Will the next 10 years be better?

Magnus Heystek

The past 10 years and even longer have not been very good for investors in traditional investment instruments. The returns were meagre and very few investors in multi-asset class investments, such as unit trusts, pension funds and conservation funds, beat inflation over 10 years.

In many cases, the returns from big names were simply a repayment of the contributions made over the term. There was very little talk of real growth, something that many investors are noticing with increasing concern. In contrast, funds with foreign exposure have shown double and sometimes triple returns over the same period.

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Many retirement plans that were made some 10 and even 20 years ago are falling far short today and this – together with the explosion in house prices which in many cases make up a large part of retirement plans – means a retirement that will be disappointing for many.

House prices – with the exception of the Western Cape – have fallen by almost 15% in real terms over the past 10 years. Take a look at the accompanying graph to see the reality: average house prices, outside the Western Cape, have fallen in real terms by between 15 and 25%.

At the same time, the net return of most pension funds over 10 years has struggled to beat inflation. The average growth over the past three years has indeed been better – largely due to the sharp rise in commodity prices – but over the past year, the return of the JSE All Share Index has again been very close to zero.

Is SA becoming a failed state?

The asset management industry is not keen to talk about this and is trying to shift the emphasis to possible better returns in the future – based on so-called “low valuations”, but in the short term such a sudden change in returns on the JSE – seems the biggest driving force of returns – not very likely.

In recent weeks, several voices have been raised about SA’s future. “No light at the end of the tunnel,” says famous commentator Max du Preez. “SA is a mafia state,” says Jacques Pauw in the same edition of Vrye Weekblad.

Ralph Mupita, CEO of the giant MT, writes in Business Day about the “three horsemen of the Apocalypse” to express his concern about the continued existence of SA as a normal functioning state. Respected economic journalist Claire Bisseker wrote a cover story for Financial Mail with the headline ‘Has South Africa run out of time on the doomsday clock?’

Peter Bruce, a former editor of Financial Mail, warns that a coalition government between the ANC and the EFF will lead to a complete collapse of the SA economy. The International Monetary Fund (IMF) also issued its regular report on SA this week and predicted that our growth rate will be just 0.1% this year. For all practical purposes, zero.

Prospects for the longer term do not look much better either – perhaps 1.5% per year, which is still significantly lower than the rate of population growth.

Many retirement plans that were made some 10 and even 20 years ago are falling far short today and this – together with the explosion in house prices which in many cases make up a large part of retirement plans – means a retirement that will be disappointing for many.

One of the main reasons for the poor returns over the past 10 to 15 years has been the restriction on foreign assets in Regulation 28 for pension and retirement funds. In 2011, the Treasury began prescribing how much money pension fund managers can keep in their fund.

For many years it was only 20% and was only increased to 30% in later years and then last year, under fierce pressure from certain interest groups, increased to 45%.

For years, the industry tried to appease investors that 20% and then later 30% was “enough overseas exposure” to increase returns, but this was not true. The true facts are that over the past 15 years now – from 2008 – the SA stock market has been one of the worst stock markets in the world with returns that barely beat inflation.

There are many reasons for this: the collapse of Eskom and other cardinal infrastructure, corruption, state capture and best of all – SA’s appearance on the so-called grey list by international banks. S&P Global Ratings also recently downgraded SA’s outlook from positive to stable.

Many commentators have tried to downplay the impact of the grey list as minor and not significant, after costs and fees, very few investors have beaten inflation and therefore experience a very sharp drop in the purchasing power of their pension money.

The average return (before costs) of a high and medium-risk pension fund over the past 10 years was 7.41% and 7.14% respectively. If one adds inflation (6%) and costs of 2%, the average pension fund has not shown any growth in real terms over this time. The media is also shying away from this topic, most likely to avoid screwing up big advertisers.

Part of the blame can also be placed at the door of investors. In many cases, investors are ignorant and do not understand the implication of growth below the inflation rate. It’s understandable.

But there is also a large percentage of investors in these funds who have a never mind attitude about their money matters and no longer ask probing questions about their own money. T

he JSE’s returns were quite acceptable for a short period from March 2020 to March 2022, but since then this growth has also decreased drastically, despite the often optimistic forecasts by some fund managers.

So far this year, in dollar terms, the return of the JSE has been third last among emerging countries, down 8 7%. In the same company as Columbia and Pakistan.

Action plan for better returns

Here are some options to consider in order to reverse and improve this situation:

• Consider shifting discretionary funds to a purely offshore portfolio. The entire portfolio can be rolled over or just future contributions. Many large asset managers and their captive advisors don’t like this because it can mean a loss of business. In many cases, investors can get better funds at lower costs.

• There are sometimes also hidden costs and commissions involved which will be terminated if funds are moved away, hence the opposition to change from some quarters.

• Investors over 55 with money in an endowment annuity, conservation fund and/or provident fund, can once again consider withdrawing these funds, either in whole or just the permitted one-third, and then swinging the balance over to a purely overseas fund from which a minimum withdrawal of 2.5% can be made. The advantage here is that (a) one third can be used to pay off expensive debts, or otherwise reinvest the money in pure overseas funds, the so-called asset exchange funds. Money is invested in rand, but the investment house will transfer the money abroad.

• The third option is to transfer the cash – if large enough – abroad via the SA Reserve Bank’s grant of a discretionary allowance of R1 million per year, or investment allowance of up to and including R10 million per year. It is amazing that many advisers are still opposed to this because such advice is “disloyal and unpatriotic”. It’s just rubbish because many of the big SA asset managers – Allan Gray, Coronation, Ford and many others – are actually foreign companies and pay little tax in SA. Coronation has a problem with SARS, which won a court case about this, and the company now has to pay R900 million in back taxes.

• And best of all, if your current advisor still clings to the “local is nice” mantra, get another one. Such positions can no longer be made on factual grounds. There are then other, hidden, reasons for such advice.

Brenthurst is frequently criticized from some quarters for this extreme stance, but the criticism fails on factual grounds. Over the past 10 to 15 years, the average South African’s investments have not created much real value. The chances are not very good that this situation will change quickly.

Magda Wierzycka, the big boss of Sygnia, just said last week at a Brenthurst web conference bluntly that SA is a failed state.

Tony Leon, former leader of the Democratic Alliance (DA), also warned in a column about the possibility that the ANC and the EFF could form a coalition government after the 2024 elections. And then, as Leon writes, it is a nightmare for South Africa.

* Magnus Heystek is an investment strategist and director of Brenthurst Wealth.

Brenthurst Wealth is one of SA’s largest independent advisory firms in the country with nine offices nationwide, plus one in Mauritius. The newest office has just opened in George. Brenthurst has twice won the Intellidex award as the top boutique wealth manager in SA, while its advisers have taken all three top spots as financial planners of the year in 2022.

For more information, you can visit the Brenthurst Wealth website or write to [email protected].