Mitigating risk in political turmoil
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RYK VAN NIEKERK: Welcome to this Financial Advisor podcast. My guest today is Johan Burger: he is the head of financial planning at Brenthurst Wealth in Pretoria. He’s also a fully-qualified financial planner and a director of Brenthurst Wealth Management. Johan, welcome to the show.
South Africa seems to be shooting itself in the foot again, on the political front at least, and this may have a profound impact on people’s investments, their pensions and their savings, especially in the long term. What is your advice for pensioners and investors to mitigate the risk that this political turmoil brings?
JOHAN BURGER: It’s definitely uncertain times. Everybody is in a way not sure what to do, what the future will hold for the rest of us. But I think everyone must go back to basics and ask ‘what is the objective of your investment?’ You will get different types of investors at retirement and the ones saving for retirement - and definitely the ones at retirement are a little bit more conservative.
RYK VAN NIEKERK: But what are the risks? The first risk obviously is the exchange rate. If the rand depreciates further that would, in dollar terms at least, have a massive impact on investments. What other risks are there?
JOHAN BURGER: Basically at this point in time at Brenthurst we are quite bullish on offshore, but the reason for offshore is not just purely from a rand point of view. If you take South Africa, for example, it represents less than 1% of the world economy.
There’s also the perception if we advise clients to have offshore exposure that things are bad in South Africa and you must get your money out and that’s not entirely true.
It’s one way to diversify your portfolio and if you take - for example the last ten years - how things have changed in the world, most of the top-ten companies only recently started and they make up the top-ten companies in the world. So to diversify your total investment in our opinion is a very good strategy, obviously taking political factors into consideration. We still feel the rand is under pressure and to take advantage of the rand weakening will definitely help.
RYK VAN NIEKERK: If you look at investors there are pretty much two types: one with discretionary money to invest (there are no limitations to how much you can take out within the exchange control ceiling), but other investors save through pension funds and retirement annuities and, therefore, have to keep at least 75% of their money in South Africa.
Let’s start with the first discretionary-type investor: how much of such a portfolio is that client advised to invest offshore?
JOHAN BURGER: I think a major factor of that opinion will depend on whether the client requires income from that portfolio. I know most clients or most investors normally only take income from a retirement fund. But you do get a lot of investors that, let’s call them entrepreneurs, have liquid investments, but at some time they require income.
The methodology we use at Brenthurst is to say you almost build the portfolio in a certain building block, where let’s say you do require income, a portion - irrespective of what market conditions are saying at the moment - must be fairly conservative. That could be a portion into bonds, into cash-type of investments. So for the first two- or three-year period you structured that particular portfolio where income will only be taken from those particular funds.
Then a portion, let’s call it 50% of the portfolio, will be in let’s call it balanced-type of portfolios and this is where the fund managers have the option to move around asset classes. For example, you just referred to the Regulation 28 fund: the fund managers can move up to 75% but things are not looking too rosy currently and they’ve reduced that exposure all the way to 35% to 40%, but they still have the option to move up to 75%.
Then ... irrespective of your age - whether you are 30 years old, 60, or 70 years old - the biggest mistake a lot of investors make is they are at a certain point and they feel I don’t have to take risk.
The biggest risk out there is inflation and the only way to beat inflation is where a portion of your portfolio will equity exposure. At this point in time we feel offshore equities currently provide a little bit of value in that department.
I also want to place emphasis on if you have a portion or an aggressive part of your portfolio - whether it’s 50% or 20% - for the first couple of years you will not redeem any of those units if you are taking income. So irrespective of whether the market is going up or down, the rand strengthens or weakens, that portion will remain, will not be touched. If we go back in the last 100 years - and obviously we can’t predict the future - but in a way these things will reach a breaking point, move up and down, and the longer you invest in those asset classes, the less riskier it becomes over time.
RYK VAN NIEKERK: You referred to offshore equity, of course that is not an easy asset class to get right because it’s so diverse and we have so many geographies that are facing different challenges. If you convince a potential client to invest offshore, what would your advice be? Where should that client put their money?
JOHAN BURGER: Very, very good question: the world is so big and so small at the same time. If you asked the question slightly differently: 'what do I think about South Africa?', South Africa does have risk. But if you asked 'do I feel that there are certain companies that will do well in the next year or two or three, irrespective of market or political circumstances?', my answer would be yes, definitely there are companies that will do well. The same applies for offshore.
If you take the US, for example, the US is currently at very high levels, so there could be a time - whether it’s in the next six months or next two years - that there could be a drawback, but nobody knows. In this period there will be companies that will go down or slightly correct and there will be companies that do well. But to answer the main question: we like companies with proper balance sheets, a lot of cash flows. We tend to stay away from the smaller, riskier companies, where small market movement that nobody can predict can have a major impact. So in short, not just geographically but in companies with big balance sheets, fairly decent PE valuations and very good cash flows.
RYK VAN NIEKERK: Do you invest directly in those shares on behalf of clients, or do you work through asset managers?
JOHAN BURGER: We currently do use asset managers, but from an offshore point of view at Brenthurst we definitely tend to use ETFs as well. The reason for that is that the offshore market is fairly sophisticated. Now, if you want to focus on, for example, the US market and fees really play a vital role in the investment industry, you get fantastic ETFs where you can go directly into a US market that will focus on the Dow Jones or the S&P 500 or technology stocks, so you do have the option.
Whereas things are slightly different if you tend to invest in a certain way, where it’s slightly less riskier. For example you want to go into a balanced fund, then that’s when you need to use a fund manager to say, well, I want to change the asset allocation, whether it’s between bonds or property or equity holdings, where the fund manager is actively making changes, not just between asset classes but also between various geographical areas. So for those particular investors, or that part of the investment, asset managers will definitely be used.
RYK VAN NIEKERK: Which ETFs do you like? Is it iShares, Deutsche Bank? Is there a specific company that you actually like more than others?
JOHAN BURGER: It’s a challenging thing from an advisor point of view for all advisors in South Africa. The first thing is there are so many out in the market: you can have BlackRock, you can have Vanguard or Deutsche Bank, there are so many, the list goes on and on. One vital aspect that we have to look at is whether that particular fund or ETF is FSB approved, so that’s one aspect from an advisory point of view that we definitely look into. There are many great companies and very good ETFs available on the market.
Active managers – local versus international
RYK VAN NIEKERK: Active managers: do you prefer locally-based ones or international ones?
JOHAN BURGER: Actually a combination. I’m very, very impressed with the South African investors, to be quite honest, and it’s spread, if you take the likes of Allan Gray, Investec, Coronation. I think one aspect that is very important from our point of view, is that if things do change and you want to communicate with the fund manager to make it easy, to fully understand what is happening, what is the holding or the position the fund managers are taking and what is the reason for that position they are taking?
Now, in order to get proper communication between ourselves and the fund manager it sometimes makes it easier to use local asset managers. But bear in mind that most of those asset managers, even though they represent a local company, are based overseas.
RYK VAN NIEKERK: What is your view on the so-called 'boutique managers'?
JOHAN BURGER: I think boutique managers will probably take over the market in the next ten years. I think they have a way…sometimes it’s easier to take a position on a particular share or a company when the company is smaller, but it doesn’t necessarily mean that they will outperform the others.
The big asset managers like Coronation and you can take for example Allan Gray last year really did well in a really, really difficult year. A lot of people would say, well, they are so big they can’t really take positions and yet they really performed well. So it’s not always the case that the smaller ones will outperform or the bigger ones will outperform the smaller ones.
I think one thing that is quite important from our point of view, is to go through the whole due diligence process. We are bombarded with new companies almost on a daily basis and then to have to make a choice to say we like your philosophy and methodology you use within your funds. So it’s a whole process from the Brenthurst point of view before we will actually invest in a particular boutique company.
RYK VAN NIEKERK: Do you invest your clients’ money or advise them to invest in hedge funds at all?
JOHAN BURGER: At this point in time we are really looking into that. Hedge funds can be quite complicated, so in order to convey the message and also the methodology within hedge funds can be quite tricky. I definitely feel that hedge funds do have a place in the invest industry, however. It’s not for every client but it’s definitely for certain clients.
RYK VAN NIEKERK: Do you think hedge funds are underutilised in South Africa? If you look at the North American market specifically, hedge funds seem to be a lot more common investment choice amongst investors than the case is in South Africa currently.
JOHAN BURGER: I fully agree with that statement. I think the reason for that is a lot of investors don’t understand hedge funds. It’s almost like most South Africans (and I’m generalising now): if you don’t understand something and if you don’t feel comfortable with something you’re probably going to stay away from it. I’m not saying it’s a bad thing; that’s unfortunately just the way it is. But I think it’s going to be a process where if we can create proper hedge fund managers in South Africa, and most investors become used to how it operates, what the advantages are, I think we will see a massive growth in that department.
RYK VAN NIEKERK: Just lastly, you are heading up the Pretoria office of Brenthurst Wealth. Brenthurst, of course, has offices all over the country. Is it important to have localised offices? Can’t you do your work over the internet or via phone and thereby save your client some cost?
JOHAN BURGER: Well, definitely; it’s almost like it’s a personal thing. We always say that even though we provide financial advice, we are more in the communication business and yes a lot of communication will be over the phone and via email and so on. However, traffic nowadays, if you take the major cities, it’s quite busy and time is money. Most people would like to go and see an advisor close to them, so that’s the one reason we try and allocate offices around the country.
The second reason is people still like to sit in front of a person to chat about their personal stuff, and there are certain things that are quite difficult to say over the phone or via email and you want to discuss that around the table. I believe that the industry will probably move to satellite offices in the future, however, from an admin-, a compliance- and a regulation point of view, unfortunately there’s still a lot of paperwork and you still require offices.
RYK VAN NIEKERK: Thank you, Johan. That was Johan Burger, he is the head of financial planning at Brenthurst Wealth in Pretoria.