A tale of two investors: Offshore Otto and Local Lenny

By Magnus Heystek*

It’s hard to believe that slightly more than ten years ago SA hosted the Soccer World Cup of 2010.

Who can ever forget the blaring sounds of vuvuzelas, our jam-packed sporting stadiums and the national euphoria of hosting one of the most successful SWCs ever?

• Click here to find out more about Brenthurst Wealth.

And as the last of the hordes of soccer-mad tourists left our shores, travelling on our spanking new Gautrain to a recently revamped ORT airport, we would all be forgiven for thinking: this is our time. The next decade belongs to us!

Tourism will boom, and foreign investors who came for the love of soccer will, no doubt, return with their spreadsheets and chequebooks to invest in this wonderfully beautiful country.

But it was not to be. In fact, 13 years later, the decade has been a financial wipe-out for most South Africans, from the poor (who became very poor) to the middle-class and even almost rich who saw their relative wealth stagnate and drop precipitously when compared to what happened in most other countries in the world.

Most alert and well-informed South Africans are well aware of what happened, but do they truly comprehend the full extent of the financial catastrophe that has befallen them?

It seems many don’t, and still cling to a belief that things are not that bad and that their collective financial fortunes will improve soon.

But it won’t, in my view, unless the ANC is somehow booted from power and replaced with a more modern, free-enterprise-based political collective.

Are the next ten years bound to be a repeat of what has happened over the past decade?

In short – by almost all measures of wealth criteria – SA – and the majority of its people have become very poor – with only a handful of rich who externalised their assets or who somehow managed to earn in foreign currency.

In ten years from 2013 to date, the following has happened:

1. The rand has dropped from around R9,85 to the USD to current levels of around R19,30
2. SA’s residential property market has declined by almost 25% in real terms. When compared to global property prices, SA prices, when priced in USD, have declined by about 60-70%. We have completely missed out on one of the largest bull markets in residential property for many decades. The average house in SA, when converted to USD, buys about 22% of the average house in the USA. Ten years ago, it was about 40%.
3. The JSE has been one of the worst-performing stock markets in the world, with its average annual growth of under 10% per annum years well below the average growth rates earned in the US and global markets. In USD terms the JSE has made investors very little money.
4. The average pension fund has shown very little real growth (after all costs and taxes) over 8 years and only marginal growth over 10 years. This is mainly due to the restrictions of Regulation 28 of the Pensions Act which limits offshore exposure to only 30% of total assets. This has only recently been increased to 45% offshore, and most pension funds have jumped at the greater offshore opportunity.

WARNINGS IGNORED 

It’s no secret that I have been writing and talking about this trend for many years.

At first—from about 2010 to 2014–I alerted investors that there was a massive boom in technology and internet stocks taking place, mainly in the US, and that in order to get exposure to these sectors, one needed to externalise some assets.

There was no other way of getting exposure to these fast-growing sectors and companies unless one sent some money offshore. Since then, things have changed somewhat for the better.

Secondly, I tried warning that SA’s fortunes are mainly determined by the ups and downs of the commodity cycle, which in 2011 started a very sharp correction which only ended around 2020.

These initial recommendations were met with outright hostility from the local asset management industry and even by some financial journalists. I was committing heresy by recommending offshore investments!

From 2015 onwards these warnings took on a more strident tone and I wrote many articles warning about the financial tsunami—as I called it – heading our way, with middle to upper-class South Africans firmly in the way of this destructive force.

Brenthurst Wealth sponsored 3 annual countrywide seminars – called SA Quo Vadis? – with a business and financial news media website from 2016 onwards.

Many attendees were openly sceptical and even hostile to these suggestions of externalising some assets. How things have changed!

On the internet I was called many things, mostly nasty and vicious. The Financial Mail called me Dr. Doom, the editor of Beeld-newspaper called me a “pedlar of doom, prying on white fears” while fellow financial advisor Warren Ingram called me a financial pornographer, a click-baiter that must be ignored as the outcomes were bound to be poor.

RUFFLING FEATHERS

It didn’t take me very long to realise that my comments were not only ruffling a few feathers, it was also a threat to very large and powerful industries – that of the local asset management industry as well as the residential property market.

But the local asset industry is battling with its own existential troubles. Money is flowing out of the JSE at an enormous rate -more than R700bn by foreign equity investors since 2015.

But wealthy South Africans have also been sending their capital offshore at unprecedented rates. The former Brenthurst Wealth consulting economist, the late Mike Schüssler estimated that this outflow since 2014 to be more than R1 trillion.

This is money that is not being invested with SA managers, but with global giants such as Vanguard, BlackRock, Franklin Templeton and Fundsmith to name just a few.

Local asset managers have not seen much real growth over the past 5-6 years. For instance, the assets under management for listed Coronation have barely moved from R588bn in 2014 to its current levels around R630bn.

Many mid-sized and smaller asset managers are battling to survive, and mergers (and even closures) are the order of the day.

But the freedom of being independent and being my own boss allowed me to continue highlighting these very worrying trends and I find comfort in knowing I managed to convince a great number of people to build up some kind of global nest egg—either in the form of offshore portfolios and even property in Mauritius and London – that made it all worth it.

Today most investors are aware of the vast difference in returns between the local and global markets, but the following imaginary story (perhaps not so imaginary) will illustrate the vast difference in personal wealth between a local investment portfolio and an offshore one over the past decade.

THE STORY OF LOCAL LENNY AND OFFSHORE OTTO

Let’s assume for the sake of illustration twin brothers Lenny and Otto who were fortunate enough to inherit exactly R10m each ten years ago.

LOCAL LENNY

Local Lenny decided he was not going anywhere with his money, and he took his inheritance and invested as follows, all in local currency and in local assets:

R5m in a multi-asset portfolio consisting of the following funds:

Allan Gray Balanced:                          40%

Prudential Div. Maximiser                 25%

Ninety One Equity                               25%

Ninety One Emerging Companies    10%

Current value:                                   R10,851,000

Weighted average rate of growth 8.95% per annum.

R4m was used to purchase a very sizeable house on a golf course estate (Dainfern/Pecanwood/Silver Lakes).

Current value:                                   R5,000,000

R1m invested in a cash portfolio with interest earned reinvested MI-Plan Enhanced Income fund:  R2 100,00 (8,3% rate of return).

Nothing unusual and very standard for someone with such a large amount of money to invest.

Equity, property and cash.

For the benefit of this example, I am assuming he lived in his property but has excluded rates and taxes, levies and upkeep.

TOTAL VALUE SEPTEMBER 2023: R17,951,000

OFFSHORE OTTO

Otto decided to spread his financial wings and wanted to create a global portfolio with his inheritance, not that he didn’t love his country, he just liked the idea of spreading his risk and investing in global investment opportunities.

In order to do so he converted his R10m into dollars at an exchange rate of R9.85/$ and invested the proceeds of $1,015,000 as follows:

$507,000 (50% of inheritance) in an offshore global portfolio in the same ratios as above:

Brenthurst Global Balanced fund           40%

Fidelity Health Care                                  25%

Franklin US Opportunities                       25%

Fidelity Emerging Markets                       10%

Current value:                                           R16,758 000.

Weighted average return of 14,31% per annum.

(These funds were not picked with the benefit of hindsight. These were funds for more than 10 years in Brenthurst global portfolios, including our own fund which is now more than a decade old).

This is also a very conservative portfolio and excludes the FAANGS and high-flying technology stocks which have boomed over the past 10 years.

Offshore property

$400 000 (UK, USA or MAURITIUS).

Current valuation: (Using several averages UK/USA market/Case-Schiller index):

$600,000= R11,700,000.

Again, to standardise the comparison, I have excluded any potential rental income as well as maintenance and property taxes.

If one were to assume that both properties were rented out during the 10 years, it would not have made any difference to the general outcome.

Cash deposit: $100,000 @ 2% per annum. Current value: R2,060,000.

TOTAL CURRENT VALUE:  R30,215,000

Offshore Otto has no plans to leave South Africa, he simply followed a globally diversified portfolio in order to reduce risk and benefit from economic and financial opportunities elsewhere in the world.

He is now almost 80% better off than his twin brother who stuck with his local investments.

While this exercise will, no doubt, attract criticism from some quarters, it clearly shows what effect the ANC’s wealth-destruction policies are having on almost every South African with some modicum of assets.

Most middle-class to even wealthy South Africans are today starting to feel the pinch unless they have expatriated at least some of their assets and investments.

Speak to anyone who has recently travelled abroad or who has had to pay for imported goods.  The purchasing power of our currency is very poor, to say the least.

If you were like Local Lenny and stuck to the false belief that “local is lekker” and only focus on SA investments, you have become very poor in a relatively short space of time. Even I was shocked by the actual numbers when I did the comparison and had to double and triple-check my numbers.

Everything imported has become almost unaffordable: new motor cars, cell phones, laptops and even overseas holidays. Purchases of these and other items are simply postponed, or they simply don’t happen anymore.

Certain top-end motor manufacturers (Mercedes Benz) have stopped disclosing local retail sales. I suspect the declining trend in sales (as opposed to booming exports) has something to do with it. Many overseas products are disappearing from our supermarket shelves (Nesquik, etc.).

WHAT ABOUT THE NEXT TEN YEARS?

I have no special insight into the future. All I can say is that if the ANC continues with its economically destructive policies for the next ten years, the middle-class as we have known it for many decades, will almost have been wiped out.

The biggest danger right now is that the ANC ignores all warnings about its profligate spending, and we stumble into a debt crisis that has ramifications far more serious than one can imagine.

Countries in a debt spiral don’t recover very soon and the price to pay is a collapsing currency and the wipeout of a middle class without offshore assets.

* Magnus Heystek is a director and investment strategist at Brenthurst Wealth. He can be reached at [email protected].