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Monthly Archives: August 2016

Time for Clear Heads

These difficulties aren’t limited to South Africa either. Global economic growth is still tepid and geopolitical tension is high.

“It’s very much at the top of everyone’s mind that there are very high levels of uncertainty both on the political and macro economic fronts,” says the manager of the PSG Equity Fund, Shaun le Roux. “As far as politics is concerned we have what’s going on inside the ANC, a very divisive US election, and Brexit and its consequences. On the macro economic side, there are big questions around the South African economy, which is going through a very tough patch and may be looking at a recession.”

Of these, the local political landscape is perhaps the most concerning. However Le Roux says that while the stakes are high and the outcomes unpredictable, investors shouldn’t make hasty decisions based on noise alone.

“What one needs to bear in mind is that when a story is dominating all the newspaper headlines the market knows about it and the market tends to be quite efficient at pricing in bad news,” he argues. “In this regard our analysis shows that something like a sovereign debt downgrade is pretty much priced in by the market already.”

Although there could still be a crisis caused by a successful attack on the integrity of treasury and the Reserve Bank, this is not PSG’s base case. Nevertheless it’s important to be diversified to be protected against even the worst possible scenario.

“The main pint that we try to make to clients is that when the world is this uncertain and the range of outcomes is this wide, we think you gain very little by trying to forecast exactly what is going to happen,” Le Roux says. “Brexit is the best example of how futile this can be. What we are rather focusing on is trying to make decisions that give our clients the best chance of achieving their objectives.”

This requires taking a long-term view and seeing opportunities beyond the market noise.

“When there are this much uncertainty and fear, we typically find that the market will give you some good opportunities,” says Le Roux. “But you need to be able to take a long-term view backed up by a long-term process. We are prepared to be patient, but we also can’t dismiss the risks out of hand. We just have to make sure that our clients are adequately protected.”

This means ensuring that they aren’t exposed to assets that could incur permanent capital losses. At the moment, Le Roux believes that there is a very real risk of this in certain assets.

“The anomaly is that even though there is all of this uncertainty and fear, at the same time there is a backstop to global financial markets in the form of ridiculously low developed market bond yields,” Le Roux says. “A consequence of this is that asset classes that are deemed to be related to bonds, specifically the highest quality equities are trading at very elevated valuation levels. We would argue that ownership of inflated assets poses the biggest risk to future performance for investors.”

At the same time, there are other parts of the market where the uncertainty has given rise to attractive asset prices.

“This includes domestically-focused business in South Africa such as banks, where the tough economic conditions and the recent spike in bond yields have had a dramatic impact on share prices,” Le Roux says. “In the last six to nine months we have been buyers of financial stocks and have also been adding South African bonds to our multi-asset portfolios.

“It’s important to note that we hadn’t been invested in South African bonds for a number of years before this,” he adds. “ It’s only in recent times that we think we can buy them at a margin of safety and at levels that lock in attractive real yields on a long-term view.”

Ultimately, he argues that the only safe way to negotiate times like these that are so uncertain is to focus on the fundamentals as much as possible.

Risk And Opportunity

 The threat of a downgrade has been hanging over the market for nearly a year, ever since S&P put South Africa on negative watch in December 2015. With the country’s sovereign rating only one notch above sub-investment grade, the next step down would be into ‘junk status’.

This has worried many investors, as the obvious question is what they should be doing with their portfolios. How do they manage the risk of a potential downgrade?

For Ian Scott, the head of fixed income at PSG Asset Management, however, this question should always be asked alongside another: what if South Africa isn’t downgraded? The outcome, he argues, is not guaranteed and therefore investors should be seeing not only the risk, but also the opportunity.

“What’s important to think about is that the downgrade is already reflected in South African bond pricing,” says Scott. “The country’s offshore credit spreads are trading in line with other countries that are already in junk status like Brazil, Russia and Turkey. Nobody knows what the market will do if we are downgraded, and there will probably be a knee-jerk reaction, but a lot of that negative news is already reflected.”

This means that the risks, and therefore the opportunities, may not be the obvious ones.

“The important thing is that a downgrade doesn’t mean a default,” Scott says. “South Africa’s debt metrics by global standards are not that onerous. Our debt-to-GDP ratio is only around 50%, and only 9% to 10% of our debt is offshore. If you look at our peer group, their numbers are way above that.”

He argues that an objective assessment of the country’s fundamentals suggests that there is a low probability that South Africa will default on its debt.

“If you can put the political noise to one side, for our peer group we are still in a good fundamental space,” Scott says. “The possibility that South Africa will not pay its debt is very low. So if you think that we have high yields, a strong capital market, and good banking system, that’s not a bad environment.”

He believes that foreign investors are seeing this opportunity more than locals.

“If this was a country where foreigners felt that they couldn’t be sure of getting their money back, why would they be coming into our market?” Scott asks. “When government recently placed $3 billion in offshore bonds, the placement was three times over-subscribed.

“That doesn’t indicate that foreigners feel that they won’t get their money back over the next ten years,” he says. “Yes, fears around the political situation do make it a much more cloudy situation, but within that is probably where the opportunity lies. We don’t know what will happen, but if you sit in assets that already reflect that negative pricing we think that’s an opportunity.”

Scott therefore warns investors against premising all their decisions on a single outcome. Building a portfolio that assumes that a downgrade is a certainty places you at significant risk.

“There is a big binary danger in having only one view in your portfolio because if that doesn’t materialise it could have a very negative effect if the opposite actually happens,” he says. “You don’t want to take one way directional bets. In the volatile world we live in, that is quite a dangerous thing to do. Diversification in a portfolio is prudent.”

This does mean taking a more nuanced view of risk. The downgrade isn’t the only risk out there, and it may not even be the biggest one.

“Is it that risky to buy government bonds when a downgrade is already reflected in the prices?” Scott asks. “At PSG, we think that when bond yields are low, that’s when you have the biggest risk. When yields are high and there is a lot of fear and uncertainty in the market that is when we see opportunities.”

He points out that last December at the time of Nenegate, ten year government bond yields spiked above 10%. This was a time of great fear in the market. However, PSG saw that as a buying opportunity because a large amount of uncertainty was being priced in.

what you’ll do after retirement?

 However, more and more people are having to ask what happens next. In a time when life expectancy is steadily increasing, the idea of throwing away your briefcase and putting your feet up to live out your ‘golden years’ in peace and quiet is looking increasingly less appealing, and less practical.

For a start, there is little point in retiring ‘to do nothing’. Many retirees find that they are actually busier than they were during the working lives, but the difference is that they can do what they enjoy.

“We are finding more and more people who are re-thinking retirement,” says Kirsty Scully from CoreWealth Managers. “In most cases, they have been professionals in their careers and they want to stay employed to continue with their personal and professional growth and development, yet they don’t want a typical work schedule. They are looking for flexible working arrangements so as to have a good balance between work and leisure.”

Wouter Dalhouzie from Verso Wealth says that from both a mental and physical well-being point of view, it is important for retirees to keep themselves occupied.

“I had a client whose health started failing shortly after retirement,” he says. “He started a little side-line business and his health immediately improved. When he retired from doing that, his health went downhill and he passed away within a matter of months.”

Verso Wealth’s Allison Harrison adds that she recently attended a presentation that discussed how important it is for people to remain active. “The speaker explained that if we don’t continue using our faculties, we lose them as part of the normal ageing process,” Harrison says. “The expression she used was ‘use it, or lose it’!”

She relates the story of a retiree who had been in construction his entire working life.

“After a year in retirement, he decided to buy a second home, renovate it and sell it,” Harrison says. “This was very successful, so he decided to repeat the exercise using his primary residence.  This yielded a bigger return than the first one and thereafter then moved from house to house, renovating, selling and moving on.”

This way he ended up making more money in his 20 years of retirement then he did in his 40 year building career.

But what about the money

 Encouraging retirees to stay active for the sake of their health may be fairly uncontentious, but the harsher reality is that many people in retirement have to find something to do for more than just the sake of keeping their minds ticking over.

It is accepted that the vast majority of South Africans will not have saved enough to retire comfortably. Many people will therefore need to look for some kind of work to supplement their incomes.

This problem is only going to grow larger as people live longer and their money therefore has to last longer.

“Because of the way medical technology is developing, we now plan for money to last until our clients are 95,” says Hesta van der Westhuizen, an advisory partner at Citadel. “But the way things are going life expectancy could be 120 for anyone being born today.”

Already many people retiring at 60 still have a 30 year time horizon, and that period is only going to grow longer. Van der Westhuizen argues that this means people need to start thinking about starting an entirely new phase in their lives.

“These days a lot of people reach 60 and say they are going to retire now and do another job, but I think we need to start changing our mindset and think about the possibility of going back to university to get another qualification to do the things that we actually always wanted to do,” she says. “We are going to be so much healthier for so much longer, and we need to think about what that means.”

In other words, we may need to consider starting a whole new career post-retirement, and not just finding another job. This has big financial implications.

“If you get to 60 and you say I am going to get another job, some companies might take you on on a half day basis or as a consultant and you might continue earning income immediately, although perhaps at a lower level,” Van der Westhuizen says. “But if you start a new career, you might go to back to university, and you will have to provide for that.

“My opinion is that in the future, we will have the ability and the health to do a second degree and launch another career and that will have exactly the same financial impact as when you started your first one.”

This means that financial planners may also have to start having new kinds of discussions with their clients.

Young investors should read this

 Equity investing

The problem you have mentioned is that you have had difficulty finding the time to manage your portfolio. First you need to make the distinction between speculating and investing. If you aren’t taking part in speculative trading, you don’t need to be sitting in front of your laptop watching the markets all day.

The time required for investing is in the form of research prior to making an investment. This doesn’t mean you need to monitor your portfolio constantly but rather make good decisions at the outset and practice restraint when you are tempted to react to short term market volatility.

This is where it may be in your interest to appoint a manager with the necessary expertise, who will build and run a bespoke portfolio for you. You want to find one that will allow you to be involved in the stock picking, but also provide guidance.

You have stated that you have learnt a lot so far through trial and error and would like to learn more in future. This would be a great way for you to continue learning, rather than pulling out of your share portfolio completely.

While there would be a fee involved (usually around 1.5% per annum), the manager would hopefully provide a service that would be worth it and may well earn his fee by preventing you from making some costly mistakes. This way you can continue to learn practically, and put in as much or little time as you can afford to.

Whether or not this is a suitable option for you would depend on the value of your share portfolio. If your portfolio is too small at the moment to diversify sufficiently, it would be advisable that you rather go the route of ETFs or unit trusts. This would also apply to the monthly debit order investments that you mentioned. But whichever of these you choose, the same thing applies in terms of prior research and guidance.

One of the benefits of ETFs is that fees are relatively low and you can access a diversified portfolio with only a small investment or monthly debit order rather than a large initial lump sum. You can also choose to have exposure to a particular country, asset, currency or industry.

Your returns will be the average of that sector or type of asset that the fund aims to track, and are unlikely to outperform the market or relevant benchmark. Once again, you need to do some initial research if you are going to start picking ETFs like you pick stocks, and so the time requirement may actually be the same.

You can also consider unit trust funds, which are actively managed by managers who aim to outperform their benchmarks rather than replicate them. There are hundreds from which to choose and each has a different objective, risk profile and asset allocation, so once again, you need to do your research wisely or get some professional guidance.

There is not one solution that suits everyone, and while it is better to be invested than not, making a rushed decision without getting any personalised advice can result in a bad experience that discourages you from investing in future.


The second part of your question relates to property investment, but the same principles apply. It is essential to do your research and calculations, take all the actual and opportunity costs into account, and make sure that what you are buying matches your expectations and requirements.

As far as research is concerned, get to know the property you are considering purchasing. Stick to areas with which you are familiar, speak to different property management companies in that area, arrange for an independent valuation of the property and be willing to walk away at any point and keep searching if it doesn’t seem a good enough opportunity. Rather learn more about what you are looking for by wasting a bit of time in the research phase, than actually buying the property and then realising it wasn’t the right choice.

It is important to set out a plan, taking into account all of the costs associated with purchasing as well as owning the property. These include, but are not necessarily limited to, the transfer duty, conveyancing fees, bond registration costs and initiation fees, rates and taxes, levies, insurance, maintenance, letting agents fees, and estate agent’s fees when selling. Consider the age of the property and potential maintenance that will be needed in future as well.

Work out what you can expect in terms of appreciation in the property price relative to rental income and ensure that the income will meet your needs in order to pay the associated costs. Take into account local vacancy rates which is also something you can speak to a property manager about.

Also consider whether you will appoint a property manager to assist in finding the right tenant and making sure they pay on time. This comes at an extra cost.

In terms of a bond, an access bond would be advisable so that you can register the bond on one property and if you pay it off, you can still use that bond for purchase of your next property. In this way you could save on bond registration costs as you accumulate more properties over time and you are able to leverage off of properties you already own in order to acquire more.

Remember that whether you are investing in shares, ETFs, unit trust funds or property the process is the same. There is no secret formula that will make or break you. It may not be ground breaking advice, but good planning, reliable advice and patience are where your focus should be.