Finding value amidst market noise

‘I do pick up optimistic signs about the local economy’ – Richus Nel

RYK VAN NIEKERK: Welcome to this Financial Advisor podcast, my guest today is Richus Nel he is a financial planner at Brenthurst Wealth. Richus, welcome to the show, we are currently seeing a lot of political and market noise, not only in South Africa but in many other countries, including the US. How does this impact the advice you give to your clients?

RICHUS NEL: I think it’s a very difficult time in the financial markets and to be in the shoes of an investor. I think to an extent the markets are getting a little bit more immune against market surprises and political surprises, we’ve seen a very dramatic move from markets with Brexit, which was completely unexpected. I can’t say that Donald Trump’s election was more anticipated but we’ve seen a lot less market volatility subsequently. So I think to an extent people are accepting that that the world is in a difficult place, there’s a legacy of problems that’s actually carrying forward, even problems that originated pre the great financial crisis and that we should probably refocus on fundamentals, rather than just on political turmoil.

RYK VAN NIEKERK: It’s an interesting perspective that you think markets are becoming more immune. Is the advice you give currently to clients or does that differ to the advice you gave, say, one or two years ago?

RICHUS NEL: I don’t think so, I think what I pick up from my clients in particular is the first announcement of a possible downgrade was a disaster, we were very busy fielding calls and emails and so on, and as these things are put into perspective and clients and investors are educating themselves, not that I’m saying we’ve got all the answers but I’m just saying all of these things have got a perspective and it’s got a broader perspective. You can choose on which parameters to focus on and whether you are going to give yourself out to go into a panic based on what you read in the newspaper, for instance, rather than to go and have a look at raw economic data behind those. So I think clients, and that’s what we’ve seen, are becoming a little bit more – I almost want to say – comfortable with this sort of announcement and surprises. The rating agency announcement on Friday November 25 and next week, we know it’s coming and I think a lot of people are prepared for it either way.

RYK VAN NIEKERK: If I summarise what you are saying, it’s stick with the long-term fundamental plan, don’t deviate due to short-term political noise. But do you think the risks facing investors, especially people saving for their retirement, has changed over the last few years?

RICHUS NEL: Ryk, I think one component that has definitely changed is obviously a lower return expectation, so what we see is that investors who are dependent on income from their investments have been probably a bit spoilt up until now with real high returns and they could actually capitalise on that and have higher drawings. I think the markets going forward are going to be a lot less forgiving for income drawdowns and that’s going to be difficult, especially in a time like this, very difficult to actually give clients returns, which can’t miss a year of return before they start digging into their capital. So I think there is a bigger focus on fixed interest return asset classes and that we’ve seen from cash and bonds, obviously those two asset classes globally are not doing much, so it doesn’t give an alternative there but definitely local. Again, when you look at income drawings, you try to ring fence those from the currency volatility anyway. But I think income and focusing on income going forward is going to be a big priority.

RYK VAN NIEKERK: As a financial advisor you, of course, put your clients’ money into different funds, especially the equity portion thereof, what fund managers do you believe are performing better in the current circumstances than others?

RICHUS NEL: Maybe just to create a bit of perspective there because I think what we’re currently seeing is also a result of what has happened over the last two years and fund managers that have done well over those two years are not necessarily doing well now and vice versa. But what I can say is obviously, and this has been proven over and over again, if you have got the patience then value-focused investments do outperform but it takes a lot of self-discipline, whist those funds are underperforming, to remain invested. Again, if we talk about income drawdown, a value style investment is actually very difficult to adopt because of the cyclical returns and bulk returns, which you receive in particular cycles. But yes, I think the fund managers that are doing well at the moment are definitely your value style managers, locally in particular, and globally I think it’s fund managers that typically focus on quality, in particular companies that have got a global footprint, high sustainable barriers to entry and competitive edge, and then high cash free flow. So yes, I think value is something to remain on the radar.

RYK VAN NIEKERK: Brenthurst Wealth has been a proponent of taking as much money offshore as possible and that’s been the advice for many years now. Is that still your position, given the current weakness of the rand?

RICHUS NEL: I think that ‘take as much offshore as possible’ maybe needs a bit of explanation because with some clients, for instance, there is no money available to take offshore and that would be inappropriate advice. So for each client that’s individualised but yes, parts that we feel are appropriate to take we have been advocating offshore a lot earlier than many other advisors and it’s paid off rather well if you look at it in a three or five-year cycle. From the start of this year the rand has strengthened significantly, where do we feel the rand is aiming to, I think R13 or R14/US$ is almost mi-range at the moment. Do we diversify because of the rand? No, we go to global markets, also for sharing in sectors that we haven’t got exposure through locally. I think a big drive from our clients and that’s just something we experience in the boardroom is there is an uneasiness about the political circumstances of South Africa and there is uncertainty about a variety of things that’s almost not even thought about in other countries. So I think we do have a unique situation, I’m not one of those who doesn’t believe in the future in South Africa but I think that is something that needs to be managed and individualised on a client-by-client basis. At the moment it’s not that obvious to say let’s take all your money offshore that’s available and appropriate for that. I do pick up optimistic signs about the local economy. So yes, the strategy is definitely dynamic and according to economic factors but also in terms of client-specific components.

RYK VAN NIEKERK: Money that you do advise clients to take offshore, where do you invest that money?

RICHUS NEL: At the moment we are in favour of global equities, the company types that I mentioned earlier, it’s a difficult call going into global bonds at the moment, especially we are trying to prevent government bonds in particular and then something like global property has taken quite a big hit earlier this month and the end of last month but we still think there is value in there, so it’s an asset class that’s yielding between 4% and 5% at times, which is actually very attractive in a low inflation environment and compared to your cash and bond yields at the moment. But still a preference for the global equities.

RYK VAN NIEKERK: Let’s talk about fees, sometimes clients are more informed about fee structures than investment returns. What is your fee structure and what is your engagement with your clients regarding fees?

RICHUS NEL: I think in terms of fees the appropriate way to go about it is to be fully transparent, if you are not then it’s obviously going to catch up with you somewhere and there’s going to be a break of trust. So in terms of our fees, I think we are positioning very competitively, we’re not trying to be the cheapest in the market because I don’t think that’s the value-add that we are trying to compete with. As I said, we are trying to focus on quality and give clients holistic financial advice and with that is a cost on the business side. In terms of fees do you want the actual breakdown…?

RYK VAN NIEKERK: Just a quick breakdown, yes.

RICHUS NEL: So obviously with your platform investment there’s a platform fee, those in terms of client size range between 0.1% and 0.4% plus VAT. Your asset management fee is ranging between 0.8% and 1.5%. Our own advice fee is 0.75% plus VAT. Depending on the amount of planning that needs to be done upfront there could also be an initial fee.

RYK VAN NIEKERK: Richus, there are some of the index tracking companies that are aggressively attacking the fees of the whole industry, some claim that the fees over a long term can reduce your return by 40%, another one claims 60%, what is your perspective on those types of marketing exercises?

RICHUS NEL: I heard 60% last night on the radio, I would actually like to hear how they got to that but nevertheless, fees will always be a focus and I think it’s a focus from the independent financial advisor point of view as well. Again, if you are focusing on quality, and it’s like with all things in life, I don’t think you can expect quality in service or in product at the lowest fee. So I think everyone should decide on what is the product and service they are looking for and then position accordingly. In terms of the index trackers I think there’s a little bit of a misconception in terms of the actual price of index trackers. There’s a very good article that Karl Leinberger from Coronation has written about index trackers and the active decisions that clients make when choosing one of these index trackers and whether they understand that risk or not, I think in most instances they don’t. Also on the radar is robo-advising, I don’t think there is such thing, I think there’s something like robo-investing currently in existence. But, as I say, I think clients should determine what are they looking for, someone will need to spend the time to make a decision on what is applicable and how those tools are applied and if that time spend is on the advisor side then obviously there is a cost to that. If it’s in their own time there’s obviously a cost to that as well, which is generally not priced in. But I’m in favour of both of those, I think there is place for index trackers, it’s a tool that can reduce the cost, it’s generally a tool that’s more difficult to enter into because the entrance point is a lot more critical. Then, again, robo-advising is opening up a whole different segment of the market that currently financial advisors are unable to service profitably. So, again, I think it’s a value-add, it’s a good idea and we’ll definitely incorporate that into our service.

RYK VAN NIEKERK: Thank you, Richus. That was Richus Nel, he is a financial planner at Brenthurst Wealth.

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So tired of hearing: ” ja but the act of choosing a index tracker is an active descision…”, as if that somehow justifies their exhorbitant fees. Are they implying that an investor should lose 40-60% of their savings to avoid a bit of research and the 1 minute it takes to purchase a etf. Just last week moneyweb ran an article once again showing how most active managers umderperform the indexes.

These advisors really play the smoke and mirrors game ” if this and if that ”The best incentive for an advisor to get more business is to perform, not ”give me your money and trust me” , with no consequences to them if they don’t – just to turn the knife, the return on top fixed deposit investments WITH NO RISK has outperformed the JSE for this year.

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