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Protecting capital through diversification

Mags Heystek explains how important diversification is in the current bull run.

RYK VAN NIEKERK: Welcome to this Financial Advisor podcast – my weekly podcast where I speak to leading financial advisors. My guest today is Mags Heystek, he is a financial advisor at Brenthurst Wealth in Johannesburg. Mags, welcome to the show.

We saw an interest rate increase last week. It was relatively unexpected and it did have a pretty significant impact on the rand and bond rates. How do you as an advisor react to such a development?

MAGS HEYSTEK: Firstly, thank you for having me on the show again. I think with the interest rates a lot of people tend to see what the effect is in terms of the market and what it means for the rand, but we also tend to look at the knock-on effects. So a lot of time we’ve got an environment where returns are increasingly under pressure and basically when we look at interest rate hikes we also look at how it affects clients. Basically one of the best examples is mortgage payments and things like that where obviously interest payments are involved and that will increase for them. It makes it a bit difficult as well for everyone because your cost of living is going to go up effectively. So we tend to look at those types of things and we try to give feedback to clients to say there is an interest rate hike and now is the time to try and manage around those types of scenarios because we are in a low-growth environment.

RYK VAN NIEKERK: Do you see your clients adjust their savings or investment amounts if we see a spike in the interest rate or the fuel price?

MAGS HEYSTEK: Not necessarily, but what we tend to assist clients with is cash flow management. When we do reviews for clients on an annual basis we typically use one of those points – and in this case the interest rate hike – and we try to explain how that will affect their bottom line. It’s especially difficult for clients who are on fixed incomes on a monthly basis, for example from living annuities, and that type of information does form part of the advice that we give them to say, ‘Well, things are going up, cost of living is increasing, in a low-growth environment. It is time to revise what the income expectation will be for the next year going forward’.

But to answer your question specifically, if the interest rate goes up by 25 basis points I don’t necessarily see it as an immediate change. It’s a gradual effect, especially with the increase in interest rates there’s always the potential or possibility that could continue. So we always try to advise clients to be prepared for what’s next.

RYK VAN NIEKERK: Cash flow management in a household I think is sometimes a significant challenge. How involved do you as advisors actually get with budgeting and cash flow management of your clients?

MAGS HEYSTEK: In terms of the actual itemised budgeting we leave that up to the clients, because at the end of the day we’re not trying to dictate how they should be living their lives. But we have a responsibility to inform them that if they require a certain amount of income, that’s above a certain percentage of their total capital, they will run into trouble ten to 15 years down the line. So it’s more about scenario planning and making sure that clients understand that everything that happens now will affect them later in life, so trying to get control of your budget is very, very important. I think that can apply to anyone of any age. It becomes a lot more difficult when you have annuitants who are in a later stage of life where they won’t have as much potential for other sources of income. So it’s very important that they understand any decisions they make now or trying to cut costs now will benefit them in future and that’s a very difficult conversation to have, but it is important.

 

JSE on a slippery slope downwards

RYK VAN NIEKERK: Let’s talk about markets. We are currently seeing very interesting scenarios. We look at the JSE: it is relatively cheap but it seems to be on a slippery slope downwards and it has been for a while. On the other hand, international markets and especially the US markets seem to be very expensive and there are concerns about those markets too. How do you invest or advise your clients in this environment?

MAGS HEYSTEK: It’s a very good question and I think it’s all about providing them with the facts. If you look at the JSE All Share Index it’s down about 14% over the past year, so we always try and provide everything that’s in relative terms. If we look at a market that’s down 14% but you have an investment that is only perhaps down 2% or 3%, we still see that as a positive because the investment and the strategy we followed has protected the investor’s capital.

If you look at the overseas markets, there was quite a big correction towards the end of October and it’s definitely affected the global economy, but I feel that corrections like that are healthy. I think they are important: they bring everything into perspective.

You made a comment about the US market or the overseas markets being very, very expensive but it comes down to the question of when is the next crash going to happen? No one knows. It’s impossible to predict when that will happen. You always get conflicting statements: the bull-run could continue for another 18 months, 24 months or the crash could happen tomorrow – we just simply don’t know. One of the conversations I have many times with my clients is that diversification is still a crucial element to any type of portfolio. That’s the basis of not investing all your money in one asset class.

Diversification is still very important and one of the best ways to protect capital, as well as getting the opportunity that the market might provide.

RYK VAN NIEKERK: Whose responsibility is asset allocation: the financier’s, the advisor’s, or the fund manager’s responsibility?

MAGS HEYSTEK: I would say it mainly comes down to the financial advisor and the fund managers. When we use different funds we typically tend to gravitate more towards multi-asset funds, but the advisor’s role is also to ensure that the client is investing in funds that are suitable for them. Every client who comes through our doors is at a different point in their lives: they have different risk profiles; they have different objectives for the investments. Basically what that means for the investor is that the advisor has a responsibility to ensure that they are invested in the correct funds. It’s very easy to place a client in a single fund without the client understanding what the objective behind that fund is, but I would say that the role goes to both the advisor and the fund manager.

RYK VAN NIEKERK: Brenthurst has always favoured international investments, offshore exposure. Has that position changed in recent weeks and months?

MAGS HEYSTEK: No, it hasn’t. I feel that the investor mindset in South Africa is still very headline-driven. If we look at where the rand has gone up and down in the last ten months, we had a very strong rand back in February – I think the rand was trading at R11.50 – now we’re sitting at about R13.80. But if we go back to October it was at R14.50, so it’s very, very volatile. However, we still feel in the long run all offshore exposure is still valid for any investor portfolio.

 

Brenthurst’s collective investment products

RYK VAN NIEKERK: Brenthurst also has a few of its own unit trust or collective investment products. Tell us about those.

MAGS HEYSTEK: We have partnered with BCI, Boutique Collective Investments, basically forming the administrative and feedback roles for the funds, but we are still responsible for the underlying funds. Basically what we’ve employed on the local platform is a fund of funds structure. So we’ve got a single fund that will at time use between six to eight different funds and the reason behind that is we are able to provide funds for different risk profiles. As I mentioned earlier, we’ve got a conservative fund, we’ve got a balanced fund and we’ve got a worldwide flexible fund – now that’s a fund that has 100% offshore exposure.

One of the main benefits of that strategy that we’ve used is that any changes we make in the portfolio will not implicate the client for capital gains tax. Obviously capital gains tax will only come into play once they withdraw from the fund, but the changes we make ensure that all the clients invested in that fund will basically have their portfolio updated at the same time.

Unfortunately [given] the advice role that we play, whenever we make changes to portfolios – perhaps we see an opportunity or we see a threat in the market – we have to contact clients one by one and we have to change their portfolios, and that could cause a bit of damage for clients that we take a bit longer to get to. We also have a managed ETF that’s based overseas in US dollar terms and we also have a global balanced fund that’s also managed and both of those funds are managed by Momentum overseas.

RYK VAN NIEKERK: Not many financial advisors manage their own funds. How does it work? When you get clients do you invest their money in your own funds or do you also invest in other asset managers’ funds?

MAGS HEYSTEK: We do invest in other managed funds and that comes back down to that principle of diversification. Bear in mind as well that with the fund of funds we don’t actually manage the capital within the separate funds – we use funds from various different MANCOs like Investec, Allan Gray, Stanlib, Coronation, Foord, Counterpoint. So there’s a long list of other asset managers [whose funds we use] and the reason for that is different fund managers have different styles of management and that also forms the basis of the diversification. To put it in a nutshell, if two out of eight advisors get it wrong then the fund has still done its role. If eight out of eight get it right then that’s always positive, but that’s also one of the reasons why we’ve employed funds from different companies.

RYK VAN NIEKERK: Just lastly, we live in volatile times; do you prefer actively-managed funds over ETFs (exchange-traded funds) or passive?

MAGS HEYSTEK: My opinion on active versus passive has changed slightly. I do feel somewhat that a hybrid model can benefit clients, where you’ve got a combination of managed and passive funds. I know you can have a long argument about it, but I still don’t see there being a definite answer between what is better between passive and active managed funds.

Obviously we lean towards active-managed funds because they do provide value in bear markets, because the fund managers have the opportunity to change the underlying assets within the fund: they can increase cash exposure and they can reduce the equity exposure, whereas passive funds are at the mercy of the market and when there’s a bear market and a big correction like we’ve seen on the South African market in the past year…. It’s always going to be a long conversation but that’s really my personal opinion on the matter.

RYK VAN NIEKERK: Thank you, Mags, we’ll have to leave it there. That was Mags Heystek. He’s a financial advisor at Brenthurst Wealth in Johannesburg.

ADVISOR PROFILE

Mags Heystek

Brenthurst Wealth

AUTHOR PROFILE

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Balanced Fund of Funds are really just a profit making machine for the advisory itself, with a bit of marketing lingo thrown in.

Why pay a fee of 2.31% p.a. for the Brenthurst Balanced Fund of Funds, when you can just go pick 3 or 4 balanced funds i.e. Prudential, Allan Gray, PSG, Investec directly and rather pay a fund manager fee of +/- 1.70% p.a. and they will manage the asset allocation just as efficiently without someone charging you a pointless fee on top.

End of comments.

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