Magnus Heystek, Investment Strategist Brenthurst Wealth
It is no secret that the investment debate over the past ten years or so has been dominated between the campaigners for local investments and those who thought the offshore markets will do better.
This has been the case ever since offshore allowances were drastically increased in 2015. Since then, investors could take out R1m per year per taxpayer—with no questions asked and no restrictions—with another R10m in what was known as the Foreign Investment Allowance (FIA) which required more stringent questions as to source of funds etc.
The latter has now been replaced by the Authorised International Transfer (AIT) which covers both outward-bound investments and emigration. The qualifying criteria—immensely increased – are now exactly the same and are seen by some (including me) as an attempt to discourage investors from taking more money offshore.
For it is a fact that the “smart” money has been pouring out of SA over the past 8 years. Official figures are hard to come by, but it must run into the hundreds of billions of rands.
This can also be seen in the huge outflows from large asset managers. Most are suffering steady and persistent outflows.
Some local asset managers – including several of the large institutional ones – are still raking in massive flows from pension and provident fund contributions, trying their best to convince investors that “local is lekker”.
The debate has been heated with advocates of foreign investments often accused of being traitors and disloyal to the country. Which is rubbish, of course, and reflects a lack of understanding as to how to world works.
Quite often questionable statistics are used to try and convince advisors and their clients to remain in the local market, such as 20-year performance periods—which includes a freak five-year period from 2003 to 2008—when SA equities beat most other markets due to a combination of World Cup optimism as well as the commodity cycle boosted by China’s entrance into the World Trade Organisation.
I have also seen some fund managers use the 100-year history, as compiled by Credit Suisse in its study Triumph of the Optimists, which ranks the JSE as one of the top three markets over 100 years. The other two are Australia and the United States.
That study is correct, but it reflects the boom period created by the gold, diamond and platinum industries during the 20th century. Those days are gone: we don’t have a gold industry to speak of any longer and none of the three listed gold mining companies on the JSE has primary listings here. De Beers, the diamond giant is gone but we still have the platinum mines, thank goodness.
Since 2008 to date the JSE is one of the world’s worst-performing stock exchanges, despite the short-lived commodity boost brought on by the Covid-19 crisis followed by the Russian invasion of Ukraine in February 2022. Those factors are now working their way through the statistics machine and the results are clear to see.
Year to date (see chart) the JSE is the third worst-performing market in the world amongst its emerging market peers and the worst over the past month.
Most companies described as SA Inc stocks have suffered a decade of no growth or even capital losses. It is not uncommon for blue-chip banks, retailers and hospital groups to be trading at levels of 10 years ago.
The little growth we have had on the JSE over the past 10 years has been driven by commodities—of which we are price takers not makers—and dual-listed offshore stocks, such as Naspers, Prosus and Richemont. And all of these stocks can be bought on offshore markets at a cheaper price than on the local market.
About 60% of the market capitalization of the JSE is now made up of dual-listed stocks which have no operating businesses in SA.
At the same time, the JSE has been shrinking. Over the past 30 years, the number of listed companies has declined from more than 600 companies to around 300 today.
It is no secret that I have been advocating offshore investments for long-only equity investors for a long time, starting around 2013/2014 when certain economic red lights started flashing.
There were mainly two drivers for my preference for offshore rather than local equity investments. Firstly, there was a massive boom in technology and biotechnology sectors in the US primarily, and secondly, SA’s debt was downgraded for the first time since the early 90’s. That was to be the start of regular downgrades, which as it now stands, in a sub-investment grade rating.
Certain commentators, as is their inclination, tried to downplay the effect of the downgrades (as they do today with the grey listing), but it did start the withdrawal from the SA market by foreign investors, which today has turned into a torrent of capital outflows.
Even the short-lived optimism inspired by Cyril Ramaphosa’s succession to power could not stem this tide. Since being appointed as head of the ANC in December 2017 and subsequently as president of the country in February 2018, markets have experienced an outflow of almost R500bn.
Since 2014 offshore returns have streaked ahead of what investors earned on the JSE. But even though I knew this, I was pleasantly surprised to see just how far ahead offshore investors were when compared to local ones.
Real-life case study – warts and all
What follows is a real-life case study. An R15m investment in May 2014—9 years ago—by a local investor. He was what I will call a “perfect investor”: he was well-to-do and was prepared to take the long view. He also did not mind volatility and stuck to his original plan. He also listened to my advice and was not influenced by the siren calls from others who tried to convince him otherwise… and there were many.
I was given R15m with a brief to aggressively seek out capital gains. The money was invested into asset swap funds on a local platform as the investment was to be made in the name of a company. Assets swaps were the easiest way to get offshore exposure.
It wasn’t even necessary to take money out of the country, a fact sometimes overlooked by investors.
I created a portfolio consisting of asset classes and funds not available on the local market – technology, biotechnology, demographics and healthcare funds. I even negotiated with offshore companies such as Fidelity and Franklin Templeton to make their funds available on a local platform as I had certain sectors in mind which were not available in SA.
For total diversification I later added a Japan fund, having just returned from an investment tour in Japan and very impressed by what I saw and heard. It turned out to be a stroke of genius as the Orbis Japan Equity fund was an astounding winner, being one of the few markets not to have shown large drawdowns during the 2021 crash.
I made very infrequent changes and only changed the Counterpoint (now called Merchant West) Value fund for the Merchant West Global Equity fund when the former fund started lagging badly.
The investment was housed on the Momentum Wealth platform in an endowment and full fees, charges, taxes and CGT have been charged over this period of time.
See here what the portfolio is worth today:
Turning R15m into R100m in nine years is equal to a compound annual growth rate of 23%. Now compare this with the returns I would have earned had I stuck with the local market.
The same investment into the Satrix ALSI index fund, a local tracker fund, would be worth a mere R29,962m. Had I used Allan Gray Equity—SA’s favourite equity fund—the value today would only be R28,450m—for an annual compound growth rate of 8,75% per annum.
This example illustrates what I have been advocating for more than ten years: for the best opportunity for long-term capital growth, you need to go abroad. The JSE does not offer that opportunity anymore. While it might chug along and make returns barely matching inflation, the real money is to be made in the USA, Europe and even Japan.
Don’t say you haven’t been warned.!
Go to Brenthurst Wealth to read more about the Brenthurst investment offering and wide range of services.