazil, south Korea and others.
See for yourself, dear reader. I don’t like what I see but that is not going to prevent me from commenting about this. And we are talking about the future retirement benefit of millions of people who don’t always fully understand why their pension funds are not growing and beating inflation.
JSE (Pty) Ltd under pressure
It therefore comes as no surprise to me that JSE (Pty) Ltd, the listed company operating the local stock market is feeling the pinch and needs to cut costs and staff fairly dramatically as was announced recently. Global fund managers have been massive sellers of equities out of the local equities market (approximately R270 billion) over the last 18 months or so. They are selling and not buying something else, it would seem.
Add to that the estimated R80 billion remitted by local investors to offshore investment markets via their offshore investment allowances over the same period of time. This represents a huge loss of business to the local bourse, which must be nervously watching offshore investment bourses moving their cheese….
In our practice, we have been witness to this trend. I cannot recall when last we invested money in a local equity portfolio while the demand for offshore investments has been massive. Any local money goes towards income and perhaps bond funds.
Most of the large local financial institutions will tell the same story. Magda Wierzycka from Sygnia this week revealed the local investment flows are drying up and that she is looking for opportunities in the UK. Will she be accused of disloyalty to her country? Or will she be told to pack her bags and go back to Poland, where she came from as a youthful refugee?
I hope not, as she is one of the view that institutional fund managers come out and admit to the torrid state investment companies are currently experiencing. Others are trying to drum up local business with fairly desperate marketing and advertising campaigns, suggesting, time and time again, that “now is a great time to be investing”.
It is my experience that many would prefer not to publicly discuss this trend, which has been unfolding over a period of time (more than six years now). It might just lead to massive withdrawals from investment portfolios where such withdrawals and re-alignments are allowed.
Investments locked in
I often meet investors over the age of 55 who have substantial amounts of money locked up in badly performing pension/provident/preservation and retirement annuity funds. In most cases they have not been advised to consider alternatives to move funds from such restricted portfolios to unrestricted portfolios such as a living annuity or even a full withdrawal. They are often not even aware that there are alternatives available to them which could possibly improve their investment outcomes.
I don’t have a certain line with regard to my columns. I am not pushing one investment in favour of the other. In fact, I try not to offer investment advice per se.
I look at the facts and comment on them. The facts at the moment make for depressing reading and it would be astonishingly irresponsible of me to recommend certain investments ahead of better-performing ones based on non-factual sentiments.
What about the argument that by recommending offshore investments I (and the participating investors) are depriving the local economy from much needed investment and job creation opportunities? There is a certain element of truth to that but the governing party should be creating the economic environment that attracts capital and offers the chance for free enterprise to flourish, which it isn’t.
Capital flows to where it is made to feel welcome.
In fact, government and its misguided economic policies over many years have been destroying capital through investor unfriendly policies, rampant corruption and the sheer stupidity of a president who is clueless when it comes to running a modern-day economy.
Until such time that these macro-variables change, I will simply speak truth to the facts.
As they say: “You are entitled to your own views but not to your own facts.”
*Magnus Heystek is investment strategist at Brenthurst Wealth. He can be reached at email@example.com for ideas and suggestions.
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