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Never take investment advice from a fund manager

SA’s economic fabric is fraying at the edges.

What’s that old saying again? “History doesn’t repeat itself, but it does rhyme…”

Therein lies a lesson for many South African investors who still seem to think that inertia is the best investment strategy, especially, considering the tumultuous and wealth-altering times we have been living in over the past few years.

For the past five years I have been on a crusade, some would call it, trying to warn investors and anyone who cares to listen, that the foundations of wealth creation for the average investor in South Africa are under enormous pressure and, like a sand castle, are being undermined by the incoming tide.

Five years ago I hosted a countrywide series of seminars with the redoubtable Clem Sunter, our foremost scenario planner and author. At the time Sunter was still vacillating between SA being part of the first league or perhaps a country playing in the regulation play-offs. He was even calling for a stronger rand going forward. Once a mining man always a mining man, so it seems.

I was firmly of the view that offshore assets were vital to the portfolios of all local investors. And so it came to be….

On my reading, SA is now firmly set on the low road and about to be relegated to the third league, notwithstanding the delusions of our president. Our economic fabric is fraying at the edges. We won’t see an economic growth rate of 3% per annum for a very long time, especially not with the current mishmash masquerading as economic policy.

The rand’s outlook

Let’s take the rand for example. In five years the rand has dropped from 6.50 to the US dollar, to this week’s R12.85. Everything you pay for in US dollars will now cost you 90% more.

Overseas travel will decline, the purchase of imported goods and services will soar in value and in a normal situation inbound travel would soar, were it not for the imbecilic visa regulations by another ANC-politician with a chip on both shoulders – a well-balanced politician in other words.

The rout in the rand is not over, not by a long shot and by the time this is all over, the rand could be trading at R15, R18 or maybe even R20 to the US dollar.

It’s interesting to note that now that Cees Bruggemans, former chief economist at FNB, is not constrained by the political chains of his former position, he is free to speak his redoubtable economic mind.

As I have said before, most full-time economists work either for one of the big banks or large asset managers where the truth is better left alone. Speaking the truth about the economic road that lies ahead could be career limiting. Political expediency triumphs over the truth. But every day normal, middle-of-the-road people base their investment decisions on these heavily massaged facts that are trotted out to the media and eventually to the public.

Bruggemans can now ask the probing question that all economists should be asking: ‘How many economists five years ago or even as recent as three years ago suggested a substantially offshore position in your investment portfolio?’ Here and there you might find one but most mainstream economists operate on the basis of ‘don’t rock the boat’.

How would you react, gentle reader, in reading that an investment of a similar risk (S&P 500 versus the JSE in rand terms) has returned more than double that of the local investment?

Where would you read that? Nowhere, as much of what you read in the financial press is heavily controlled by a number of large asset managers. The truth is, the JSE has returned 15% per annum over the past five years whereas an investment in the S&P 500 more than 33% per annum. The same pattern is repeated over three years, one year and even six months. All the other major indices of the world show a similar pattern.

So, on a global basis your local investment returns have been slaughtered by the returns international investors have been earning. Never take investment advice from a fund manager.

Let’s talk residential property prices

The other day I was driving home listening to a favourite radio station, MixFM, when up popped an interview with a local estate agent. Again we were saddled with that hairy old chestnut that “residential property is the biggest investment the average investor will make in his or her lifetime”. I almost flipped my car as I tried to Google the station’s number to try to point out this bald-faced lie.

“It’s your biggest debt, not your biggest investment”, I wanted to shout down the line, as thousands of would-be property moguls are finding out to their detriment as the residential property market enters its seventh year of a bear market.

Average property prices – with the exception of the Western Cape – are still 20% lower in real terms than they were at the peak at the beginning of 2008 and are set to decline by another 2% to 3% in real terms this year.

You haven’t seen or heard the term ‘negative equity’ yet, but you soon will. Property values are dropping in both real and nominal terms in many parts of the country. The pockets of areas where property prices are holding their own is shrinking rapidly. In many smaller towns the property market has stopped functioning.

World class African city? I think not

You cannot have an efficiently-functioning property market when Johannesburg, still proclaiming to be a World Class African City, takes over seven months to issue clearance certificates.

As I wrote in April this year I sold one of my ‘investment’ properties in Dainfern, and I cannot get this wonderful city to sort out this mess. Millions of rands have effectively been locked up, the house stands empty and I’m massively out of pocket. Likewise, the survivor from Stalingrad (read Investment Lessons from Stalingrad), who sadly passed away some weeks ago, also sold his house in December last year. To date the transfer has not been completed. So please don’t tell me residential property is a sound investment. It’s not.

South Africa and all its people, rich or poor, are rushing headlong into an economic disaster. I don’t share the sanguine views proffered by columnists Max du Preez and Peter Bruce. I think President Jacob Zuma is unlikely to leave at the end of his term in 2019 and even if he does, the economic damage he has done would be so vast and deep that it would take many years to heal the scars. Even replacing Zuma with someone else will make no difference. The system of political patronage now runs so deep and wide, affecting all sectors of political power and money, that it’s not going to be dislodged soon. An octopus does not let go easily.

All this at a time when commodity prices have collapsed and are unlikely to increase again for many years. Even if they recover tomorrow, will foreign investors rush into setting up mining companies in South Africa? Not after our government last week effectively made mining rights subject to the whims of a mining minister. Say goodbye to foreign investment in our mining sector.

There is very little to show from the most recent commodity boom (1980 to 2002). Nor from the boom fuelled by the inflow of money sans 2008. The cupboard is empty. Yet government wages are up 40% since the Great Financial Crash. In many other parts of the world government officials have accepted cuts of up to 25% in wages and salaries.

The ever-shrinking tax base is now in the cross-hairs of Sars. Prepare to be hunted down like Cecil the Zimbabwean lion.

Let me end with a quotation from Warren Buffett: “Read, read and read some more. Or suffer the consequences….”

*Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be reached at magnus@brenthurstwealth.co.za for ideas and suggestions.

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COMMENTS   33

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Magnus, you shouldnt post articles on a monday morning, they are depressing enough.

I think you also need to take some responsiblity for the decline in the rand.
You probably are one of the reasons for capital flight.

I think you could serve the readers better by turning that sharp mind of yours to other spheres of economics and finance, Surely there is something other than ” reasons to get your money out of SA” to talk about.

My favorite part of the article:
“For the past 5 years I have been on a crusade”

And what a crusade it’s been, we’re all wondering how he’s maintained sanity through it all, and most of all, when this now-starting-to-look crazy ‘crusade’ will end.
I sort of skimmed over what followed, as I already knew what was to come thereafter, same old same old Magnus endlessly blabbering on about getting your money out of the country.

I don’t dispute or doubt the credence and substance behind all that Magnus says, he is right, as he has been, over and over and over again, because, after-all, he writes about exactly the same topic, over and over and over again.

How and why Marc, Ryk and whoever is part of the editorial team at Moneyweb allow him to do this is beyond me.

When you are right you are right! No time limit on being right.

@ghostface killah

“I think you also need to take some responsibility for the decline in the rand.”

Must be (partially) a journalist’s fault that this happened.

Not the:

Gold price plummeting (we sell gold, remember?)
Unfavourable labour market (strikes et al.)
Ever increasing balance of payments deficit (we SPEND more than we EARN)
Loss of foreign investor confidence (refer to above points)
Outflow of foreign capital (refer to above points, again)
Looming downgrade on our bond status
Crime
Corruption

How about we blame a useless, corrupt, directionless and spineless government for making no headway in education, the private sector, job creation and most importantly foreign direct investment (referred to as FDI) in the past 20 years. We are chasing away foreign investors (look at BMW and the Rosslyn fiasco, for example), and potential future investors (tourists who are cancelling their travel plans because of the visa requirements)

If a country is not favourable for investing, then people will not invest. South Africa is currently NOT FAVOURABLE if you haven’t noticed.

Would you rush to invest in Somalia or South Sudan right now? No? Maybe because there is no infrastructure or the economic environment doesn’t accommodate business opportunities? What about even Zimbabwe? No? Think about that for a minute.

But please enlighten us which favourable topics on economics and finance should be discussed. They way I see it, Magnus is writing about how it IS. Why lie or diverge the attention to other matters?

A sharp mind is wasted if being used on a dull one.

Magnus, thanks for your independant, non-baised and excellent articles.

Over the last few years I switched most of my local investments into global equity investments, with very good results – thank you.

Please carry on, tell us the truth, so some of us who believe in you, can continue to reap the benefits of your good, honest advice.

You could still make money in SA inc, but you need to stock pick, and do that selectively. The easy money have been made. But having said that, any portfolio now needs to look at increasing rand hedge & foreign investments. It will become tougher and tougher to make money in SA in current conditions. It’s not a pretty picture.

Magnus, great read.

You tell it like a slap on the face. What many carrer income earner intuitively knows but are scrambling to find affiramtion to their troubling gut feel of their investments in the SA economy.

Those that see it as negative information will continue like ostriches.

What one needs is a balanced portfolio, x% local, y% offshore (as to what x and y should be, i surely don’t know – I hope someone can help me with the answer). It will however be reckless to take a one-way bet against the rand.

Either x or y will perform better than the other. Thus one is right and the other wrong. do the mathematical analysis and crunch numbers.
So much for the “balanced portfolio” theory. why include the poor performer? in a choice of two options scenario, unless they both give exactly equal returns, go with all one or the other.
In this case, it’s clearly all offshore, at this time. But it could be the opposite in the next cycle.

“Economists are too politically correct”. Not true of Dawie Roodt- he has been telling it like it is for some years now.
On fund managers the quote from the film “The Wolf of Wall street” rings so true:
Jordan Belfort: “I gotta say, I’m incredibly excited to be a part of your firm. I mean…the clients you have are absolutely…”
Mark Hanna: “F*ck the clients. Your only responsibility is to put meat on the table. The No 1 rule of Wall Street is nobody, I don’t care if you’re Warren Buffet or if you’re Jimmy Buffet, nobody knows if a stock is gonna go up, down, sideways or in f*cking circles, least of all stock brokers.
It’s all a fugazi. Yeah, fugazi, fogazi. It’s a wazi, it’s a woozi. It’s…fairy dust. It doesn’t exist, it’s never landed, it is no matter, it’s not on the elemental charge. It’s not f*cking real.”

Magnus – I think we appreciate that you may have “called the Rand” correctly over the last year or three (and I hope your clients have all benefited from this sage advice) but it’s disingenuous to think you’re the only one who might have had this insight (“never take investment advice from a fund manager”).
As I’m sure you’re an avid reader of Moneyweb articles , you would have recently spotted this little gem (and from a “fund manager”, nogal!):
http://www.moneyweb.co.za/moneyweb-radio/market-commentator-moneyweb-radio/a-buy-and-hold-strategy-doesnt-work/

So glad you mentioned Max du Preez, his articles are sometimes so disconnected from reality that someone needs to sit him down and tell him to get serious. His proposals or “solutions” for fixing this country are often so far fetched that it becomes pointless reading the article

“The ever-shrinking tax base is now in the cross-hairs of Sars. Prepare to be hunted down like Cecil the Zimbabwean lion.”

what is the recommendation here ? that it is now time to pack the bags and exit …. even if just a hop over the border to swaziland ?

@ghostface, @barney … are you really suggesting that we should limit the contributions to the market place of ideas ? pheyeewww …. off to the SABC for you. or maybe the TNA. with excon in place locals can only invest a % offshore and presumably this column is simply promoting that this % be fully utilised ?

I enjoy Magnus’s writing, he has an entertaining style and from what i can gather vast expierence, as well a profound knowledge of the investement industry.

Which leads me to the point, so as an investor I have now diversifed my portfolio and put a considerable portion of my portfolio in offshore funds. Now what?

I really enjoy Magnus’S writing with regards to his amusing anecdotes about his stubborn neighbour who couldnt sell his house, his dinner with Mandela and when he failed to take Mr Moutons investemnt advice.

Hi Bertie Buzzkill.

Not ‘limit the contribution’ but rather tweak it somewhat by diversifying the range of topics, or ‘contribution to the marketplace of ideas’ as you put it.

As stated in my previous comment, I do not doubt the substance behind what Magnus is saying, from a personal finance point of view, many people need his advice, and will heed his calls.

However, from a purely journalism point of view, even the staunchest Magnus mega-fan must admit that what he is doing is bizarre. Can you imagine what would become of this beloved website of ours if all the journalists followed the same principle of repeatedly recycling a single topic ?
Topics that are personal finance related invariably solicit the most interest and comments, because they resonate with many people, and it’s no surprise that you are defending him, but c’mon, even you must find it just a little bit weird that you always know what Magnus will be writing about, even before you open the article.

Cheers.
Loved the SABC/TNA joke by the way.

hi, cheers for the reply. i take your point and aside from all else, MH has built an investment legacy in SA and you would think there are things he can share that go beyond SA-> toilet.

fwiw i am not defending him, just defending his right to bang the same drum. maybe you and i are the bigger fool because we open the articles knowing what they will say ?

Sadly Magnus has ben right and for quite some time. Denial is a South African trait which is going to cost a lot of people a lot of money. Typically when the Rand is strong no one will move funds offshore and when the Rand is weak there is a rush for the door. However I not sure that a return to Rand strength is pending. Lets hope the door remains open to transfer funds.

Imagine if Magnus wrote a really depressed article instead of his usual upbeat ones 🙂
Jokes aside: we are in a huge mess. A tsunami we could all see coming (unless you were ANC) and which we cannot escape.

I am honestly not sure what the outcome is gonna be but I guess the most likely will be:
1. A severely depreciated rand
2. A very weak housing market
3. Very high unemployment
4. More social disorder and unrests along with striking due to large retrenchments.
5. More censorship of the media.
6. With the nuclear deal I am afraid we are facing a potentially bankrupt SA coz there is no way we can repay a best estimate of R1.3T for nuclear power. Given past ANC ventures this figure will likely balloon to 3x that figure.
7. Interference with the legal fraternity.

Bottom line…expect to get very poor whilst a few connected ANC guys will get very rich.

Not much of a future I’m afraid 🙁

But then those are just my very upbeat predictions 🙂

Magnus writes very well, there is no denying it, but he makes some serious logical errors which sadly infect most of his conclusions. Magnus is the master of the generalised anecdote where he uses one “personal” experience to generalise to everybody. Is property really such a terrible investment (it is an investment by the way because you are buying an asset) because Magnus and one other WWII survivor had a tough time in Dainfern? Would Magnus please write articles where he has called the future wrong? Even a broken clock is correct twice. By the way, most commodity exporting countries are suffering to a greater (Brazil, Chile, Australia) or lessor extent.

Bottom line, you write very well, and it is tragically entertaining, but making generalisations from a few data points in something as complex as a multi billion dollar economy is stretching logical coherence to breaking point.

Dear Magnus, Thank you for founding your opinions on facts. Thank you for providing your honest independent opinion. Thank you for being willing to make unpopular statements to help prepare fellow South Africans for the future.

At last – someone from the Financial Services sector who can see the wood through all the trees!. I bought my house in 2005 for 1 million Rand and might, – just might , if I’m really lucky get that million back now 10 years later!!. How’s that for an ” Investment “?. In addition, I returned from visiting my son in the USA in 2008 when the Rand was R8 to the dollar – now it’s nearing R13. Are we South Africans really so blind?.

I am curious in which suburb did you buy? Seems really unlikely that you had zero growth since 2005!

The real problem is that there are too many “economists” who spend their lives describing “the problem”, but are rather short when it comes to proposing practical solutions that politicians can use.

Which brings me to the opposition parties. None of them (apart from the EFF, it seems) is able to ENTHUSIASTICALLY articulate a different and promising economic policy that excites the populace.

The Deurmekaar Alliance (DA) have NO policy on ANYTHING.

They cannot even run an effective traffic department in Cape Town. And then they have the cheek to aver that they are the “government-in-waiting”.

Their “policies” exists only in the criticism of the ANC’s policy. Doesn’t matter whether it’s Economics, or Justice, or Taxation, or Education. It’s all the same. The Opposition is comprised of an uninspiring bunch of “Shadow Ministers” who bring NOTHING to the table except a napkin, to feed at the gravy table alongside their like-minded ANC-bretheren.

This country is not failing solely because of the ANC. It is failing PRIMARILY because the political alternatives are articulated by even more feeble-minded bozos!

Moneyweb needs to put ALL these impostor politicians and economists at the end of a journalist’s pitchfork: It is not enough to describe the problem ad nauseum. You MUST also provide the solution.

Magnus, whilst I agree on some of your extremely negative sentiments, I think you are entirely incorrect regarding the property market in all aspects.

Whilst property may be an expensive debt at first, the return on the investment has proven to be one of the best world wide, especially in the long term. It is for this very reason that banks are granting 100% bonds to qualified buyers. And in the Western Cape, property prices in many sectors has increased by over 20% over the last year and, as a result, there is now a severe shortage of sock.

Regarding your comments of delayed transfers, I think you are generalizing based on one or two bad experiences. With a good conveyor, problems with transfers and deeds offices is usually remedied in a relatively short time.

In conclusion, I agree with some of the other comments in that you should focus on other spheres of economics and finances, especially the spheres that you are more qualified to report on. Hopefully you can also focus on some positive issues going forward.

Yes and no about CT property. We have actually noticed lots of property still being on the market even after being told by “agents” that offers have been made on them. I was phoned by an agent to ask if I was still interested after the offer was refused – sorry but I don’t believe one should make 100% profit within 3 years!
People in CT are ripping people off with property when the salaries in CT are out of touch with property prices. I am noticing a major change and it is certainly not a seller’s market anymore unless it is Atlantic Seaboard

Harold MacMillan’s “Winds Of Change” have been blowing through Africa since the late 50’s with the collapse of the Gold Coast into Ghana. With the possible exception of Botswana the results have been as predictable as they have been uniform. Not anticipating the likelihood , nor planning for the same demise in South Africa implies massive naievity.

We ask those who criticise Magnus for being excessively negative about the future of South Africa to provide some qualified reasoning as to why they are not, with particular reference to areas where the country might excel…………..or, at least, not get any worse. It’s obvious that there are still many who won’t accept reality. Or are they rather just decent, hard-working people who have simply accepted what the big banks and fund managers, together with their illustrious, tame academics tell them.

Keep up the good work Magnus

“Prepare to be hunted down like Cecil the Zimbabwean lion.” Correct, SARS owes me over 17k and have subjected me to a 3-6 month audit now!

They audit me every year but this time money is obviously running out and in desperation are making me out as a criminal hiding Ferrari’s and mansions! I don’t even own a TV but put money away in my RA which everyone tells you to.

Sorry but the future is bleak with Zumbo at the helm and I have zero confidence in the regime

Off topic, but I wonder who Cecil the lion was named after. Could it be that same Cecil who had s**t thrown all over his statue at UCT? Uncle Bob wouldn’t have liked it, but then Uncle Bob couldn’t even join the dots on a puzzle with only one dot.

Intriguing question you pose Phil. I would have thought your uncle Bob would have thoroughly enjoyed the UCT happenings. He is reported to have said something like this in a recent visit to RSA. “You have his statue……….we have his body.”

Robert Gabriel despises anything associated with CJR so which Cecil are you and your five supporters referring to?

But I do understand the dots stuff.

Property prices in my middle class area are going through the roof! I bought six years ago-in the depths of the financial crisis and have profited handsomely since. It helped that I did not pay agents commission as I did a private deal. Agents knock on my door weekly asking if I want to sell, there is a huge shortage of stock in the area. Magnus, you forgot the golden rule of property: location, location location. You say never take advice from a Fund Manager. I disagree, fund managers are judged by performance. I say: Never take advice from a broker or agent! Have you ever heard an Estate Agent tell you not to buy property now because the market is expected to go down? Have you ever heard a Financial Advisor say don’t take out another policy now? Don’t waste time with agents or brokers when investing in property or stocks- go direct.

i tend to agree – you only have to look at areas like the the parks to see how property can work well. I think Dainfern had its day when it offered a revolutionary alternative. these days though the commute (for work and entertainment – the latter has grown exponentially since Dainfern opened) is disgusting and it offers little that you can’t get elsewhere.

to Magnus’ broader point though, right now surely the better investment is offshore. too much uncertainty especially re growthwill inevitably erode buying power in SA.

frightening to think that you would have made 6% return on your ZAR if it was in GBP in the last month alone.

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