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In unforgiving markets, income is priority

If you have the patience, value-focused investments do outperform – Richus Nel.

RYK VAN NIEKERK: Welcome to this Financial Advisor podcast. My guest today is Richus Nel, 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 to 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 the world is in a difficult place; there’s a legacy of problems that are actually carrying forward, even problems that originated before 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 that the advice you give currently to clients or does that differ from 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 that 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 a perspective and it’s a broader perspective. You can choose on which parameters to focus and whether you are going to let yourself go into a panic – based on what you read in the newspaper, for instance –rather than go and have a look at raw economic data behind that. So I think clients – and that’s what we’ve seen – are becoming a little bit more, I almost want to say, comfortable with these sorts of announcements and surprises. The rating agency announcement on Friday, November 25, and that 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, have 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 probably been a bit spoiled 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, clients who can’t miss a year of returns 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 [does] locally. 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. Which fund managers do you believe are performing better in the current circumstances than others?

RICHUS NEL: 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 past two years, 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 proved over and over again – if you have got the patience then value-focused investments do outperform. But it takes a lot of self-discipline, while those funds are underperforming, to remain invested. Again, if we talk about income drawdown, a value-style investment is 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 on companies with a global footprint, high sustainable barriers to entry and a 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” may need 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, for 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 heading? I think R13 or R14/dollar is almost mid-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 that there is an uneasiness about the political circumstances of South Africa, and there is uncertainty about a variety of things that’s hardly 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 that’s available offshore, or 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 favour 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 at the end of last month. But we still think there is value in there. 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 there’s 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: 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 ranges 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 they are a focus from the independent financial advisor point of view as well. Again, if you are focusing on quality, 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 product and service they are looking for, and then position accordingly.

In terms of the index trackers I think there’s a 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 a 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 spent is on the advisor side, then obviously there is a cost to that. If it’s in one’s 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 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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