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‘We use economies of scale to drive down costs’

Peter Nurcombe-Thorne on the family office concept, Rosebank Wealth’s fee structure, his investment strategy and the role of non-financial assets in business and property.

RYK VAN NIEKERK: Welcome to this Financial Advisor podcast. My guest today is Peter Nurcombe-Thorne, a director of the Rosebank Wealth Group. He’s responsible for the design and management of investment products. He has a BCom Honours in financial management and he is a chartered alternative investment analyst. Peter, welcome to the show. What is a chartered alternative investment analyst?

PETER NURCOMBE-THORNE: Thanks for having me here, Ryk. A CAIA is a US qualification similar to CFA but focusing more on alternative investments – so hedge funds, private equity, real estate-type investments. Outside of the mainstream is where they tend to focus.

RYK VAN NIEKERK: Qualifications in the financial advice industry are critical. Many people base a decision on which advisors to follow or to use. Do you think normal South Africans who need investment advice are knowledgeable about the different qualifications out there, because you have CFP, you have CFA, and you have CAIA, the one you have. Does it make a difference who you approach?

PETER NURCOMBE-THORNE: I think so. In our organisation we’ve got a CA, a CFP, a CIMA and a CAIA. So I think a broad range of skills and qualifications ultimately enhances the final product that you deliver to your clients. I don’t think it’s the be-all and end-all of being able to offer good, solid financial advice, but I think it does broaden your perspective to better understand what’s out there, better understand a variety of investment products, a variety of tax and estate duty and various other implications that you’re faced with as a financial planner.

RYK VAN NIEKERK: The Rosebank Wealth Group is actually quite interesting. You don’t have that many clients and you focus on really high net worth individuals. Just take us through exactly what your core competencies are.

PETER NURCOMBE-THORNE: We are quite unique in the South African financial planning context. I think we’ve got about R4 billion to
R4.5 billion worth of assets under advice, depending on which way the exchange rate goes, obviously, and that’s made up of about 80 to 90 clients. Obviously that’s a relatively large client size and we like to call our business a multi-family office. The family office concept is something that’s been going on in the US and China, Brazil and places like that where people with a large amount of family assets set up a business to run the family’s money. We use a similar approach to look after a variety of families and use economies of scale to drive down costs, bringing service providers who can service a range of their needs and just help them run their affairs. We believe that the affairs of a wealthy family should be run as well as a well-run business, and that’s the approach we try to adopt in our financial planning.

RYK VAN NIEKERK: Is that a comprehensive service offering, ranging from tax management through to the wealth management and investment strategy?

PETER NURCOMBE-THORNE: We tend to focus on a non-executive role for the family’s affairs. So we don’t profess to be a fiduciary expert or a tax expert. We will outsource that to a third party who will look after the family’s needs. We call it a hub-and-spoke approach, so we are the hub of the wheel and we bring the spokes in to service the family’s needs. And we control it, advise the family, help them make decisions around estate planning, liquidity management, and big strategic asset-allocation decisions. That is our role, to advise the family on a variety of their financial needs.

How do rich families choose wealth managers?

RYK VAN NIEKERK: That is obviously a long-term relationship that you build with families and clients. How does a rich family decide on which firm to approach to manage their wealth? It can be either a costly or a very profitable decision.

PETER NURCOMBE-THORNE: I think much like every relationship these relationships usually start small and grow over time into something more complex. We’re not your traditional assets-under-management type of financial planner; we earn a retainer from the majority of our clients for the work we do. So it doesn’t bother us if they give us more money or less or any of that if they’re under our advice. They pay us a reasonable fee for our services and then we help them with a full range of their needs. Like I say, the relationship grows over time into something more substantial. Sometimes the relationships don’t grow but in most cases we’ve got families who have been with George, the founder of our business, since 1998. He’s looked after them since then.

RYK VAN NIEKERK: So there’s not a commission structure, fees for funds under management?

PETER NURCOMBE-THORNE: Traditionally we charge 0.75% is our fee up to a cap, and that cap is negotiated with the family based on the level of complexity of the underlying investments and structures. So once they hit that cap it’s a flat fee into the future, adjusted for inflation every year. We may or may not have a performance fee built in, and that’s just personal preference based on how the family likes to pay for services.

RYK VAN NIEKERK: So there is a quite unique, negotiated fee structure involved. It’s not a set fee like many of the other financial managers?

PETER NURCOMBE-THORNE: No. Some people may argue that a fee for assets under management isn’t fair and you are penalising bigger clients. While I have some sympathy with that argument, the truth is that the more money you have the more complex your affairs are. So someone with a R5 million retirement annuity relative to someone who has sold a business has a variety of property and other assets, and he’s worth potentially R50 million, is far more complex and requires more of our services to help them properly manage that structure. So we do have the traditional fee structure up to a point, but then after that we tend to cap fees.

RYK VAN NIEKERK: You are, among other things, responsible for the design and the management of investment products. What does that mean?

PETER NURCOMBE-THORNE: We took an approach a couple of years ago to say that high net worth investors in this country are treated as retail investors, where a lot of these clients have assets that are equivalent to a small institutional investor in some cases. But the market refused to recognise these assets and, hence, never gave them the fee discounts that should have been given for assets of this size.

RYK VAN NIEKERK: Such as just go and invest the money at Allan Gray, at the fixed retail investment fee?

PETER NURCOMBE-THORNE: Exactly. And many institutions were very hesitant to allow us to negotiate fees and bring them down for our clients. Equally clients with more money were treated a lot differently in certain circumstances from clients with less money. So we took the view to structure investment products as a way to aggregate assets and drive down fees from service providers like administrators and custodians, and also from the underlying asset-management companies.

So we’ve helped build a variety of investment-management vehicles, fund of funds in most cases. And with our investment partner, Novare, which manages these structures from an investment-management point of view, we negotiate fees. So our view is that by using these vehicles as core building blocks for our clients’ investment needs we can cover a range of their needs and drive down fees to quite competitive levels. We’ve used hedge funds quite extensively and these vehicles have just recently moved into the regulated space. We started a few unit trusts in our own name that we’ve subsequently moved over to Novare to manage. These are just examples of ways we aggregate assets, drive down costs and execute our investment strategy.

RYK VAN NIEKERK: Is the strategy more wealth-preservation focused, or do you have mandates to try and beat normal market performance?

PETER NURCOMBE-THORNE: Like I said earlier, these solutions form a building block of our clients’ investment needs. So some clients have slightly more risk appetite, where we would structure something bespoke for them, either through a bank or through a platform like the RMB or something like that, where we can add an element of leverage and try to enhance returns that way. But most of the time the investments are focusing on wealth preservation.

We believe that it’s our job to keep people rich and not necessarily make people rich. They’ve done a very good job of that themselves, so we want to preserve wealth.

We believe that the best way to grow assets over time is to avoid losses. If you can sustainably earn a reasonable return – CPI +4% or 5% over time, versus suffering the vagaries of the market, up 30% one year, down potentially 20% in another – in the fullness of time you’re going to get a better result.

 You have to take a reasonable amount of money offshore

RYK VAN NIEKERK: So what is your investment strategy? How would you approach the management of a new client? Do you have specific views on, for example, taking money offshore and, if you do, how would you structure that part of the portfolio?

PETER NURCOMBE-THORNE: We definitely have strong views on taking money offshore. I think South Africa represents less than 1% of the world’s GDP so, from a diversification point of view, you have to take a reasonable amount of money offshore. Our baseline is about 50/50 offshore versus local. Depending on the client’s needs we might change it from there. So if a client has more money than he needs then maybe the number is closer to 60% or 70% offshore. If the client needs more money to live on in South Africa, or has unfunded liabilities like children’s education and things like that, then we would obviously keep more money in South Africa. We believe that if you’ve got rand liabilities they should be funded from rand assets. And when you take money offshore you forget about the rand conversion of those funds. They are treated as an offshore asset and measured in the currency that you choose to invest in.

RYK VAN NIEKERK: Are exchange controls a hurdle in your life?

PETER NURCOMBE-THORNE: To a certain extent, yes. I think since it was relaxed to allow for R4 million a year, we’ve taken advantage of that every year for our clients and built up reasonable sums of assets offshore. And now that it’s been relaxed to R10 million we will continue doing that. I think if as a family you can take R8 million to R20 million – depending on the size of the family – offshore on an annual basis that’s more than enough assets to go offshore. The strange thing is that since it’s been relaxed to R10 million we’ve hardly taken any client money offshore, because when the rand was around R6, R7, R8 we were slowly taking the money offshore that exchange control would allow, and now we’re pretty full up on out offshore allocation. If anything we, post Nenegate, saw the rand as very much oversold, so we haven’t moved much since then. And now we’re in a bit of nowhere territory where we don’t have strong view on it either way. It’s come back as we expected but we’re not sure if it’s due for another leg ou,t based on ratings downgrades, the economy slipping into a recession, or it’s due for a bit more strength based on more appetite for EM high-risk plays, this big global yield trade that’s been going on for some time.

RYK VAN NIEKERK: The rand has been very counter-intuitive. We’ve had the ratings downgrade; this recession was relatively unexpected, especially the magnitude of the negative growth. We have political uncertainty and yet the rand seems to be immune and swimming against the current. It’s difficult to plan in that situation, especially if you get it wrong. How do you interact with clients regarding the currency and the risk it may pose?

PETER NURCOMBE-THORNE: Like I said earlier, I think our baseline is 50/50 offshore. And our view is almost that when you have the money to take offshore then take it offshore. When the money is offshore, then measure it in the currency that it’s in. We never try to time the currency or generate excess return from the currency by measuring it in offshore investments in rands, because you look like a hero obviously when the rand is blown out and you look a lot less clever when the rand is coming back. I think most of our clients understand that the reason we go offshore is diversification from an asset-allocation and geographical location point of view. It’s not a play on the rand, it’s not anti-SA sentiment, it is more that the money is offshore to grow in a variety of markets that we don’t get access to as South African investors.

The role of non-financial assets in business and property

RYK VAN NIEKERK: What is your position on non-financial assets, especially the role they can play in business and maybe property in South Africa? Do you offer services related to those assets?

PETER NURCOMBE-THORNE: Not really. I think we do get a lot of interesting opportunities that come across our desk and we might pass those on to certain clients who have expressed an interest in such. We generally steer clear of local property investments because I think generally South African investors are pretty full up on property. I think it’s been a great asset class for many years for a lot of investors, and they swear by it, and they do that in their personal capacity. Where we do try to intervene is to find offshore property investments that may be of interest to them, help them to potentially structure some of these investments, and advise them on potential private-equity and property deals that they might find. We’ll look over that for them and give them our two cent’s worth. But generally in South Africa we don’t venture too much into those types of investments.

RYK VAN NIEKERK: You referred earlier to asset allocation, which is critical in a portfolio of high net worth individuals. How would you approach the asset allocation, especially in light of the fact that the US markets are really flying, to put it mildly. How would you advise a client in the current climate?

PETER NURCOMBE-THORNE: I think our starting point is about 60/40 equity to fixed income and bonds, credit and assets like that and then, based on the prevailing climate, reducing equity exposure. So we have been light on equity exposure over the last couple of years because of how well the market has been doing. I think our view on equity markets for some time has been that they aren’t going to deliver this outperformance that we have seen, but they carry on delivering – and for the time being we are proved wrong. I think that  it’s a function of low to zero to negative interest rates the world over that the discount rates that a lot of these guys are applying to these companies has never been this low and, hence, these PEs are going through the roof. In the absence of proper economic growth coming out of the US and Europe, I battle to see how this can continue. But, having said that, there are pockets of value. Oil and natural gas infrastructure in the US, as represented by master limited partnerships, are a great source of value. After oil went to US$28/barrel it was a screaming buy and it’s done particularly well. I think emerging markets are offering great value at the moment. As to part of your question earlier about how the rand keeps performing, I think it’s appetite for emerging markets. They have been neglected so much, with resources sliding like they have, that now we are seeing emerging markets rebound to more reasonable levels and that’s somewhere that’s still offering a bit of value at the moment. But also, you can’t neglect an asset class just because you think it’s overpriced or a specific geography, so you keep a toe in the a water. But on the margin you tilt exposure away from where you are seeing a bit of a bubble and right now we do see a bit of a bubble in US equity, especially.

RYK VAN NIEKERK: We are seeing a significant outflow of funds, especially the JSE foreign investors, who are disinvesting from South Africa. And the amounts are increasing. We saw R17 billion leave South Africa earlier this month, which was on one day. It was more than what it was for the whole of last year. Is South Africa really on the radar for, say, European and US investors as an emerging market?

PETER NURCOMBE-THORNE: I don’t believe so, unfortunately; from an equity point of view I don’t believe so. As we both know, the construct of the South African equity market means that the majority of these revenues are earned offshore, so anyone who bothers to take a look can see that you’re buying back into the US or you’re buying back into the developed world by buying South African equities. I think South African bonds are a different story, I think there’s this global search for yield, and I think South African bonds since 2010 have been a big benefactor of that. There’s been a lot of volatility and there may still be more volatility. I think the taper tantrum May 13 Nenegate showed how much volatility there is potentially in bond markets. But I think that is definitely on the radar. I think that we have got deep and wide and liquid capital markets in South Africa, so guys are quite happy to commit capital to South Africa. The US is often described as the least dirty shirt in global equity markets. I think we could possibly be the least dirty emerging market. I was in Brazil earlier this year and I think we’re a lot better off than Brazil, notwithstanding our recent recession and our political problems. I think we are a lot more stable potentially than Russia and Turkey. I’ve also been fortunate enough to go to India and China in the last year and I think we are a completely different proposition to those two. I think they are both opening up their markets to foreign investors, whereas we’ve been open for business for many years and the rand is often used, through our bonds, potentially as a proxy for emerging market sentiment.

Investment decision affected by overly emotional South Africans

RYK VAN NIEKERK: I think many South Africans are overly emotional about what is happening and that does influence investment decisions.

PETER NURCOMBE-THORNE: Like I said, I was in Brazil. What we are seeing now is a cycle. The world is full of cycles that repeat themselves over and over again. Brazil has been going through the cycle since 1964; we’ve been going through the cycle only since 1994. There was that post-apartheid euphoria that carried the market and we saw some significant leg-ups until probably 2008. We saw a lot of rand volatility along the way. But it is normal in any functioning democracy that things starts to fall apart, and hopefully South Africa or the ANC specifically cleans up its act, or potentially another party comes into power. We saw this in the UK with the Labour Party up until 2008 almost bankrupting the place. Conservatives have taken an austerity line since then. The economy was flourishing, maybe until pre-Brexit, and now there’s a bit of uncertainty again. But it’s a cycle and I think South African investors need to understand that we are not immune to these cycles. They will happen in South Africa and they will happen more frequently probably from here on out. But at the end of the day the balance of probabilities is we come out on top.

RYK VAN NIEKERK: We’ve been on the downward slope of this cycle since, as you’ve said, 2008. Do you think we are at the bottom or close to the bottom?

PETER NURCOMBE-THORNE: I believe so, I think obviously we’ve got a few political hurdles coming up with the ANC’s policy conference. That’s going to set the tone for investor sentiment going forward. I think with this “radical economic transformation” angle that some parts of the ANC have been playing we could potentially see a policy shift to the left, which could spook investors slightly. I think the big one we are all awaiting is the elective conference in December. That again is going to set the tone whether it’s going to be more of the same or things are going to change. Post that there is obviously the 2019 elections. But yes, I think we are potentially bottoming in terms of definitely the political cycle. I think this can’t carry on…

RYK VAN NIEKERK: There are specific deadlines for political action that needs to take place, otherwise we will remain in limbo for too long.

PETER NURCOMBE-THORNE: Yes, people need to stick up their hands. And when you look back in history people need to make sure that they are on the right side of this thing. I think we are getting closer to the day when people are going to start taking action, be it post the policy conference, post the elective conference, or potentially in the lead-up to the 2019 elections. I believe we will see change – and maybe that’s Afro-optimism – but I truly believe that we’ll see a change in this country.

RYK VAN NIEKERK: I hope you are right. Thank you, Peter, for coming in today.

PETER NURCOMBE-THORNE: Thanks for having me here, Ryk.

RYK VAN NIEKERK: That was Peter Nurcombe-Thorne, he’s a director of the Rosebank Wealth Group.

ADVISOR PROFILE

Peter Nurcombe-Thorne

Rosebank Wealth Group (Pty) Ltd

AUTHOR PROFILE

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Thanks for an open and honest interview – great to hear from a family office in South Africa.

It is not the first time that I have heard a family office with an average asset per client of plus R50 million mention that they need local assets for their children’s education – I find this strange considering the size of their asset base versus the education spend and the ease to bring money back onshore – just saying !

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