The best investment nobody is talking about
By Magnus Heystek
I am often approached by members of the public, asking for an “Investment tip”, some or other special insight into the stock market or commodity market that will double their money in a very short space of time.
They are mostly disappointed when I tell them I cannot give any advice under such circumstances, as regulatory requirements require that I do a full assessment of their needs and financial objectives before I can provide any financial advice.
In short: it should be in a professional environment guided by many variables.
I have in recent times been “lucky” to select individual stocks such as Tesla, Nvidia, Meta and more recently Rheinmetall (which all have subsequently doubled), but such investments come with massive downside risks of 30, 50 and even more when global markets go through turbulence, which happens from time to time.
But these are speculative investments which do not appeal to the majority of investors, most who tend to be quite conservative with their money.
But there is an asset class which I have liked for many years, especially considering the high-interest rate regime in South Africa, driven by our need to keep rates high (in order to protect the currency) as well as the exchange rate.
It is an investment class you probably haven’t heard of, yet it has been the best local asset class for more than 10 years now.
But before I discuss this particular investment, lets first look at the most important criteria any potential investor should look for before they commit their money.
1. LIQUIDITY
The first criteria as far as I am concerned is liquidity. How quickly can I get my money back should this be required?
This hurdle – for me at least – disqualifies many fixed term investments, which I loathe and generally I don’t recommend.
I want to have immediate access to my money should it be required. Enhanced Income funds are 100% liquid with no withdrawal penalties.
2. SAFETY
We read almost daily about people losing their money in investment schemes such as Kleuterzone recently where people have, again, apparently lost millions of rands.
People were attracted by the seemingly high interest rates on offer but did not bother to ask about the safety.
Many years ago, I exposed the Sharemax scheme as I spent some time analysing in great details the workings of the Sharemax schemes and was very worried by the underlying safety and said so publicly.
I was threatened with legal action, but after Rapport newspaper ran an article on the facts as supplied by me, the scheme collapsed. It wasn’t a safe investment.
Enhanced income funds are probably the safest investments one can find in SA. The fund manager invests in loan instruments from very large local and overseas companies (think Mercedes Benz, for instance) who require funding for their local operation.
Most of these loans are AAA-rated by the ratings agencies. Only a very small portion is exposed to more risky companies, but then the interest rates payable tend to be higher.
These loans are then pooled into registered funds, under supervision of the Financial Services Conduct Authority (FSCA), which exercises stringent controls over the management of these funds.
It can happen that some of these smaller and more risky loans can run into trouble, (like African Bank some years ago, and SA Taxi more recently) but in the case of African Bank all the loans have since been repaid.
3 REGULATED
I touched on the fact that these funds in SA are highly regulated, and funds and fund managers fall under the scrutiny of the FSCA.. This ticks another one the criteria one needs to consider before investing.
4 RETURNS MUST BEAT THE INFLATION RATE
The returns of Enhanced Income funds (such as the Custodian Enhanced Income as per my example) have more than doubled the inflation rate over the past ten years and more, averaging about 10% per annum (and almost 14% over the past year) when compared to inflation.
These returns also beat the average return of pension and retirement funds in SA over the same period of time.
5. COSTS
Enhance Income funds are also cheap.
Fund management fees are about 0.5 to 0.7% per year, which is very low when you compare it to more popular brand name funds (the big ones, which you see on advertising boards everywhere) which can have a fee of up to 2.5% per year.
So, you will never see an advert for an Enhanced Income fund; fund managers simply don’t make enough profit to go and spend it on advertising.
It is also a reason you will almost never see any discussion, conference or webinar about Enhanced Income funds.
These are not the money-making giant funds that earn investment companies hundreds of millions of rands every year in fees.
But Enhanced Income funds are increasingly being used by investment advisors who consider costs to their clients.
At Brenthurst Wealth about 25% of all our assets (and most all of our local assets) are invested in Enhanced Returns funds, and results have been very good and consistent.
The fund is ideal for money that needs to be parked somewhere or for people with limited funds needing a predictable income at retirement.
If I was retiring and with a limited amount of capital, I would strongly consider Enhanced Income funds: predictable growth, beating inflation and having access to my money whenever I need it in case of an emergency.
Why do people go and look for an extra one or two percent by investing in investment scams? Its either greed or stupidity.
*Magnus Heystek is investment strategist at Brenthurst Wealth and be reached at [email protected]
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