Gareth Stokes asked some of the country's top investment professionals about strategies to protect wealth.
It is almost impossible for the layperson to navigate the 21st century financial services environment.
The array of investment products on offer, locally and offshore, can be intimidating to a private investor. Many well-to-do individuals end up leaving their cash fortunes in ordinary bank deposit accounts where the interest earned is minimal.
There’s risk in doing nothing, but dangers lurk for investors with large and diversified asset portfolios too. Far too many investors believe that by drawing only the interest or dividend generated by their investments, their capital wealth is protected. The reality is that a significant portion of the total return of an investment, whatever the source, compensates for inflation before any real return is earned.
“When assessing the success of a selection of investment portfolios, look at their real returns after inflation—real returns show the often substantial differences between portfolios in terms of creating wealth,” says Richard Carter of Allan Gray Life.
“Regardless of whether at the current low rate or at historically higher rates, inflation gets a large piece of the pie.”
What steps should you take to ensure that your capital resists the ongoing ravages of price inflation?
“A popular inflation-beating strategy is to use asset allocation,” says Tshepo Ditshego, Head of Investor Solutions at Stanlib. “In order to protect your portfolio it’s important that you don’t put all your eggs in one basket—so you need to invest your available capital in a variety of asset classes such as equity, bonds, property and cash.”
Asset allocation helps you to balance risk and return in your portfolio. When you are deep in retirement the trend is towards the less risky classes such as cash and bonds, with some years to go in retirement you can retain a heavier weighting towards equities. You’ll have to get help to implement an asset allocation strategy.
“The first step in the process is to engage with a wealth manager or financial planner,” says Hennie Franzsen, FNB Wealth, Head of Advice. Together you need to work through a comprehensive financial needs analysis, including the amount available to invest and the time horizons for such investment. Once this has been decided you can begin to choose specific destinations for your wealth.
Ryan Jamieson, Investment Marketing and Sales, Momentum Wealth expands on the topic. “An investor must decide on an appropriate required return for a given level of risk—because his/her risk tolerance is an important factor in choosing from the available investment options,” he says. You must determine at the outset the minimum real return you require to accomplish your investment objectives and what level of risk you are prepared to accept along the way.
Although it’s impossible to create a ‘one size fits all’ investment strategy, Franzsen was prepared to share a tactical asset allocation for an average client looking for a long-term rand-based investment spread. This client would invest up to 75% of his capital in South Africa, with 30% of the total to South African equities, 20% to South African alternative strategies, 15% to bonds and 10% to South African protected equity.
The remaining 25% of capital would be diverted to offshore opportunities including developed market offshore equities (15%), offshore alternative strategies (7.5%) and offshore properties (2.5%) “These are long-term strategic holdings and the percentages will change slightly from time to time based on the wealth manager’s strategic view,” he says.
Momentum Wealth doesn’t structure client assets, choosing instead to deal extensively with financial advisers and family officers that are directly involved in such planning activities. However, Jamieson believes investors are best served by a tactical asset allocation mindset with a medium-term outlook rather than a long-term passive or strategic asset allocation.
“There is enough data available to ensure informed decisions about the medium-term economic and investment landscape,” he says. “Investors would, of course, discuss these decisions with their wealth planner or financial adviser based on their financial planning objectives and investment outcome expectations.”
His defensive tactical asset allocation over the next few years would include 35% local cash, 10% inflation-linked bonds, 10% local property, 10% local equity, 10% global equity (developed), 15% global equity (emerging) and 10% commodities. It should provide inflation-beating returns given South Africa’s medium-term inflation and interest rate outlooks. Inflation could soon move above the Reserve Bank’s 6% upper target and interest rates will probably spike by 200 basis points (2%) in the coming upward cycle.
The opening of global markets has created numerous opportunities for the super rich. “Some investment opportunities require fairly large minimum investment amounts,” says Franzsen. As an example he mentions an upstart African commercial property fund with attractive potential returns but a minimum investment ‘buy in’ of US$2 million. And many opportunities in the wealth management space require investors to act quickly. This is easier for an investor with R50m in the ‘war chest’ than for someone with only R1 million already fully invested.
Jamieson agrees: “Larger investment sums lend themselves to more bespoke investment solutions—specific assets and capital protection and preservation strategies can be deployed for wealthier clients.“The final trick in the wealth manager’s toolbox is the trust.
“Wealth management is not only about growing your assets, but also about protecting them,” says Franzsen. A trust might not be appropriate in all cases, but can definitely be considered as a vehicle to protect your local assets. Trust benefits escalate offshore—though investors in either dispensation must make sure to get professional advice in this tricky field.