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  maybe keeping to the subject at hand "making money in a time of low growth and low inflation" would be of help...  

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The timing couldn’t be worse

Home-bias is a global phenomenon.

Nearly two years ago Stanlib closed its Science and Technology Fund to local investors, due to an almost lack of support from the investment public and financial advisors alike.

It didn’t attract much money and had less than R100 million in assets which, from a business perspective, might have made sense for Stanlib, but for me was a loss.

I could never understand why money wasn’t pouring into it, as I thought the fund and investment area offered great investment potential. I used the fund and just as the performance started ratcheting higher, Stanlib decided to close it down.

It was not only a loss for local investors but also for the country. South Africa really does not have much of a science and technology industry which allows local investors to benefit. Even our largest share on the JSE, Naspers, is really just a conduit to get exposure to Tencent – one of the best performing global shares over the past ten years or so. Since then onwards, if you wanted exposure to technology and biotechnology funds, you had to purchase US dollars and invest in an American fund company. So money leaves the country and any profits are made by an American company with a loss of tax revenue for the local fiscus.

The Science and Technology Fund was the only local fund which gave me cheap and easy access to global technology companies such as Apple, Google, Baidu, Cisco and Microsoft, to name just a few. For as little as R250 per month local investors could get direct access to the companies changing the world at a speed and direction which investors could never dream of a handful of years ago.

I spoke to the head honchos at Stanlib at the time, and their reason for closing the fund was that despite their best efforts they could not convince local investment advisors and investors to commit to it.

It was deemed risky and “far away” and the default option was to rather invest their money in local funds with more familiar and comforting branding.

It’s a fact of life that investors, all over the world, invest in funds and brands that make them comfortable. It’s for this reason that the bulk of new investment flows over the past ten years or so have gone to the big five: namely Allan Gray, Coronation, Investec, Stanlib and Foord.

If investors truly know how much this so called ‘home-bias’ costs them over the long term, they would be astounded, but that’s an article for another day. But let me add: home-bias amongst investors is a problem all over the world; not only here in South Africa.

Great rewards

At least those investors who could be persuaded that the investment world and opportunities are not limited to the local bourse and companies listed thereon have been greatly rewarded.

The second quarter of 2016 was a spectacular period for technology and social media companies’ earnings. Facebook reported revenue of $6.42 billion for the quarter and now has 1.7 billion users. I was reminded of a discussion I had with some know-it-all orthopedic surgeon a year or three ago who, cigar-in-hand, tried to convince me that Facebook was a gimmick and wouldn’t last. “Give me bricks and mortar any day,” were his parting words to me.

Amazon also had a fantastic quarter and, on July 29 for a brief period, the top five companies listed on Wall Street in terms of market capitalisation were all technology and social media companies – beating the traditional behemoths such as Exxon and Berkshire Hathaway into sixth and seventh place respectively. The biggest on that day were Apple ($569.1 billion), Alphabet ($539 billion), Microsoft ($446 billion) and Amazon ($366 billion).

Just imagine that: Berkshire Hathaway ($355 billion), grown and cobbled together by Warren Buffett over more than 50 years, has been overtaken by a company founded a mere ten to 12 years ago by some 19 year-old nerd in his Harvard dormitory, as a means of making himself more popular with the girls! And it is now making real money that you can feel and touch, unlike the paper companies that boomed, crashed and burnt during the dotcom years.

Excited about the future

To me investing in technology and biotechnology companies is all about the future, which excites me immensely. And much of this excitement stems from what is being invented and created in far-away places such as Silicon Valley just outside San Francisco and other hotbeds of technological innovation, particularly in the United States, but also in Israel, Switzerland, France and the UK.

Nary a day goes by that I don’t read or hear about some new invention which may or may not profoundly change the way we will live in the next five, ten and even 20 years. I just hope that I will be around to see some of these inventions. The more I learn the more excited I become.

Imagine in your wildest dreams a future of driverless cars, a colonised moon and/or Mars, nano-robots travelling in your bloodstream fixing broken and cancer-ridden cells, solar-paneled cars (not yours – we will all be sharing cars) and so on.

But every time I hear or read about some wonderful new invention, I know full well that not every one will be the technological-equivalent of discovering the Klondike gold reef – the richest seam of gold ever.

That was the recipe followed by Koos Bekker when he was running Naspers.

The company invested a great deal of money in about 300 different start-ups; Tencent was the Klondike, Witwatersrand and Welkom gold reefs all rolled up into one.

Speaking recently at the Berkshire Hathaway AGM in Omaha, Warren Buffett (86) commented on his and co-partner Charlie Munger’s (93) improving investment skills. “As an investor you never ever stop learning: the minute you think you know it all is when you burn your fingers,” he was reported as saying, or something to that effect.

It has taken much time and effort to overcome home bias as far as my investments and the advice I give thereon are concerned. There was a time when recommending offshore investments was considered unpatriotic. Even former President Thabo Mbeki recently described the stream of offshore investing by SA companies and investors alike as “racist”. “They have no faith in black people running the country and therefore they are investing their money elsewhere,” he said on a TV programme I watched two weeks ago.

It was an astounding statement to make, but one far from the truth. As far as local companies are concerned, they are investing in other parts of the world better ruled and faster growing than their home country. Individual investors invest offshore to reduce risks, enhance growth and participate in investment opportunities not available on home turf.

Staggering rewards

The below chart illustrates the staggering difference in returns between an investment in the local market, versus three offshore funds available to local investors: two technology and one biotech. The offshore returns have been boosted by the decline in the local currency.

Click to enlarge

Magnus 1

If one refers to the returns in US dollars the picture looks as follows:

  • JSE: +3.1%,
  • Blackrock Technology Fund: +56.9%,
  • Franklin Technology Fund: +91.7% and,
  • Franklin Biotechnology Fund (even after its severe correction over the past year) is still +167.5%.

I know it serves no purpose to look back at investment returns on the basis of what one should have done. But the issue as far as technology investments is concerned is simple: we don’t have a technology industry and if you want to participate you take your money offshore to do so. It’s the same for someone living in a country that does not have a gold mining industry: if you want to invest in gold or gold shares, your money has to go somewhere else.

That home-bias could be costly over time.

* Magnus Heystek is the investment strategist for Brenthurst Wealth. He can be reached at magnus@heystek.co.za for suggestions or recommendations.

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Mduduzi Luthuli

Mduduzi Luthuli

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Magnus – After your train wreck of an article on passive versus active funds I see you back on selling your own financial planning practice on Moneyweb. Essentially by rubishing your own country to ensure you make money on you offshore portfolios. So all 1ste world countries are safe havens?? – So lets look at the current state of affairs in the UK and Europe. Social unrest in USA (do you watch the news??) So how many Biotech firms actually make money (not just selling a dream) – So lets look at the tech companies in the USA – They outsource their labour to 3rd world countries and they pay no tax in the USA (all run from tax havens). Good old pharma companies spend more marketing the R&D.

Rubbishing my country by making money for clients offshore?
Is that you Thabo?

At least run the graph till today’s date (reflecting the sharp Rand appreciation) – The Franklin Biotech fund has not outperformed the biotech index (I suspect after fees its under-performed) Of course one should diversify – But you first much your assets and liabilities in your local currency – We will see how the bio-tech funds do over time – The smart money normally leaves way before the crash

Biotech is clearly a bubble. Just like the DotCom mania of 2000. Yes there will be decent companies after the fallout, but I would stay away at current prices. Most people will be better off staying in boring companies which have proper cash flow, bought at the right price. If you invest for excitement you will probably be disappointed with your returns. Look for something that gives a real return and stick with it as long as possible.

The only concern around technology overtaking bricks and mortar is if you look at the two companies mentioned in this article. Facebook at 63x PE and Berkshire at 14.6x PE – perhaps Facebook will grow into the PE, time will tell, but to me it feels as if investors may have inflated expectations of earnings and therefore saying FB has overtaken Berkshire seems a little strange simply because we value the FB’s earnings at 4x greater than Berkshires… to me, Facebook’s earnings would be under greater threat than Berkshire since technology is easily disrupted – low start up cost, and the world is littered with failed former technology superstars – Friendster, Myspace etc, so I’d value the earnings at lower multiples… but clearly in the market at the moment that’s just me…

“The timing couldn’t be worse”, timing is always an interesting one. I can totally understand home bias from an SA point of view. If we look back 15 years on the funds you have listed:

JSE – USD 463%
Franklin Bio Disc – USD 241%
Franklin Tech A – USD 114%

So long term, you good locally. I do believe that there is merit in holding some of the technology stocks out there, but using past performance as a justification is a poor selling point. Physical offshore diversification as a whole is a must for South Africans, but part of a proper financial strategy and not during periods of panic.

Interestingly enough, YTD your best choice to house your funds would have been the JSE ($18.3%) vs. Franklin bio (-$13.35%) – around about the same time everyone was shouting offshore as we were going to see R20 /$ or exchange control restrictions – Super Mag, I believe you were one of them?

Diversifying by investing offshore makes sense, but I wonder how much the superior performance of offshore investments in Rand terms in recent years are due to the sick Rand rather than real growth in the investment?

I guess an offshoot quesion is ‘does it matter?’

I don’t have an answer, but I would be very carefull about new offshore investments with all the uncertainty in Europe and the US.

I come not to defend magnus – but to hail him (apologies w Shakespeare). mark my words – in years to come MH will go down as one – if the not the only advisor – who called the markets right. I have made money from usa biotechs and continue to so do – AND I live in aus land where there is NO currency exchange control!

Robert – Maybe good old Aus should worry about the shocking abuse at your detention centers…

maybe keeping to the subject at hand “making money in a time of low growth and low inflation” would be of help

Time is of the essence (if you want to play with the Rand!)
This time around all the ”so-called” fund managers got it wrong again. Almost all fund managers invest 25 % of their clients funds offshore (during the beginning of the financial year) and expect big returns due to FX exchange rate depreciation, in the so-called longer term!
Funds invested so far this year to date, lost more than 20 percent on their investments, despite some Rand gurus calling for USD/ZAR 60.0000 soon.
I think most of these fund managers – come FX experts – lost their clients a plethora of Rand during the last 10-15 years as the Rand is busy correcting its oversold condition. Billions of Rand were invested much higher than the current Dollar Rand exchange rate. At USD/ZAR 13.50 at the moment we are very close to the mid 2000 level on the Rand.
In my FX trading days (more than 40 years) nobody had the audacity to make ridiculous predictions, like most of these so-called ”fund managers” with their derivative products , that most of them trade today, but that they don’t understand.
Most investors looking forward to repatriate their funds soon to go on pension etc, will also soon find out that the latest ”mark-to-market ” received from their fund managers could be double digits lower!

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