What SA’s top asset managers would do with R5m

Paul Theron: Externalise now

A family that has R5m to invest should move it all offshore at once. When you’ve done that, invest the money in a balanced portfolio of US-listed blue-chip stocks.

It’s not enough to tell your current service provider to select offshore options inside a rand-based wrapper, annuity or unit trust portfolio. You have to get your savings outside the exchange control net, into US dollars. One day when you need the money back, it must be payable to you anywhere in the world in hard currency.

You can send up to R1m per person out now, no questions asked, using your annual single discretionary allowance (SDA). Just contact your local bank and have them make a foreign payment. Larger sums will require the SA Revenue Service’s onerous new approval for international transfer (AIT) application.

I’m an optimistic South African and I hope we will muddle through somehow, eventually becoming a stable middle-income democracy, but our political future is highly uncertain and the rand could well get much weaker.

The pathetic management of the country by the ANC and the collapse of almost all government institutions and state-owned corporations, especially Eskom, will limit our ability to grow the economy in the medium term. It’s tough to run a big business in this country, so investing in their shares is not attractive.

When the ruling party falls below 50% in a general election (hopefully in 2024) we will enter a period of unstable coalition governments.­­­ My assumption is that the state will become even weaker in that period. Just look at the state of Joburg now.

Vestact was established in 2002 and we focused on managed portfolios of stocks listed on the JSE. We were shocked when Jacob Zuma was appointed head of the ANC in December 2007. How could a person of such low intellect and questionable character go on to win an election and assume the highest office in the land? It was a recipe for disaster. We pivoted hard, actively encouraging our clients to move their assets offshore.

We now have R8.4bn under management of which almost $400m is in New York. That’s 90% of the money out of rands and into something much more stable.

By all means live here and enjoy the amazing lifestyle, (mostly) friendly people and personal freedoms. The local economy is stagnant but there are always niches that are growing and you can still get ahead, work hard and make money. Once you’ve got savings, get them out.

Some will say the rand is too weak now to buy dollars. Ignore that advice.

When the Springboks won the Rugby World Cup in 1995 the rand was at R3.64 to the dollar. When we won it again in 2007 it was at R6.52. By the time Siya Kolisi lifted the trophy in 2019 it had slumped to R14.73. Where will it be when we win it again?

* Theron is CEO of Vestact

Zwelakhe Mnguni: Hedge your risk

South African investors are facing serious challenges in terms of investment choices that can deliver sustainable returns above inflation into what appears to be a very uncertain future for the country. South Africa faces three major challenges: the first, a visionless political leadership whose purpose appears to be survival rather than creation of prosperity. The ruling party is likely to lose an outright majority in the 2024 elections, which would lead to a complicated experiment in coalition government where policy clarity could be diluted and thus reforms delayed.  

The second is a crippling energy deficit. According to the 2021 Enerdata report, industry is the main electricity consumer (50%), followed by the residential sector (23%) and services (18%). The energy output decline from between 20,000GWh and 23,000GWh in five years prior to Covid to 16,700GWh in February 2023 has dire implications for the country’s GDP growth and employment (which drives the economy). 

The third is the deterioration in our trade account, fiscal deficits and geopolitical posture, which have all exposed the rand exchange rate to further vulnerabilities. This is likely to drive inflation higher and keep interest rates elevated.     

Still, we must be cautious against being overly pessimistic as our bonds and our equities offer attractive valuations. For example, the SA equity market is trading at 8.7 versus our historic 12.2 forward earnings multiple. Our bonds offer the second-highest real yield in emerging markets after Brazil.

Yet we must also be realistic. Unlocking that discount would require at least the first two challenges be addressed. And local money managers have rushed offshore since changes to pension fund regulations allowed local funds to increase their offshore allocation from 30% to 45%. An RMB Morgan Stanley survey shows the percent of assets held offshore is probably close to 39% on average. To achieve this, investors had to sell South African portfolio assets such as equities and bonds. This explains to some extent why our equity and bond markets remain undervalued relative to their emerging market peers.  

The offshoring trend may continue for another 12 months before it settles down. I would therefore break a R5m investment into three components: 40% local bonds, 40% individual South African stocks and 20% in passive offshore equity.

South African bonds (R2m)

The South African government bond yield curve has steepened towards 12% beyond the 10-year tenure. I believe that at 9.7% the 5-year yield offers a nice trade-off between tenure to maturity and yield.

South African equities (R2m)

Naspers 7.5% (of total portfolio)  

Prosus/Naspers are still simplifying their business footprint. Prosus is reportedly selling PayU’s non-Indian operations. Consolidating its Indian business (and maybe one or two more regions) would boost group profitability and returns to reach breakeven in H1 2025. Prosus and Naspers are trading 27% (excluding cross-holdings: 38%) and 16% below our estimated NAVs, respectively. Naspers offers diversification away from the South African macro into more Asian growth.  

Impala: 5%  

Impala Platinum has improved to be a business with low costs, good finances, and improved margins, and its product mix is a safe investment. The Canadian business, though small, could be a swing factor in production numbers as load-shedding hits local output. We believe operating recovery is yet to come at its Rustenburg Lease Area and a positive outcome in Zimbabwe is not fully priced in. PGM prices should stabilise now as the less power the mines get, especially the smelters, the more supply/demand would move into a deficit at a time when sanctions are being implemented against Russia. Should Impala be successful in buying Royal Bafokeng Platinum, meaningful synergies would be realised at mining and refining levels 

Gold Fields: 5%

There is good reason to rank Gold Fields as the top gold mining counter on the JSE. It has the lowest all-in sustaining cost (AISC), it has the highest proportion of production in low-risk mining locations, it has a strong balance sheet and it has an attractive dividend policy. Management has reiterated a cautious M&A policy following the failed Yamana bid, thus reducing execution risk. It also has favourable near-term prospects in the form of added production from the commissioning of Salares Norte in Chile. 

Shoprite: 5%

Shoprite continues to be an innovator within the food market, having gained market share through three distinct strategies: township market penetration through Usave, upper LSMs through FreshX and Sixty60. More recently, Shoprite launched its new standalone clothing business, UNIQ, in March. At a time when the economy is struggling, it has been able to take away some market share as other players are more focused on defending rather than innovating.  

Spar: 5% 

We think Spar’s share price has dislodged from the fundamentals and has potential for value unlock through the sale of some underperforming European assets. The exit of some European assets would de-gear the balance sheet and allow the fundamentals to be fairly considered by the market: (a) Spar is a highly cash-generative business, with the best free cash flow outlook in the SA Food/FMCG retail sector; (b) Spar has superior capital returns in the South African business.

TFG: 2.5%  

In January and February of this year, TFG was unable to do business for about 120,000 hours (9.4 times as many as in the same period the previous year due to load-shedding). Still, the company expects to have 80% of its shop base equipped with backup power solutions (based on sales contribution) in the next few months. TFG’s earnings are somewhat better protected than its local apparel competitors due to the company’s more diversified business strategy (across geographies, product categories and customer segments). Jet’s value fashion offering, which benefits from downtrading in weaker conditions, has the potential to both boost and defend earnings. 

British American Tobacco: 5%  

BAT is another business that has diversified away from the evident pain in South Africa. BAT’s user base continues to grow globally, driven largely by growth in its Next Generation products portfolio, particularly in US vaping, which could offset weakness in the US cigarette market and a potential flavour ban on its combustibles portfolio (US menthol). 

Capitec: 5% 

Capitec recently put out decent numbers, but the market seems to have expected better. While the lending environment is deteriorating across the board in the South African banking industry, I think Capitec has a self-help story if it could apply its excess cash towards its business banking franchise (the rebranded Mercantile Bank). While historical earnings growth and high net interest margins are likely to be diluted by the current economic environment, these should be offset somewhat by loan book growth and a conservative 90-day write-off period.  

Passive: Coreshares total world stock feeder ETF: 20%

The Coreshares total world stock feeder exchange traded fund tracks the FTSE global all cap index, which covers both well-established (developed) and still-developing (emerging) markets. 

* Mnguni is chief investment officer at Benguela Global Fund Managers

Delphine Govender: Get anti-fragile

It’s hardly surprising that domestic investors feel vulnerable on all fronts. Take the recent Financial Action Task Force greylisting, then add unprecedented levels of rolling blackouts, a currency hitting record lows, interest rates at multiyear highs, deeply worrying geopolitical rumours involving the government and a domestic stock market as volatile as ever.  

This perfect storm of events results in fundamental and sentiment-driven influences which cannot be ignored. 

For a start, persistent stage 6 load-shedding will directly affect the cost lines of many companies. It will force profits noticeably below expectations at the start of the year and worsen inflation and supply chain shortages.

This implies interest rate relief will not arrive quickly, and second-order effects are likely to be constrained consumption, a worsening rate of household debt repayments and a rise in bank impairments.

The horrible outlook is further clouded by the lack of clarity on when we will solve our electricity crisis and the government’s mixed messages about the nature of its relationship with Russia.

Commodity prices have trailed off, too, which hurts South Africa’s terms of trade. No wonder foreigners have been net sellers of South African equities to the value of R2.1bn this year, according to SBG Securities.

Yet, for rational investors, this time of trouble could provide long-term opportunities.   

In 2012, statistician, investor and writer Nassim Nicholas Taleb presented the concept of “anti-fragile”: the quality that allows an asset or portfolio (or any other system) not only to withstand shocks but to perform better whenever there is risk and uncertainty. 

So, what might an anti-fragile portfolio look like today? You’d be hard-pressed to find an investment product more enduring than a good old-fashioned balanced or multi-asset class fund, with exposure to domestic and global equities, domestic and global bonds, property, commodities and cash.

Assuming you still have to keep at least 55% of your assets in South Africa, this is how you might want to funnel your money to ensure optimal compensation for the risk we currently see:

• Domestic and offshore cash (about 6%-8%) with the dual objectives of  preservation and choice; 
• Commodity exposure via gold and platinum ETFs (about 5%);
• Fixed-income instruments of about 25% of the fund: 18% in South Africa (a combination of shorter-dated inflation-linked bonds and 10-year government bonds, which are fundamentally undervalued even if vulnerable short-term) and the balance in higher-yielding short-dated US government bonds;  
• South African stocks of about 30% (remembering that our stock market is not our economy). You’d want a portfolio of specific rand-hedged resource shares; some domestic and rand-hedge industrial companies; some self-help meaningfully undervalued, ungeared domestic opportunities; and some financial stocks; and
• The balance of just over 30% should go to an actively managed global equity portfolio of stocks; we would be underweight the tech-heavy US market and more exposed to other developed but neglected markets, such as Europe, the UK and Japan. You want to seek out high dividend-yielding stocks, with resilient earnings streams.

We would expect this diversified combination to deliver a solid return as we eventually emerge from vulnerable times. More importantly, it would help to manage permanent downside risk.

* Govender is chief investment officer at Perpetua Investment Managers