Magnus Heystek: From R15m to R115m in a decade; what got me going offshore

Seasoned wealth advisor and BizNews community favourite Magnus Heystek reflects on the past decade of being an offshore investing bull.

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By Magnus Heystek*

Battle between onshore and offshore investing has been a bloodbath

It’s now been just more than 10 years that I have been recommending offshore investments to anyone who cared to listen. I have been recommending offshore investments selectively to certain clients before that—from about 2011—after I attended a seminar where renowned global financial commentator John Mauldin spoke about the exciting prospects for technology and biotechnology shares.

I liked what I heard and took some time to try and understand these sectors, especially biotechnology, of which we had no exposure on the Johannesburg Stock Exchange—and still don’t.

Mauldin also spoke about other trends—demographic and healthcare trends—and alerted the audience to the growing number of funds that were investing in this space. Again, nothing listed on the JSE to cater to such a demand.

In the end, I was forced to have discussions with global fund giants Fidelity and Franklin Templeton to get these (and others) listed on the Momentum International Platform (MWI) to be able to offer to SA clients, either directly or via asset swap funds.

Likewise with technology funds. Stanlib used to have a technology fund which they closed in 2013 or thereabouts due to a “lack of interest” from SA investors. That was at the start of a major bull-market in technology shares which has been returning more than 25% per annum ever since. Talk about bad timing!

Initially, my offshore recommendation was merely to gain exposure to global sectors not available in SA. Like buying champagne or caviar, you can only get it from France or Russia respectively.

SA QUO VADIS?

It was only after the first of many credit downgrades and the first signs of the State Capture that local factors started influencing my offshore recommendations, particularly after a series of seminars our company hosted, called Quo Vadis SA. Speakers at these seminars, which included the late Mike Schussler and dr Frans Cronje, raised the issue of SA potentially becoming a failed state.

This added to my urgency to recommend offshore investors, always with the preface that offshore investing can be volatile and not guaranteed to beat the local market.

For certain investors, the degree of volatility was simply too high, and I desisted from recommending offshore, instead looking for safety in enhanced income funds which, incidentally have proven to be great investments, beating the JSE all-share index over this time.

It’s no secret that this advice did not sit very well with other advisors, fund managers, and even media people. I was branded as “disloyal” and” unpatriotic”, the primordial reaction that people often have when they are confronted with uncomfortable truths. I can understand why local fund managers were upset by my recommendations, but why were so many local advisors cheesed off? I can only surmise that this view did not align with their own recommendation to clients.

However, I couldn’t find any facts to support a large exposure to the JSE. A whole array of economic indicators were flashing red—in quick succession—and it was very clear that the economy was slowly grinding to a halt.

At the same time, foreign capital was fleeing the country, in total now more than R1 trillion over the past decade, as Trevor Manuel highlighted recently. But this outflow has been going on for a long period and I often spoke and wrote about it. Now these outflows are being used as a justification for the poor returns earned by the large asset managers.

In the meantime, offshore markets were roaring ahead, especially the US market and also recently—quietly and under the radar—the Japanese stock market.

However, because there is not one local fund in SA that offers exposure to Japan, I was again forced to look elsewhere for this needed exposure, especially after I returned from an investor tour with Investec Asset Management in 2015. I left Japan with one certainty: this is a country worth investing.

Recommending offshore investing 10 years or more ago was a hard sell. There were a lot of skeptics and many clients, no doubt under the influence of overly bullish forecasts by local fund managers, decided to walk away and invest elsewhere.

Fortunately, there were many clients whom I could convince and who today are reaping the benefit of my urging and insistence.

10^th ANNIVERSARY

One client has a 10th anniversary coming up next week, and I took some time to analyze his performance.

Admittedly, he is a wealthy and experienced client with a wide range of investments, both locally and abroad. And it also wasn’t all his capital which he required for retirement. As the saying goes—who dares wins.

His investment of R15m has turned into an astonishing R115m 10 years later for an annualized net return of 23,10% per annum. It was placed into an endowment which means all taxes and fees have been paid by the fund. Compare this to an investment in the JSE All share index which would be worth a mere R30,6m today. Even worse, are the values of R21,62m and R20,469m had the same R15m been invested in the Nedbank Rainmaker and Old Mutual Investors fund respectively. These two well-known funds have utterly underperformed over the past 10 years. That’s a difference of almost R100m in the case of Old Mutual!

OVERWEIGHT JAPAN

The current portfolio and % exposure is as follows:

Ranmore Global Equity 3,81%

Fidelity funds Global Health Care 16,01%

Fidelity Sustainable Global Demographics 16.9%

Franklin Investment Technology fund 2 23%

Franklin Templeton US Opportunities 9,49%

Global IP Opportunity 11,41%

Merchant West Global Equity Feeder 6,40%

Orbis Japan Equity 3,75%

The exposure to Japan currently is substantially overweight if I use global market capitalization formulas used by large asset managers, but it didn’t start that way. It’s just that the Japan Global Equity fund has outperformed almost everything else, with a return of 54% in USD terms over the past year. Over 3 years the returns were 21,3% and over 5 years 18,37% in USD terms. However, I am happy to ride that out as the Japanese stock market fundamentals look better than the US, in my opinion.

Ask yourself, when did you ever see any of our local fund managers and or media commentators discuss Japan as an investment opportunity? Never!

What are the lessons from this example:

It shows just how well offshore markets have done for offshore investors.
Home -bias has cost SA investors potentially a lot of money.
SA is not the center of the investment universe.
Macro-factors play a role in investment outcomes.
Independent advice is not always independent.
Beware of taking advice from fund managers. They are there to promote their funds and nothing else.
Mainstream media has misread the investment climate totally.

NOTE OF WARNING:

Now for a warning: I don’t think these returns will be achievable again over the next 5 to 10 years. I say this in reaction to the plethora of advertising by most local fund managers now seemingly all recommend offshore investments. Stanlib, Ninety One, Discovery, Investec and many others are having webinars/seminars and podcasts on offshore investments almost on a daily basis.

This is being done, I suspect, due to the large outflows from local funds to offshore platforms.

However, with the rand at R19/$ and the US market at historically high levels (Nasdaq average PE now above 30), I need to point out that future returns are bound to be more pedestrian.

If the outcome of the forthcoming general election turns out to be even slightly better than forecast, might one even see a return of foreign capital into a market that is very cheap and a rand that is very weak.

Go offshore—but be realistic about future returns. A repeat of the 20%+ returns is unlikely to be repeated going forward.

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Magnus Heystek* is investment director at Brenthurst Wealth, twice voted SA’s top boutique wealth manager.

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