Start your investment journey - Season 1

[00:03] Introduction of guests and how they became interested in the markets 

[05:19] Investing for your long-term future and the next generation’s 

[08:30] The power of compounding returns

[12:11] Understanding your investment needs at different life stages

[16:36] Recurring market themes and separating the signal from the noise

[21:52] Explaining diversification 

[23:36] Investing on the JSE vs investing offshore

[28:05] Strategies for dealing with risk events

[33:56] Closing remarks

[00:03] Introduction of guests and how they became interested in the markets

Ayabonga Cawe: Welcome to the first in our series of Wealth Creation Podcasts. In this series, we aim to provide you with the tools you’ll need as you build up your wealth and leave a legacy for generations to come. Our aim is to deliver more than just vanilla investment advice that you can access online and you’ll be hearing over the next few weeks or so from investment professionals who have a passion for markets, as well as expertise and guiding many of South Africa’s leading families in their investment journeys. We’ll also have access to leading experts and different areas of investment specialisations. In our first episode, we speak to Stephen Silcock and Tebello Rabele about why we invest and the power of compounding. Now they’re a perfect pair for this topic as Stephen has a wealth of experience in the markets while Tebello is a young investment manager who’s insights are sure to resonate with most of us. Tebello Rabele is a wealth manager at Investec Wealth & Investment and his other titles include being the IT guy at home, a son to many and husband and a father to one at the moment, whereas Stephen is a portfolio manager with Investec Wealth & Investment and he joined the group at the turn of the century in the year 2000. He loves reading, fishing and playing sport but loves nothing more than a bush holiday with his wife and three girls. Now gentlemen, thank you of course for joining us for this discussion. I want us maybe to start with Stephen and Tebello with I guess you know, what drives all of us to invest? Not necessarily the technicalities or the asset class, we’ll certainly get to all of that, but Stephen I mean, you have an interesting sort of genesis of your own interests in the market, having I guess being somebody who used to shadow your grandfather who was also a seasoned veteran in the markets as well. What resonated with you about the marketplace, about the preservation of wealth that has certainly you know kept you in this industry for as long as it has?

Stephen Silcock: You make me feel very old when you say that I started at the turn of the century but I’ve been very fortunate to have worked at Investec Wealth & Investment in a number of capacities for 20 years now and in several roles as I mentioned. I’ve been in stockbroking, portfolio management and investment management and I’ve seen a number of bear markets also, as you touched on, I started in the dotcom cash in the early 2000s, at Investec and then we had the Global Financial Crisis (GFC) obviously in 2008 and now in the Covid pandemic which is affecting so many people but I was incredibly fortunate as you mentioned to have started in the industry and even before that, with a grandfather who was very well known in stockbroking circles around South Africa and I think Ayabonga, I inherited some of my passion for investing from him. Some of my fondest memories are of sitting with him in typical grandfather style in mahogany-lined office, listening as he spoke about shares and why you must start investing early, wonderful tales of the floor of the JSE, as well as the insights that he’s learnt over 40 years in the market. I think one of the things that comes across so strongly for me and he was from Scotland, he had a wonderful broad Scottish brogue and he used to talk about Leo Tolstoy’s quote about the two most powerful warriors being patience and time. He had a very long-term view on investing.

Ayabonga Cawe: And I guess that similar experience I mean on your end Tebello having been you know, raised in a family of entrepreneurs and business people and really being introduced you know in your teens to the stock markets and you know analysing PE ratios and high school, I don’t know who was doing that but clearly Tebello you were doing that and yeah, I mean also joining the Stock Market Academy in School and really going in at university and studying investment management. It’s quite interesting Tebello that you, you would have sort of had this interest in the stock market and you know in different asset classes and for you from your perspective I mean how did that I guess you know, compliment your interest in business and the genesis of that?

Tebello Rabele: Sure. Yeah I think when you sort of revise it that way I mean it’s keen recollections or fond recollections I would say. You making me sound as old as Stephen but I would say you know one very key thing I would say, coming from a family of entrepreneurs, I think we can see it in the environment that we are in now, and my family came from a business or an environment or background of entrepreneurs and you can imagine trying to run it that time back then, in a similar environment is what we see now with riots, but it just re-fostered the interest in value creation around wealth and I think that’s where I sort of developed the passion for it and I guess you know my father obviously then put the newspaper in front of me at the time because we didn’t have Bloomberg and he used to make me read through that huge page of numbers and that gave me a passion for pricing of businesses, so a combined business or passion for entrepreneurship and a combined then, you know, formal market that gives you pricing for these businesses which create value and you know essentially the art around investment management, sort of sparked the passion and the interest.

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[05:19] Investing for your long-term future and the next generation’s 

Ayabonga Cawe: You know Tebello, it’s quite fascinating that you draw the links between you know the moments your own family was in business across a wide range of sectors and the riotous mood in the 80s and where we are, I guess you know now because it speaks volumes about why people invest. I don’t think people need a lot of convincing at this point in time, what with Covid-19 with all of the risk events that we’ve seen materialise, there’s the sense that you probably want to make sure, you not just investing just for a rainy day but there’s also this question of the inter-generational transfer of wealth.

Tebello Rabele: Yeah. I think just as you speak about generations I mean very privileged obviously to share a floor with a seasoned investor like Stephen. Also very great human being who has a very big passion for, for our country, in our space in our office I don’t know if he minds me sharing but we call him Stevovo. You know, such a refreshing view and it’s honestly you know one of those things, the same way learn from your grandparents, or the same way you learn from uncles and mentors, we rely on the experiences of professionals like Steve, as well as you know shaping our own view in the future, I think markets are obviously going to be different for our generation going forward and but it seems like Steve will probably share you know the more things change, the more they sort of you know kind of stay the same which is why I guess Steve would say, you know, having time in the market versus timing the market is a very crucial aspect of it.

Ayabonga Cawe: And I guess Stephen a big part of that is about weathering the storms you know, there is my piece sort of short term developments that have massive implications on asset prices but as you said earlier, you know this balance between you know time and patience and embedding value over a long period of time, how important is that I mean you as you said you see a lot of you know bear markets. What can we learn from past experiences about how we weather the storms and take a long-term view on where we are?

Stephen Silcock: Yeah, thanks. You know sometimes it’s the best thing to do and I know it’s going to sound very boring, particularly to the Reddit crew who have made a lot of money with some very short term trades, but sometimes in these stomach-churning events, the best thing to do is actually nothing, Ayabonga, and it sounds quite contrary to what you should be doing, you should be reacting you think, but the best thing to do is allow compounding and time to do their work. You know compound interest favours those who start early in life and it’s never too late to start or too early and time is compounding’s magic because importance cannot be minimised. We can try time the market, we often get it very wrong and we just sometimes have to leave investments untouched. The best return is usually slow and steady. The problem is Ayabonga in these sort of environments, it’s very a motive and I think going back to my grandfather, one of his most successful attributes is that he remained very dispassionate about all the emotionally charged things that were happening day to day and this ultimately led him to coming out ahead of almost everybody else in the long term, but I think the two key points that I want to emphasise here are the long term side of things and then obviously the compounding.

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[08:30] The power of compounding returns

Ayabonga Cawe: And I guess a very good example of that would be a stock that many of us are quite familiar with, Apple. And then you know you make this example of you had invested in the IPO of Apple in December 1980, where would people be? You know where would one’s portfolio be, I guess in relation to its waiting of on Apple. If one had invested out in December 1980, I get a sense that you probably would have had to stomach a lot of share price falls as well.

Stephen Silcock: Yeah, that’s it’s an incredible point. So Apple obviously everyone knows and most households have some sort of Apple device. In them at the moment, IPo’ed in 1980 and if you had just stayed invested in Apple, you would have had an accumulative return of over 56,000% which just sounds mind-blowing but during the course of that journey 56,000%, you would also have to stomach share price falls of over 80% on two occasions, over 60% on two occasions and many more occasions where the share price fell over 50%. Panicking in these pullbacks would have been exactly the wrong thing to do. What you need to be doing in my opinion, and it is, as I say sometimes, very hard, because you need to be buying into great and growing companies at good prices. Don’t become impatient, don’t expect it to perform quickly. What you do need to do is understand that great companies can go through occasional periods of downturns of stagnation but that the best thing to do is to stay invested in these companies, with good management, with moat-like defences that have pricing power and that are going to provide you with exceptional long term returns.

Ayabonga Cawe: I guess Tebello let me bring you in here because I think Stephen’s making a very important point of the time horizon and the importance when we analyse that over a few decades of you know how certain asset allocation can give you the type of returns I mean if you think about 30-year return on the S&P 500. It think I saw in something that you wrote 850% which, if you factor in inflation, it’s probably you know just shy around 250% or so. So in a sense there’s this, you know, not withstanding all of the perceptions that you know equities and the last while haven’t performed as well, but if you take a longer-term view Tebello, does seem that there’s certainly I guess to give some bang for buck.

Tebello Rabele: Yeah Ayabonga I think you’ve got it spot on you know and I think what Steve mentioned there which is very crucial is the notion of instant gratification which is something that especially our generation isn’t immune to you know. How do you compromise your potential spending today and, you know, leave it for potential earnings and growth for tomorrow? And you know, if you have a look at the impacts, I mean Steve mentioned something very crucial, the power of compounding. Both negatively and positively, you know can impact you so if you are sort of taking on let’s say debt maybe. That’s negative compounding. It’s compounding that’s working against you. If you sort of then invest in your funds, so sacrificing your spend of today to sort of, you know, invest in your potential spending for tomorrow, you’re then investing in the positive effects of compounding which is something that a lot of times you know, we overlook until it’s too late so, you know, we investment professionals deal a lot with people who are retiring and it becomes such a very sensitive thing and if you get to a point where you need to retire and you haven’t made sufficient provisions and we all know the stats about you know retirement stats in this country, probably, you know, less than 5% of our population actually retires in a position where you know they can sustain their lives.

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[12:11] Understanding your investment needs at different life stages

Ayabonga Cawe: Tebello, it’s so very interesting that you mentioned time and patience as Stephen did earlier on. Also in relation to one’s work lifecycle because I do think that that introduces alongside the benefits of compounding over a long time horizon. This notion of risk, because the risk of somebody at the start of their career, a 24-year old, and we can build out an archetype of what that looks like versus somebody who’s much closer to you know retirement time, who’s potentially looking from the investment for periodic flows and streams rather than appreciative value over a long period of time. How does that influence where you know the allocated decisions go when by implication, I guess one’s investment philosophy if you can think about it in that sense?

Tebello Rabele: Yeah, I would say look, I don’t think any of us are immune to that I mean there’s a lot of competing interests for not just your money but for attention, your time as a young person. I myself you know you’re gathering assets on one end. You also need to be very careful what you consider assets and personal use assets because it’s a big difference you know, so you obviously try to set up your life, you’re trying to purchase property, you’re trying to do all of these things and that at the same time with all these things competing for your financial interests or your financial attention if you can call it that, you still have to think shucks, I need to save but you know, when you look at the impacts of compounding you know there’s various case studies where you know they will show you that someone started investing at the age of 18 and stopped at maybe like 28 and you know didn’t invest for a long time and versus someone who started 28 and invest double that amount and often you find that with the impacts of compounding, the person who started at 18, as little as it may have been or three times less as the equivalent would probably have you know much more in the 40 year team you know than the person who started 10 years later, that’s how powerful compounding is.

Stephen Silcock: Yeah sorry, just to add to what Tebs is saying there, so the risk, we tend to think of risk as a little bit of a fixed concept in other words that equities and stocks are riskier than cash and bonds but I think we need to also assess risk in combination with the time horizon, so what I mean by that and Tebs was alluding to it with regards to starting early. The earlier you start investing obviously the better and diversification is key but I think one of the most important decisions you make as an investor is the allocation between asset classes which are primarily stocks, bonds, property and cash and some of the recent reports that I’ve been reading have intimated that the younger generation has a disdain or a dislike for equities, particularly over cash and I can understand that in that people who’ve started investing 20 years ago, had that dotcom bubble impact, they had the GFC and then obviously had the pandemic which has impacted and you’ve had big drawdowns in the market but I think what has happened and you’ve seen that is that people that have become fearful of markets and have stayed in stayed in cash and I think that’s very, very risky. Actually being in cash is dangerous. Every single long-term research report that you’d read intimates that cash is the worst performing asset over almost all periods and that equities are certainly the best over longer periods but that doesn’t mean to say that diversification isn’t key, but the point that I’m trying to get across is that if you used to say that you’re 25 and saving for a time and that you had a 40 year time horizon, that drastically changes what is risky and what is safe in my opinion and that would mean that you can have quite a lot of equity exposure and ride through the cycle and added to that Ayabonga is that I think the changes in lifestyle and medicine has meant that we’re living longer and retiring later so that even a 40 year view looks quite conservative to me at these stages so avoid making decisions now I think, or making decisions that feel as if you’re on the verge of retirement when you’re young, as it could cost you huge amounts of wealth.

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[16:36] Recurring market themes and separating the signal from the noise

Ayabonga Cawe: Steve, you make a very interesting comparison and point about in the last I would say two decades, critical moments of crisis that we have had you know. Dotcom crash early 2000, the Global Financial Crisis around 2007/8 and now the onset of Covid-19 and it does seem as certainly that the frequency of many of these financial and capital market crises, is becoming I guess a lot shorter if you take just those last two decades or so. What are some of the things that you’ve picked up I mean as recurring themes and one I would think is you know massive liquidity in response to this crises if you think about the Global Financial Crisis and the current one in global markets and that of course has an implication for us here at home. What are some of the other things that you’ve seen?

Stephen Silcock: Yeah, that’s well I mean that’s the financial stability has largely been kept up by central banks and governments with, as you mentioned, this huge amount of stimulus and I think that we were on the precipice in 2008 so that was very interesting to see how governments and central banks worked together to bail our banks and institutions and the individual investor. What we are seeing is that information has become a lot more available to people. I think that the pullbacks in markets are going to be shorter than what we’ve being seeing in the past as the stimulus has come into effect and as I mentioned Ayabonga there’s a lot of cash still on the sidelines so people will use any pullbacks in the market I think to prop up their exposure to equities and bonds and property.

Ayabonga Cawe: You know Tebello, Stephen works a very important and interesting comment around the accessibility of information and often in the markets people say information is reflected in prices and it does seem all of us in our smart phones have some templates of the market information we used to read in the newspapers or the price information you used to read in the newspaper and also, we’ve seen this proliferation of platforms that allow people entry into the capital market. What suggestions would you have for me as a layperson who is being bombarded with all manner of platforms that are saying hey, here’s an avenue or a conduit to equity markets and other asset pluses, you know how do I separate I guess the wheat from chaff?

Tebello Rabele: Yeah, so I think in the investment community there’s a term of what they would call armchair investors, so what often happens is that there’s a silo that people normally form views in, so you’ll probably find that you there’s a specific channel that you watch or there’s a guy that you rate highly that sort of confirms your biases, you know whether it’s on radio, whether it’s on television or a newspaper writer and I would say what you need to, first of all in terms of a living body, you must understand that financial markets are probably the most sophisticated impressive things that, you know, have ever come to invention you know, you’ll understand it if you ever try price companies and private equity markets, so that voting proxy is a view and it’s very crucial in terms of the sentiment but the sentiment can also throw you astray. You basically trying to you know sort of channel or sort of ride the sentiments of you know a population of maybe close to three billion people that are voting daily on price. So what I would actually advise is say, inform your process or your decisions more around processes than you do around prices, so if you’re saying you’re taking on a value approach or if you employing a manager and you employing them for value or you employing them for growth style investing, assess them accordingly so you might judge a value manager and say, schucks they sold this company you know early, you know, whereas part of the metrics of what they meant to do, it probably was the right call, so I would say, you know, similar to what Stephen alluded to as well, view your risk according to your time horizon, that is very important. As a young person, I mean, if you know that in 45 years, equities (and this is just in South Africa), SA Equities gave you an annual return of about 19.6% versus inflation, you know that gave you 8.5 so at least you’ve got a real return you know of close to call it you know 10.5% whereas bonds or cash, cash gave you 10% so you’ve only really gotten a 2% real return and that’s for me, in my view, as an aspect of erosion. One thing that we need to also understand from equities is that you know the base of it is a risk-free return so ultimately managers are always trying to out-perform risk-free return, which essentially does sort of factor in inflation, so if you base your faith or your vote on the capacity of people to always wanting to achieve better, you know entrepreneurs are artists, so are investment managers. We always want to achieve better, we always want to create value and people are always aspiring to outperform their current situations and you putting your bet on the markets and I think that’s my view and I think in that respect I really do agree with Steve.

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[21:52] Explaining diversification

Ayabonga Cawe: Tebello, we’ve spoken I guess about diversification from an asset plus perspective but there’s also the other element if we are to think about it in a broader sense and try and, you know, get these risk adjusted returns that you’re referring to which is diversification across different sectors in the economy but also geographic diversification in a context where the markets also allow us opportunities to invest you know in other assets outside of South Africa.

Tebello Rabele: Yes, Ayabonga, I completely agree. So one thing that’s crucial to understand, South Africa is privileged to have a very strong financial system. In fact, some of our banks are the best rated banks globally and similar with our, you Know, our leaders so in terms of executives and companies and what that has sort of created is, I don’t want to call it myopic, but you know we sort of self, we view ourselves as self-sufficient and not too many times the people have to, I mean Steve will touch on the performance of local markets, you know in the early, late 90s headed towards the early 2000, which you know the JSE was the second at some point the second best performing market globally. However, what we need to remember is that South Africa as a market or you know our listed markets constitute less than you know 0.5% of the global economy, so if you investing 100% of your investable assets you know in South Africa, you’re basically placing 100% of your view on local markets, which constitute less than 0.5%, so I would definitely prioritise asset plus diversification, as well as geographic diversification, very crucial.

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[23:36] Investing on the JSE vs investing offshore

Ayabonga Cawe: Stephen, let me bring you back in here, I mean you were speaking about the Reddit crew earlier on and I think one of the things that has come with this sort of diffusion of technologies in this space is also sort of massive rises in volumes and the liquidity of particular types of, you know, investments that you know certain groups that ordinarily wouldn’t you know have invested in it, were it not for these digital advances. I’m quite interested I guess in hearing from you whether or not that’s introduced a certain type of short termism in the market place and what are the implications of that in a context in South Africa for instance where you have a declining base of listings, also in a context where many people are still looking to take their businesses to the capital markets as well.

Stephen Silcock: I actually, strangely enough, have some sympathy with the crew that have made a large amount of money through this short-term trading and all credit to them. My feeling is that you have to get in right at the bottom to be a big beneficiary of that. Not everyone can do that and some people have obviously lost a lot of money during the course of it. I might be boring and old fashioned, but as I touched on right at the beginning, Ayabonga, I just feel that you just need to be, I’m much more of a fundamentally driven investor. I’m not saying that it’s right or wrong but that’s certainly, that would during the course of history that’s what has proven to be the best source of action particularly in investing and equities. Coming back to South Africa, it is a concern to me that there are a number of companies delisting and as Tebello touched on, we are 0.4% of the globe now. I think we can make a lot of money in South Africa and I think that there’s particularly from a valuation perspective, South Africa’s looking extremely cheap, as are our emerging markets particularly relative to the States but it does concern me that we’re becoming smaller and smaller from a global perspective. We’re very well positioned to help, should our clients need offshore exposure and large portions of the portfolios do have exposure to the best companies and funds in the world.

Ayabonga Cawe: And I just, a question for the both of you, I mean, are you seeing any preference shifts in the not only just I guess the risk apetite, but even the allocative, you know, desires of some of those clients that you know have family or large individual clients as well, just across the board.

Tebello Rabele: Yeah, I’ll start dibs and then jump in. We certainly seeing a lot high networth private clients financially immigrate, in other words taking a large portion of their funds offshore. In order to gain exposure to the best companies in the world, but that doesn’t mean that you can’t make money in South Africa. Funnily enough from a risk perspective, we think that South Africa and emerging markets right now Ayabonga, are looking very attractive. You know at Investec the difference is, you know, we’re not a necessary entity that, you know, has global reach. We actually have global presence so you know we have specialists across the world which would be giving us insights into you know the different factors which are impacting markets in their respective jurisdictions, you know whether it’s in emerging markets or Switzerland, the UK, etc, you know, something that people often neglect is when you’re investing offshore and you’re investing in segregated items, you face risks where, you know, the tax implications upon death might be quite detrimental for intergenerational transfer. We’re also able to give you access to fund managers, you know which normally have a high barrier of entry by the way, who are the best fund managers in the world you know, some of our funds are top quartile percentage or top quartile performers since inception and you know they would give you you know access to the likes of your maybe your apps or your Amazons, your different fan stocks you know, with a theme which they sort of valuate or the metrics that they position, they fund managers who perform accordingly to, fund managers who in their respective jurisdictions, with SITUS as efficiency, tax efficiency, cost efficiency, you understand, so it’s not that much of a daunting task as well, to invest in offshore markets and lead us in the right in the right correct avenues.

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[28:05] Strategies for dealing with risk events

Ayabonga Cawe: And I guess Stephen, I mean, Tebello makes a very crucial point. There is this perception out there that there are massive barriers to entry into this globally diversified pool of capital and where potentially people could invest in line with their risk profile and pursue their intergenerational transfer of wealth now, the point on taxes, the point on you know the transfer from one generation to the next of those asset holdings I think is so important, at the current moment where we find ourselves, I don’t think it’s a tough sell for people to think about these things when Covid-19 is spilling over into successive risk events for families, death, retrenchment, short time, household distress. What message would you have for many of our listeners who you know without a shadow of a doubt of finding themselves in a context where many are very anxious about these risk events and the implications that these are going to have on the ability to pass on wealth from one generation to the next.

Stephen Silcock: It’s a great question Ayabonga. I think that you have to, you have to choose people that you trust to look after your wealth, with experience. I think that you have to be in it for the long term. I think that you have to have a portfolio, I always use the term “sleep easy portfolio”. I wouldn’t be taking any additional risk that causes you not to sleep well at night, whether it’s in an individual stock sector geography, I think you have to have diversification and ultimately I think Ayabonga I think you know at the end of the day, we have to make sure that the decisions that we make rest very easy on both your investment adviser shoulders and on your shoulders, and it’s vitally important that you get the risk profile, right at the beginning correct. From there we’ll be able to go on a journey with you which we hope will provide you not only with enough for retirement but to hand over significant wealth to your children.

Tebello Rabele: So I would really say that, you know, taking the advice of professionals, making sure that you, you plan in terms of your prioritising for your future is highly crucial,  me and my wife just recently got our first born son and my priority now is to make sure that I you know I’ve set up his tax free savings and I’m ensuring that you know from day 1, he’s already able to take advantage of compounding and even myself, I’m not as an investment professional, I’m not really a keen fan of single stock exposure so even for my son personally, I’m investing through fund managers myself so I’m asset allocating for my son in according to different diverse teams which I find prudent and hopefully by the time you know he’s 9, 10 years old you know and he’s exhausted that tax free savings amount or you know allocation or allowance that you get, you know he will already have a base which already starts compounding by the time he’s 10 years old and hopefully then I’ve sort of done, you know, what’s necessary as a parent to prepare my son for and his siblings in the future to come for the financial future that the need to be prepare for. You know, when we deal with retirement clients, you really then get to understand the sensitivity around preparing for your future. Nothing can ever prepare you for conversation where you sit with the person who’s worked incredibly hard, you know, their whole lives and you know at the point where they think they can retire, you then have to sort of break down the fact that you know, they’re not necessarily in a position to do so. It’s a soul crushing experience in fact, especially if someone has been, you know, doing the most for trying to provide for their families and all these competing interests that we spoke about earlier, eventually come to you know a crescendo at that time, so yeah there’s nothing more important than that, making the initial step. Try your best to squash your negative compounding contributors, so what does that mean is, if you’ve debt, try to your best to, you know, clear that as soon as possible because remember in the negative compound and if you getting charged prime let’s say for instance, that means you are going back that same snowball effect that we are talking about, where you could easily retire if you’re disciplined, is taking you away from that at an equal if not faster pace, so I would definitely say prioritise, keeping your expenses at bay as much as you can and focus more on squashing the negative compounding contributors. What you should rather try and do in terms of setting goals for yourself, if you have a certain taste for things, try and increase your capacity to earn, so invest in your specialties or you know, get a mentor, set goals. Personally, I’ve got various mentors, but my father is my life coach and every once in a while, whether it’s a year or two years, we sit and then we assess the goals and then I tell him you know what I’ve done, what I haven’t done and you know if you’re disciplined in that way you might find yourself in a position where you’ve invested the time to grow your income capacity in whatever front but don’t, you’ll never cheat, as a fact you’ll never cheat the game. You’ll never cheat the game so don’t think that you just going to, yes, sure you might make quick wins that’s very great if you do, but rather try and invest in a skill or if you know if you investing in a business that you will create your capacity to increase your earnings you know versus you know what you earning in your job or your skill set, whatever the case may be, rather let that be the guide of your increase in lifestyle versus necessities.

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[33:56] Closing remarks 

Ayabonga Cawe: Sure, sure, don’t try and game the game but also make sure that you expand what I’ll call the income side of that income statement and certainly hope that many of our listeners will continue to check in and benefit from the immeasurable wealth of experience that the pair of you have, Stephen Silcock and Tebello Rabele, thank you very much. Just a reminder, this is the first episode of the Wealth Creation Podcast series. So do stay tuned for more engaging conversations on Wealth Creation and our upcoming episodes we’ll touch on the basis of investing and discuss different asset pluses. If you’d like more information on some of the topics we’ve covered today or if you’d like to start your wealth creation, please reach out, your wealth manager or private banker. If you are an existing private bank client you can also access the Investec, My Investment Platform to start investing in local unit trusts. You can invest in these with reduced minimums of R1 000 per month. The views expressed in this episode are those of the contributors at the time of its publication and do not necessarily represent the views of Investec Wealth and Investment and should not be taken as financial or any other advice. Investec, Wealth and Investment, a division of Investec Securities Propriety Limited, a member of the JSE, Equity, Equity Derivatives, Currency Derivatives, Bond Derivatives and Interest Rate Derivatives Markets. An authorised financial service provider and a registered Credit provider.

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[00:00] Introduction of guests and topic

[03:39] Cutting through the jargon and understanding asset classes

[10:49] Some rules of thumb for asset allocation

[14:25] Property and alternative asset classes

[18:12] Points to consider as you approach retirement age

[20:21] Conclusion – love your future self

[00:00] Introduction of guests and topic

Ayabonga Cawe: Welcome back to another episode of our wealth creation series.  In this podcast, we talk about how to get the basics right.  We unpack the building blocks of your investment strategy and how cash can work for you and against you, as well as other alternative asset classes, such as property. And, joining me in this discussion is Kate Stannard and Paul McKeaveney from Investec Wealth & Investment.  Now, let me start off with, introducing Kate.  Kate is not only a financial adviser relationship manager, she's also a qualified level 1 kundalini yoga instructor.  She's a Neurozone certified coach and a meditation enthusiast, and she describes herself as somebody who's quite curious about the outer and inner worlds that shape her thinking.  We also have with us, Paul and he's a portfolio manager and fund manager.  And much like Kate, he's somebody who's constantly looking for different ways to stimulate his mind.  He keeps himself very busy with his two young boys, playing squash and golf, mountain biking and just generally having a good time.  Kate and Paul, thank you so much for joining us and I'm also quite interested just as we kick things off and I'll start with you Kate, how you got into investments.  I mean you could have gone into the world of meditation solely.  You know, the kundalini probably would've kept you busy as well but, you know, when did the investment bug bite you?

Kate Stannard:  I think for me growing up, my landscape was coloured by my parents getting divorced, just maybe as a personal thing, but my mom and a lot of other women of her generation were stay-at-home moms and I felt like they didn't necessarily have the skills to look after themselves financially.  Like that role had been performed by their husbands traditionally, and I really wanted to be a woman who looked after my own finances and could empower myself and maybe empower others. That was my initial driver, I guess, was to be financially secure. 

Ayabonga Cawe:  Paul, yah, I mean you could've stayed in the outdoors and I'm quite interested I guess in some of your own early experiences and how you were introduced um, to the world of markets and investments.  And yah, seemingly, you've also done some very fascinating and interesting things, travelling all over the world as well.

Paul McKeaveney: It’s interesting listening to Kate answering that question as well.  I remember, at quite a young age actually, my dad had all these tapes and books and these classes that he had taken on a Sunday morning on investing and it seemed to me that if you just listened to these tapes and read those books then you could make lots of money out of investments.  So, I tried to, as a youngster, to do some of those, you know, listen to some of those courses.  I made some investments myself that my dad helped me with and then I used to check the newspaper basically every day, get the unit trust prices and then plot them on my graph paper with a pen and like a pencil and paper on the inside of my cupboard to see how much money I was making or losing.  And, that worked quite well and then I got a bit more confident and I decided that it was time to pick a few companies to invest in.  So, I remember picking five shares and basically within a year, four of them were worth nothing again.  So, bit of a bit of a mixed bag – and we'll come back to some of the lessons that maybe we learned...that I learned from that experience – but really through you know, my parents getting me going at a young age.

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[03:39] Cutting through the jargon and understanding asset classes

Ayabonga Cawe:  You were fortunate in a way you know, to learn a lot of those lessons and even I guess, the big losses.  Um, but of course you would know a lot of people who aren't necessarily in financial services and I must say many of them, myself included, feel very overwhelmed by some of the jargon you know and some of the industry talk there.

Kate Stannard: No, I think that that's very true.  I think that it can be a very overwhelming industry.  Certainly, I have a lot of friends, um who kind of give me feedback and they're like Kate, it's a whole lot of boring old men, talking in jargon and I don't understand anything and I'm scared to ask questions…you know, I think that Paul is luckily neither old, nor boring.  I really empathise with that feeling because um, I kind of liken it to taking my car for a service.  I'm really not clued up about the inner workings of a car and I feel very vulnerable when I take my car for a service because I don't know if my oil needs changing or my shock absorbers need changing.  I'm really trusting that the person that I take my car to is a professional, but I recently, for example, learnt the other day, that you should change your shock absorbers like every 90,000km. And I thought that was a really useful rule of thumb and I feel like we could do that today perhaps with asset classes which is what we wanted to discuss today and maybe just go through some rules of thumb.  Which might help lay people or people who are not in financial services, navigate their life choices and their financial goals, more meaningfully.  So, I don't know whether ... Paul, do you wanna just kick off and share kind of basically what the building blocks of investments are?  What are asset classes? 

Paul McKeaveney:  So, asset classes, it's exactly as you said, are the building blocks of your investment strategy.  At the very simplest level, the main ones would be cash, bonds, equities and property.  Each of these asset classes have very distinct attributes in terms of how they behave and crucially, and we'll come back to this a bit later on, are accessible for the average investor.  I guess from a property perspective you may be saying well, not all properties are accessible for the average investor and I guess that is depending on how big a house you're looking to buy but generally speaking, cash, bonds and equities, would be accessible.  Cash is probably the easiest asset class to understand because we all have a lot of experience with cash and cash is very predictable.  It's basically earning interests on funds on-deposit with the bank.  You know what interest rate you earn and you know it's going to be there when you need it.

Ayabonga Cawe: Many of us are familiar with cash because yes, we have it in our, you know wallets in many instances and it sounds great, it sounds safe, predictable.  Why don't we just all put all of the money in the cash? 

Paul McKeaveney: So, the silent assassin for cash is inflation.  Inflation is something we're all aware of on a day-to-day basis and we know that through looking at what our shopping baskets costs, what school fees are, what our medical aid fees are…I mean, even electricity prices at the moment are catching a lot of our eyes, and petrol prices.  But sometimes we don't make the connection between what inflation is doing to our savings, especially when we invest in cash.  So, using a very simple example.  If the interest rate on your R100 cash deposit is say 4% and inflation is currently 5%, your savings are actually going backwards in a sense because in a year's time, the prices of the groceries that you want to buy today will be R5 more expensive, while that R100 will only have earned an extra R4 of interest.  So, you effectively short R1.  And that's before tax as well, which we can maybe come and touch on a bit later.  So, you know cash is not a good strategy for long-term wealth creation and inflation is something that's fighting under the surface against you all the time. 

Ayabonga Cawe: And, what are some of the other alternatives?  I mean, you'd mentioned earlier on you know two other asset classes in the form of bonds and property as well.  Um, what's the balance, ideally one should strike there and maybe we can start off with bonds? 

Paul McKeaveney: Okay.  So, now we're getting a little bit more exciting.  So, we've spoken about cash, so let's start with bonds first and then we'll come to equities.  When you invest in a bond, you're effectively lending money to a government or a company who will pay you an interest at an agreed rate and then return your original investment back to you in a certain number of years.  So, the interest rate you earn on a bond, is higher than the cash deposit because you are lending money for a longer period of time and you are taking risk that the company or even the government – if you think about Argentina here for example – may not be able to repay you in full, in case something goes wrong.  In the more highly rated areas of the bond market, these risks are very low, but defaults do occur.  Inflation is also a bond investment's worst enemy although if you are earning a higher rate of interest than you do on cash but because you agree on that fixed rate for a longer period of time, if inflation goes up during that period, the value of the interest you receive as well as the capital that is returned to you, will buy less because it's worth less in real terms.

Ayabonga Cawe:  And, I find that quite interesting, I mean, you say inflation is also the biggest enemy of the bond market.  Many investors might be asking well, what other options do I have to hedge against that particular risk and equities I guess might also be a compelling proposition if we're interested in building long-term wealth? 

Paul McKeaveney:   100%.  So, I guess you know, now we arrive at our...probably our most exciting, but also the most volatile, and volatile is a word that you know the community use to describe something where the prices is going up and down all the time.  So, we mentioned that cash and bonds tend to be quite stable.  If you're looking at your share portfolio every day, you'll see that the prices are moving around all the time.  So, that's generally what we mean by volatile.  Um, but the reason that equity is the most important of all the investment options for investors looking to build long-term wealth, is because they've easily produced the highest returns over extended periods of time.  These high levels of returns over the long term are why they are an essential component of any long-term wealth creation strategy.  What are they?  What is an equity or a share?  It's effectively an ownership stake in a business and as a shareholder or an investor in a company, you're sharing the fortunes of that company which are reflected in the profits that, that company makes and hopefully grow, over time.  Equities or shares can also pay you income in the form of a dividend, which is paid out of their profits.  The reason that inflation is less of an issue for an equity investment, is that whatever service or product that the company provides, would generally tend to be linked to inflation anyway.  If you think of a simple example of a retailer.  You know, if the costs of the products that they sell to you go up for whatever reason, um they will tend to raise the selling prices of those products to you as well.  So, equities will tend to provide better protection against inflation and much better growth than cash or bonds over time, as our listeners of Episode 1 um would know, given it was all about the powers of compounding.  

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[10:49] Some rules of thumb for asset allocation 

Ayabonga Cawe: Quite an interesting prospect and I want us to maybe take a look at another asset class in the form of property, but before we do that, Kate I wanna bring you in here because earlier on you spoke about rules of thumb, you know, heuristics that we can apply. So that the question that we ask isn't really about I guess what asset class is suitable for me, but rather, faced with whatever risk event in one's financial life, what type of asset allocation or mix is needed to make sure that those risk events don't hit you as hard as I guess many people have seen during this pandemic? 

Kate Stannard: I think that clients don't normally think of what asset class is right for me, but they think of, will I be okay in an emergency and do I have enough to retire on or what do I need to invest in to be financially free?  I think those are the ways in which we obviously think about our own finances and maybe some of the rules of thumb are, I believe everybody should have an emergency fund.  I think Covid has really shown how critical that is.  You know, life happens.  Your laptop breaks.  You have to take a salary cut because of Covid.  You lose your job or whatever the case may be.  And, those kinds of emergency savings really create a buffer around you that makes you feel safe and that feeling of safety is quite expansive and that kind of part of your financial world for me should be in cash.  It should be safe and stable and not subject to volatility because your time frame is quite short.  You may need it for an emergency.  And then I think for building longer-term wealth for becoming financially free as I like to call it rather than retiring, I think that retiring is kind of an outdated concept.  There you need ...There you've got a longer-term horizon for investment and you can afford to take on volatility, as Paul discussed, and there you should really be taking on more of the equity-type investments to really achieve those financial goals, those long-term goals. 

Ayabonga Cawe: So, Paul I guess, you know Kate's, already mentioned the importance of um, at whatever life stage somebody might be, the critical importance of having a corresponding asset class with a certain risk profile that can contribute to building long-term wealth.  What are some of these, I guess, asset classes that could be linked to some of these goals and different life stages? 

Paul McKeaveney:  I guess the easiest way to think about them is that they each do something very different for very different people in helping you to achieve your financial goals.  Ranging from the safest but least exciting from a potential return perspective, which is cash as we've discussed, to potentially the highest-returning but also the riskiest asset class, which would be equities.  Everyone should hold a combination of all of them because they will each perform differently at different stages of your investment lifestyle and holding a mixture helps to smooth the investment journey out while meeting the broad objectives of income, security and growth as Kate has touched on.  So, for example, you know a young person who has a long time to save for financial freedom, can afford to take on riskier asset classes like equities because that has historically been the most probable way to maximise long-term wealth creation, but on the other hand, someone that needs to draw an income from their saved assets who may not have a long-term investment horizon, may need to shift some of their savings into bonds and cash.  And, if you have a specific spending requirement in the short term, like a deposit for a house you know, then that money should be kept in cash and not invested in the equity market. 

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[14:25] Property and alternative asset classes

Ayabonga Cawe: And, what about property?  Um, I mean I'd also think there would be other asset classes. You often hear people talking about fine art and wine and all of those other nice things.

Paul McKeaveney: We have only chatted about the most basic of asset classes so far, being cash, bonds and equities and there are absolutely a few more that we could discuss and maybe you know we can do another podcast in the series a bit later on, going into a little bit more detail of other asset classes, in inverted commas.  Though property I guess, would be one that most of us would have engaged with at some stage or are thinking about getting involved with.  Property has a very long-term track record. So, we understand what the drivers of property prices are. We know that the returns are typically linked to inflation, which makes sense when you think about how rental escalations work and how properties are valued.  And, as you’ve said you know, much more exciting candidates for discussion could also include commodities like gold, wine, art, vintage cars, stamps, crypto, you know there's a wide range of candidates for asset classes out there.

But a very important consideration when we discuss these different, other asset classes, is liquidity. By liquidity, we generally mean, how easily can a public investor access these asset classes? And investments like art, wine and stamps, you know, despite their strong inflation-beating track records, are not easily accessible for the average investor. And another thing to consider is understanding how those asset classes behave relative to the other asset classes we’ve spoken about. Ideally we’re looking for an asset class to behave distinctly to each other.

Ayabonga Cawe: And, I guess the other consideration Kate, would also be you know especially insofar as retirement is concerned and the timing of the investments as we’ve spoken about, would be potentially maybe you know what implications this would have at different life stages.  So, you probably don't want to be taking crypto um, you know, a few years from your retirement age?

Kate Stannard: Look, I have to say I don't think I'm a crypto whiz.  Certainly, I'm still kind of getting my head around it as an asset class, truthfully.  But yes, I think one of the things that we haven't really discussed is liquidity, which I think is crucial with regards to any form of investment.  So, whilst you know it might be wonderful for example to buy a beautiful piece of art, it's only worthwhile as an asset if you can sell it again.  And you know I think that there is a certain place for certain types of asset classes throughout the lifestyle journey and I think liquidity is a crucial part of that.  It might be worth talking about some of the things that we see in our industry where I feel like people make mistakes will let them down...will let themselves down with their asset class choices.  Paul, I'm sure you've got some.  Probably, my most obvious one is I see a lot of young people being afraid of investing in equities because they're nervous of volatility.  And, volatility is really just volatility.  It's just going up and down, but that can feel very scary and what I tend to see as a mistake for…especially for younger people is that they don't invest past cash at a time where they really have time on their side.  They've got the benefit of compounding as we discussed in our first episode and they've got that long-term time horizon where they really can afford to take on that price movement but they're afraid, and I get that, but for me that's a major missed opportunity um in one's financial well-being and health.  Paul, what do you think?  What do you see? 

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[18:12] Points to consider as you approach retirement age

Paul McKeaveney:  I look after a number of retirement funds, um and what I see also quite a big issue in the industry, is that, as people start approaching you know that age of 55, they start to shift aggressively out of their growth assets which are those equities that we spoke about earlier and moving quite quickly into cash and bonds, but the fact is that you know life expectancy is obviously depending on you know your health and you know all those sorts of things, can be...You can still have 20+ years of an investment horizon to still be, um…and living expenses to have to worry about.  So, shifting too quickly into these low-returning, safer, in inverted commas, asset classes, can actually be quite unsafe in the longer term because you're giving up that still quite a long-term investment horizon, depending obviously on your health and lifestyle.  That's a big one.

Kate Stannard: Yah.  And, I think that people are living longer.  I mean, the reality is that we are.  Our lifespans have increased dramatically over the last 100 years and for me, that's a major risk that you mentioned.  And, I think we can mitigate it by moving some proceeds into cash for short-term liquidity needs and income or bonds and then having the rest of the portfolio providing growth so that you're not drawing into the volatility but you're allowing the volatility to work for you.

Paul McKeaveney:  Exactly.  I mean, I think sometimes we talk about goal-based investing and you know you can possibly split out those allocations separately.  So, you acknowledge that your equities are your growth assets and you make sure that you've got enough for your income and your rainy-day savings.  And, you don't mix them altogether because I think sometimes that's where the volatility makes people nervous because if they look at just one portfolio in its entirety, it's obviously gonna be moving up and down. But if you separate those components out so that your cash is nice and stable, that the bonds are delivering your income and your equities are all over the show, but they're still gonna provide you with the growth over that long term. 

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[20:21] Conclusion – love your future self

Ayabonga Cawe: I think you know, Kate and Paul, if there's any message um that one you know takes from this discussion, is the need to strike that balance.  To balance out you know your choice of asset classes informed by whatever liquidity needs or preferences you might have that correspond with the life stage you are at and also, some of the potential or latent risks that one might face.  And so, it's about balancing all of these considerations and I think as we wrap up, that for me is the big lesson. But, from the pair of you and maybe Kate we'll start off with you, any last big message that you might want to send to many of the investors who are listening in to this platform.  What would that message be and similarly to you as well Paul?

Kate Stannard: So, I think for me it would be: start early.  I mean I have a running dialogue with a young girl who is kind of 18, 19 and I'm kind of teaching her financial health on the side and you know I said to her start even if you've got short-term requirements.  Put a little bit in a unit trust and start early because firstly you start to normalise for example, volatility or movement.  It becomes normal for you and you grow in confidence.  And also, you have that long-term time horizon.  I really have this kind of view that we need to balance future love and present love.  I feel like all of us are pretty good at loving our present selves, but we need to also love our future selves and for me loving our future selves is paying attention to our finances early.

Ayabonga Cawe: Thank you so much for that.  Paul?

Paul McKeaveney:  Can I steal Kate's answer?

Ayabonga Cawe: Potentially. Potentially. I like that future love…Present love.  I like that.

Paul McKeaveney:  She's spot on. You can't start early enough.  I would just add to that, that everybody's circumstances are different, and there's no one-size-fits-all approach.  And I think that those conversations are very important to have with your wealth manager or your financial adviser around, what is the most appropriate mix of asset classes depending on your circumstances.  You can't just pull a book off the shelf and it's gonna tell you exactly what you need to do.  It's a very human conversation that has to be had, based on you.  And I guess that would be my number one take-away.

Ayabonga Cawe: Kate and Paul, thank you very much, for joining us for this lively discussion.  That was Kate Stannard and Paul McKeaveney from Investec Wealth & Investment. Bringing to us another episode of our episodes in our wealth creation series, where we took a look at the building blocks of one's investment strategy and, the balance of the choices around asset classes.  And also a discussion on some alternative asset classes as well. Until we meet again. Just a reminder to listen to the first episode of this series if you may have missed it and please stay tuned for more engaging conversations on wealth creation.  In our upcoming episode, we'll speak on the importance of the global economy and taking a global view to investing.  If you'd like more information on some of the topics we've covered today or if you'd like to start your wealth creation journey, please reach out to a wealth manager or a private banker.  If you're an existing private bank client, you can also access the Investec My Investments Platform to start investing in local unit trusts with reduced minimums of R1000 per month. 

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[00:00] Introduction of guests and topic

[04:43] Understanding the yield curve in different markets

[12:59] Global supply chains and why South Africa is a high beta emerging market

[17:09] What shapes asset allocation decisions

[20:25] The impact of inflation expectations

[22:46] Gen Z, meme stocks, NFTs and the democratisation of investing

[27:31] What working from home and other cultural shifts mean

[31:52] Closing remarks

[00:00] Introduction of guests and topic

Ayabonga Cawe: In this third instalment of the wealth creation podcast series, we take a global view to investing. Now you'll recall in the first two episodes, we unpacked the basics of investing. We took you through the building blocks of a successful investment portfolio and in this episode, we delve a bit deeper and look at the impact that the economy has on markets. Now we're going to talk about the connection between the global and the South African economy, and the impact that that has on market outcomes and asset values. We'll also touch on a topic that I'm sure all of you have been anticipating, and that is investing in assets such as mean stocks, NTFs and cryptocurrency and we'll also take a look at how technology and lower costs have made investing in multiple asset classes much more accessible. Now here to simplify all of this, I'm joined by Zenkosi Dyomfana, who's an investment manager, and Chris Holdsworth, chief investment strategist at Investec Wealth & Investment. Zenkosi describes herself as having an inquisitive mind and has an approach to life that is a continuous voyage of discovery. She also has a passion for financial markets and is an eternal optimist; although she also describes herself as a nonconformist and at times, a sceptic, and we'll get into a bit of that in the next - in the next few seconds. Chris is an avid trail runner, but he does admit that he’s kind of fallen off the bandwagon since COVID-19, and he used to enjoy traveling too, but since the onset of COVID-19, he’s taken more of an interest in reading, and has done quite a few road trips domestically instead of traveling abroad. Zenkosi, let me kick things off with you.  And I'm keen to hear from you, when you say you're a nonconformist, and a bit of a sceptic, what do you mean?

Zenkosi Dyomfana: Thanks for that intro Aya. What I mean by being a nonconformist, I you know, there's a lot of opinions and comments in the financial markets from very clever people, but it can be a lot of noise as well. So, being a nonconformist, for me, it helps me resist the herd. Instead of going with the crowd, you establish your own views and your own opinions, and then you make decisions from, you know, instead of just going with the crowd. And also, scepticism protects me from distractions caused by again, listening to predictions by gurus and other prominent forecasters, but just like having an independent mind and-and think… But of course, you need to pay attention to what those clever people are saying.

Ayabonga Cawe: Ja, and I guess clever people like yourself. You know, I remember being taught at school that, markets over time, follow a random walk. And I always wonder how much of it is random and how much of it is a bit of an art or a science? And Chris, you know quite a bit about that. I mean, I guess when you're not out on the trail or out on the road, you're also reading up on global markets and how market outcomes are influencing the economy? Why does the broader economy matter for how markets perform and I guess, movements and asset values?

Chris Holdsworth: I think there-there’s a key fundamental point that-that needs to be established when linking global markets to the-the global economy. And-and that is what-what matters for companies over the short term is earnings and dividends, but what matters for share prices, ultimately, is discounting future earnings and dividends back to this point in time. So it's a question around how much are companies going to be able to generate from an earnings and dividends perspective over time, and then at what rate do you discount them back. And for those two things, in effect, you need to have a view on the economy, because when you've got a strong economy, companies will be able to generate more revenue, and potentially in that environment more earnings and return those earnings to shareholders through dividends, but you also want to discount the future dividends and earnings at a particular interest rate. So you need to have a view on the economy, but you also need to have a view, at what discount should you apply. If a company's forecasts are particularly risky, if you can attach very little confidence to forecasts, you're going to discount at a higher rate. And if you have great faith, and if a company is particularly stable, they're not volatile, you can discount at a lower rate because you're more confident about what will occur. So you need to have a view on the economy activity and a discount rate. And broadly, for the entire market, I mean we’re not looking at individual companies, we will then say, right, we need to have a view on where economic activity is going. And then we'll look at the broad discount rate, the risk-free rate, your government 10-year bond yield. And we’ll add a premium to that, and that will give us an idea as to what we should discount. And then we can say is the market currently at fair value, was it cheap or was it expensive, based on an anchor point, which would be established using longer term economic forecasts and an appropriate discount rate. 

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[04:43] Understanding the yield curve in different markets

Ayabonga Cawe: I remember, Zen, in finance class, they used to always talk about, you know, what Chris just mentioned, which is the, a 10-year sovereign bond and the yields on that, and how if you mapped out a yield curve? I found it very confusing at that point in time, but I've later come to understand that I guess the shape of the yield curve is rather indicative of where we are in the business cycle, where we potentially might be. Just tell us how that works because I must say, I mean, it took me quite, a long time to wrap my head around that.

Zenkosi Dyomfana: You’re spot on Aya. That’s it. So, you know, the yield curve can be and has been a great economic and inflation predictor, but, let me start off by explaining the yield curve Aya. So, it is a graphical representation of the yields available for bonds of equal credit quality, but different maturity dates. So it reflects where short rates are expected to go, since long rates and average short rates, but, to put it another way, so long-term lending should give you the same returns as short-term lending rolled over. And so we rely on that equilibrium for our forecast. The way I like to think of it Aya, is that the yield curve is a proxy for investor sentiment on the direction of the economy and how they feel about risk.  So what we look at is the shape of the yield curve.  I mean, I'll spare our audience the technical aspects, and just touch on the most two important shapes, but let me just start off about the, the normal yield curve. So the normal yield curve, it's like short term bonds, carry lower yields [to] reflect the fact that investors’ money is at less risk relative to long term bonds, which demand higher yields for their long commitment, right? This type of yield curve, it implies a stable economic conditions, and then you have the steep yield curve that has a similar shape to your normal yield curve, but the spread between short-term rates and long-term rates gets wider, and this type of curve implies a growing economy. And then the flat yield curve, this one implies an uncertain economic situation. Lastly, we have the inverted yield curve. It slopes downward where short-term rates exceed long-term rates. It sounds counter-intuitive, right? I mean, why would long-term investors take on more risk, settle for lower rewards than short term investors? Well, when those long-term investors believe that this is their last chance to lock in current rates before they fall even lower, they become less demanding of lenders. So it implies a severe economic slowdown. It’s signalling, you know, trouble ahead. [It] definitely signals a severe economic slowdown. Chris will tell you Aya, you know, as the oldest in the room, and having lived through a couple of cycles, that yield curves have reliably preceded economic cycles. So for, for example, October 2007, the yield curve flattened out, and a global recession followed. This was during the 2007/2008 financial crisis where financial engineering, to be frank, got ahead of the market. And then in late 2008, the curve became steep, which accurately, again, indicated a growth phase of the economy following the Fed’s easing of the money of the money supply. But looking at our local markets, the current yield curve … is extremely steep, and it's difficult to justify. It implies doubling of short-term interest rates in the next three years. From where we are sitting, it does not look like the South African economy will grow enough to justify those rates, or even inflation will be high enough. And so, as an investor, you can take a view against that and in the US, the current yield is steep. So the one month yield is at 0.03 and the ten year is 1.3 which signals higher growth, and that investors expecting a rising inflation to come. We also tracked the US 10-year yield, which implies what market participants expect inflation to be in the next 10 years on average. For example, high inflation expectations translate to high yield. Why does this matter? Well, higher than expected inflation is negative for risk assets, including equities. So as an investor, you should keep an eye on the bond market.

Ayabonga Cawe: Zen I find that so interesting, because I guess what you're suggesting is that the shape of the yield curve is not only indicative of the expectations of market actors, but also might give us a glimpse into the crystal ball of the future in terms of how those expectations will play themselves out, and also, I guess, the comparison between the risk expectations now in the current moment and of course, in the future in relation to people putting their money down into the bonds. Now you're signalling there to Chris, and I guess we call him the chief, because I guess, he's seen a lot these ebbs and flows in the business cycle over the last while. I would think that Chris, you know, there would be a lot of these variables and Zen has started to mention some of them, you know, inflationary expectations here at home, but also abroad. Um but also, I guess there would be product prices, and I'm thinking here, commodity prices, terms of trade, but also other, you know, regulatory or policy actions by the Fed, by the central bank here in South Africa, that would really influence the expectations that Zen has been speaking about.

Chris Holdsworth: Absolutely. If we simplify it to the most elegant model for South Africa, we are a small, open economy. We are completely dependent on global fortunes. So what typically happens in South Africa’s cases is that, there’s recession caused by one factor or another, and for us to get out of that recession, we require global stimulus and an increase in commodity prices. And then what typically happens, commodity prices strengthen, the rand then subsequently strengthens. We land up with lower inflation in South Africa. Space for a cut from the central bank, and then we land up with SA Inc, consumers doing better. So that’s a transition from high commodity prices ultimately, to an improvement in domestic consumption. And then at some point down the line, we land up with the next recession caused by, again, a myriad of factors, and then we land up with commodities rescuing us again, and then the cycle continues. So for us, broadly speaking, very simplistically speaking, the key question always is where are we in that cycle? And where we are at the moment is, we've recently experienced a massive boom in commodity prices. And it just so happens to be the case that it’s commodities that South Africa exports. Very beneficial to us, so our trade surplus is massive. We've never seen a 12-month trade surplus like we've currently got. It’s around 8% of GDP, which is huge as a percentage of GDP. That's the highest that we've seen since the late eighties, so post democracy. We haven’t seen this in South Africa. To put that further into context, our net exports as a percentage of GDP at the moment, are not materially different from what Saudi Arabia was printing pre-COVID. So we are exporting in a way that Saudi Arabia did before. And if this persists for a long time, it matters immensely for the South African economy. It means that we get a supported currency. We land up with tax revenue surprising an upside, because these miners will pay more tax, and then you'll end up with more revenue for the state, which they can then use to either reduce taxes or reduce borrowing. And then that leads back to the long bond yield that Zen was talking about. And if it is the case that, this, last for sufficiently long, government finances improve, then our long bond yield comes down, and that's the reference rate for all discounting in South Africa, so you start to discount at a low rate. It's very beneficial for all equities, not just resource companies. So commodities are a key leading indicator for the broad economy, and should they remain elevated for sufficient amount of time, it's very helpful for the broad essay market, not just resource stocks. 

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[12:59] Global supply chains and why South Africa is a high beta emerging market

Ayabonga Cawe: Chris, how much of that more favourable terms of trade has something to do with the global supply chain challenges that we've seen? I mean, we see it in the semiconductor in the chip industry at the moment. Um and also the challenges, you know, in the, I guess, the freight and logistics sector, especially the export focused ones out in China, initially due to the Covid-19 outbreak, and we're seeing more recently, now the typhoon.

Chris Holdsworth: A lot of it has to do with the stimulus in China in particular. So they experienced a recession, just like the rest of the globe did, and-and they open their stimulus taps completely and as a result, they started to suck in a lot of commodities, and the rest of the world provided, but as you said, there are supply chain issues, so the-the price of those goods started to go up. And if we look at our exports, we're not exporting any more than we did before. It really is simply the case [that] the price has gone up. So, these supply chain disruptions in some way have been quite helpful to South Africa so far. There will be knock on consequences as well. We're struggling to import goods as well, but the stuff that we export is going up in prices and so there's a profit that is now coming through to certain parts of our economy, which is very helpful for the broader economy. 

Ayabonga Cawe: Zen, let me bring you in here, because I think the picture the chief is painting here is a very interesting one that suggests that you would have across the business cycle, some volatility in not just asset values, but volatility in the real economy that is determined. We’ve spoken about commodity prices, but of course there would be other challenges such as the, you know, global supply chain challenges that would influence that. You referred to South Africa as a high-beta emerging market. Now, maybe just explain that for us. What do you mean by that, and more importantly, what implications does that have for my money? 

Zenkosi Dyomfana: Just to, first off, start talking about the relationship between the South African economy and the global economy. So, what seems to be quite a consistent relationship between US dollar weakness, and emerging market currencies and market strength. Those are positively correlated just to start there. So the link between capital flows out of the US into emerging markets and bonds is good for EM currencies, including the rand and is particularly helpful for pure essay plays. You know, this will be your Mr Price, your Distell, your Bidvest and the likes because it helps hold down inflation and interest rates. So while our market will move in line with emerging markets, at times you observe a unique relationship in the JSE. You know, when you look at the performance of the JSE measured in dollars, the exchange value of the rand will influence that performance. We observe a different picture.  When you look at the performance of the JSE measured in rands, net-net, the impact is diffused, by the composition of the JSE. What do I mean by that? Rand plays tend to be hurt by rand weakness and rand hedges, these are your British American Tobacco, Richemont, Naspers and the likes, these benefit from rand weakness for South African specific reasons, as an example, as in Nenegate. As such, Professor Brian Kantor, our colleague and my mentor likes to refer to them as South African hedges rather than rand hedges. I'll give another example Aya. The rand has been the best performing emerging currency year to date on South African specific reasons, such as the tailwind that Chris touched on earlier. You know, the high commodity prices being boosted by the buoyant global demand, and of course, that's boosting mining activity, and also the South African GDP data, that's been a surprising upside. And so the impact of the dollar on the JSE in rand terms and because of JSE in dollars is different. Another interesting aspect, which now attaches directly to your question is that the South African market is the high beta emerging market, so the rand in the JSE market perform worse when global risk elevated and better than emerging market peers when those risks decline. And this is partly because the rand, is among the highly liquid emerging market currencies. 

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[17:09] What shapes asset allocation decisions

Ayabonga Cawe: And Chris, I'm quite interested in the picture that both you and Zen are painting for us, and how that informs or gives us some tools to make an objective assessment of the outlook of the economy. And based on that, make not only asset allocation, but I guess portfolio decisions as well.

Chris Holdsworth: Fortunately here, we are able to establish what consensus forecasts are, and we can then try to figure out, are those reasonable or not and where is the error likely to lie? So as an example, I mentioned early on that the trade surplus that South Africa’s got at the moment, the record-breaking trade surplus, that ultimately means a current account surplus as well. The consensus forecast is that it’s going to disappear quite quickly and within a year or so we're going to go back to a trade deficit. So if it is the case the commodity prices persist at current levels for the not too distant future, we know that the market has got it wrong. That's not what is widely expected. And should that be the case, government revenue will continue to surprise on the upside, and I'll come back to that point shortly, but profits will surprise on the upside and discount rates will surprise on the downside. So it would be very helpful for our equity market in aggregate. So what do we need to keep an eye on? Quite simply, at this point, we need to keep an eye on commodity prices. There are a few other factors at play, which in many cases we can't simply ignore, like our ability to generate electricity as an example, but the key factor to keep an eye on at the moment for our market in general, is simply commodity prices. Now, in terms of government revenue, there too we've got consensus forecasts, and we've got forecasts from the state as well. Every February they put out their budget, and in November, they put out the Medium-Term Budget Policy Statement. And, from that, we can see expectations with regards to government revenue, and government debt. And from that we can calculate expected debt-to-GDP. Now that's a key metric. It's what the rating agencies refer to.  It's what investors in general refer to when evaluating the security of our government debt. So you've got lower debt-to-GDP if you're an emerging market, then you will land up with a better rating; high debt-to-GDP, and you will be penalised. And so when government revenue surprises an upside like it is at the moment, and we think at this point, government revenue for the financial year, could well be more than R150 billion above the February forecast, then in that environment, government debt is lower, and then in that environment debt to GDP is low.  And based on our estimate, at this point, the current debt-to-GDP trajectory for the state is not materially different from the pre-COVID debt-to-GDP trajectory, which is nearly unique amongst countries. I mean, we've seen countries around the world throw debt at the problem that they needed to and as a result they borrowed and the debt-to-GDP for a number of countries is worse than it was before, but for us not, but that's not what's reflected in the market. And so there does seem to be some degree of pessimism. There's an expectation that this trade surplus is going to disappear quite quickly. The excess profits are not going to be persistent, that the debt to GDP trajectory will increase and materially worse relative to what we think is a reasonable current forecast. And so for us, we think that there is some degree of margin safety in a number of asset classes in SA. And that’s broadly speaking how we link an economic outlook to evaluation of various asset classes.

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[20:25] The impact of inflation expectations

Ayabonga Cawe: I guess the other dimension, Chris, that I'd be interested in, especially if I'm a long-term investor, is what that will have as an impact on inflationary expectations, because we know that inflation then erodes the value of a rand today, compared to the value of around in 2035. How will all of these real economy considerations that you've just mentioned, have an implication on inflationary expectations and by extension, I guess, the erosion or lack thereof of value?

Chris Holdsworth: The first thing we need, to start off with, is by humbly recognising that inflation is something that is very difficult to forecast. We, there are a number of economists over time that have said what looked to be very reasonable models, but nonetheless, we find that there's a huge margin of error around those models. You can look at central banks for pretty much any country around the world, and then you go and get the little, the shape around their central forecast where they account for variability and 95% confidence interval, and you'd be surprised at how wide that interval is. So the first point is, we have a little ability to precisely forecast inflation over anything longer than the very shortest time horizon, but notwithstanding that, we must accept at the same time that in the environment, we've got a central bank, which targets inflation, inflation matters a lot. It matters A, for the reasons you’ve mentioned, but B, because you get a policy response from the central bank. If inflation is high, surprisingly high, then you get a hike, and if it's low, then potentially you get some form of a cut. So despite the fact that it's difficult to forecast, we nonetheless need to be able to provide a forecast. And at the moment, we think that inflation expectations in South Africa are too low over the coming 12 months. We don't expect that inflation will breach 6%, we think it'll be at and around 5%. The general market views is that it will be around four. So we’re a bit higher, but not high enough to suggest that the central bank should aggressively hike. So we think that there will likely be one 25 basis point hike over the coming 12 months, and then we’re quite different from the market. The market says inflation is going to be well behaved, but the central bank’s going to hike rates by a hundred basis points anyhow, and that's something that we simply can't figure out. So, again, this does appear to be an excessive amount of negativity, and even though we forecast inflation to be higher than the market, we don't think the market's going to hike anywhere near as aggressively, as is generally perceived at this point.

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[22:46] Gen Z, meme stocks, NFTs and the democratisation of investing

Ayabonga Cawe: Thank you very much for that, Chris. And what I like about this discussion is the interface, I guess, between micro-level real economy considerations, and the broader macro-economic environment that we faced with. And the other element of that is what some might argue, Zen, is the democratisation of investing. If you were wanting to invest around the time when I was born in the early 90s, you probably would have had to have a brokerage account. You probably would have had to have a significant amount of investable capital to be able to access the investment space. It seems a lot has happened since, but it's also moved in tandem with some generational shifts that are quite interesting.

Zenkosi Dyomfana: See Aya, this is a theme I find quite interest, which is the democratisation of investing.  I mean, we’ve all seen the rise in retail investing, in particular, millennials and Gen Z investing. So the Robin Hood crowd, you know, coupled with the Reddit rebellion has made day trading both profitable and fashionable again, but very little attention is paid here to the history of speculative episodes like these. The skyrocketing popularity of meme stocks among millennials, creation of cryptocurrencies, NFTs – I mean NFTs Aya can really be anything digital such as drawings, music. But a lot of the current excitement is around using technology to sell that digital art. And like I say, as a millennial, I’m also fascinated you know? But, also, how can I forget the recent squeeze, with Game Stop, that also illustrates this. Commission-free trading and investing platforms such as Robin Hood, they allow people to purchase fractional shares, options in crypto trading, and with ease of access as in your phone. We have digital robo-advisors using algorithms. They’re also democratising low-cost financial advice, so that it's no longer just institutions that have the know-how, right?  Social media platforms like Reddit, TikTok, um you know, are filled with advice for young people. You go to learn about investing. And this phenomenon has been further fuelled by the inability to go out and spend money on travel and entertainment during the ongoing pandemic and the economic stimulus money. So Aya, millennials have taken the reins of their own investments, but some question whether this is a short-term phenomena, as with previous market bubbles, or a long-term movement. Well, looking at history, however, I mean, I like going back to history for insights, individual access to trading securities has ebbed and flowed across many cycles. We have seen this type of behaviour going back about hundred years. I mean, I have a plethora of examples Aya, but some noteworthy ones I’ll touch on. The roaring twenties. You know, the great bull market that lasted nearly a decade.  You know, this is where, you know, bucket shops, which invited folks off the street to trade stocks and margins. So what I mean by that is that investors borrowed from their brokers to buy stocks. You know, that so many individuals buy and sell stocks during the 1920s, and then they were burnt by the great crash of 1929.

Ayabonga Cawe: Zen, it’s interesting, I guess, the comparison, because the roaring twenties follow on from the 1918 Spanish flu, which many people are comparing, I guess, you know, for differences or similarities to COVID-19?

Zenkosi Dyomfana: Ja, no, definitely. Again, it just speak to the, the craze around the time we are in the cycle as well. So what I was trying to say is thatit's not new, it also goes with the time we are in the cycle.  and, and also, one of the other interesting times is that, you know, day trading became a national pastime, as the internet bubble began, began to inflate in 1995. So again, multitudes of investors were trading hot dot coms, regardless of whether they were profitable, had revenues, or even make market ready products. Crazy, right? That market was also democratised, only to wipe out many traders and investors when the bubble burst in the year 2000. So like I say, I've got a plethora of examples. Otherwise we’ll be here the whole day… I guess, I guess what I’m trying to say Aya, here, is that the game has not changed, only the faces have. And this is not the first time that your average Joe has seen the playing field levelled in the stock market. And like all others before it, it's likely to tip back in the favour of the pros and hit the newly freed individuals.

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[27:31] What working from home and other cultural shifts mean

Ayabonga Cawe: What a revealing, I guess, historic and contemporary insight there, um because often, people make it seem like a lot of these advances and opening up of the space in the world of investment is something that's rather novel. And I like that you mentioned, you know, in the first parts of the, of the um, of the 20th century that we saw a similar development there. I want to maybe tie up our discussion, I guess, with a question to, to the pair of you and Chris, I'll start with you and get a response from Zen thereafter. And it's around how workplace and cultural shifts that have been brought about by restrictions of mobility. I mean, one of them is working from home. It’s improved the productivity of many workers, and many employers are quite concerned around how you preserve corporate culture, but it also will have massive or has had massive implications on commodity prices. We're not driving around as much as we'd like, and therefore, you're not paying as much on fuel. Not enough cars are being sold to justify, you know, the need for auto catalysts that drives the platinum group metals in this country, which have certainly been on, on a rally for quite a while now. How do we deal with that, and the negative impacts that might come to the resources sector, but also some of the opportunities that might - be presented by this new working from home phenomenon and this new sort of work culture, if I can put it that way? Chris? And then we'll get Zen's response as well.

Chris Holdsworth: This is a very complicated topic. It’s going to have a number of impacts in the market, which I think at this point are quite difficult to forecast. As an example, as you quite correctly say, that there is now an aversion to traveling to work.  Even in countries that are back at work, we find that people are not wanting to use public transport in the way that they did before, but that might ultimately mean people buy more vehicles. There might be more vehicles on the road, because you want to travel to work by yourself, not next to somebody else who potentially could be contagious, which could lead to an increase in demand for catalytic converters and ultimately flatten. So it's very complex, but the one thing we can establish with some degree of certainty is that there has been a productivity improvement. Companies have been forced to operate in a more lean fashion than before, when people were at home and they were unable to come through. And a lot of what they've learned is going to stick and ultimately, we see an increase in productivity and typically an increase in productivity means an increase in wages. And so we'll land up with more-more wages, and that is beneficial for the broader economy. So it might well be that the silver lining to what has been a very dark cloud is that the net output of all of this, this COVID period, this 18 months or so that we've been suffering through, might well be an improved trajectory for growth in the long run, which would be very helpful, more broadly speaking, for commodity prices, and for the price of risk. And so if it is the case that we land up with more productivity, more wages, more ability to take on risk, that also means ultimately, better equity markets, and stronger emerging market currencies. So as I said, it's a bit of a minefield out there. It's quite difficult, I think, to be able to forecast anything in the space with any degree of precision, but the trend is probably in favour of growth, wages and emerging markets.

Ayabonga Cawe: Thank you very much for that. Zen, you have the last word on this one.

Zenkosi Dyomfana: I think there's more opportunities to come from this. You know, that the nice thing about working from home, it's made more workers more productive, coming from that flexibility. I mean, I see it with myself, you know, the quality of my work has improved drastically. I mean, others can argue to say that, working more hours and the like, but I mean, that, you can question your, the quality, you can put in more hours, but is the quality good? But for me, like I say, just seeing the flexibility I have, my quality of work has improved and that should filter through into your GDP, right? More productivity and better quality of productivity. And, you know, as much, as some industries might be hit hard, like your coffee shop around the Investec building, or, you know, some people that are servicing those buildings. And property companies, that capital and those resources and those people will, you know, they'll find other opportunities in this new world that we're going into. So I don't think all would be lost. It just means a bit of creativity, but I think net-net, it’s going to be positive and should be positive for the economy. 

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[31:52] Closing remarks

Ayabonga Cawe: Chris and Zen, you guys have been awesome um and, I think we’re going to have to leave it here. We could chat probably the whole day and, on all of the fascinating things. I mean, I think you've taught me a lot today and I wish I could steal your minds, as Zen was saying.  Hopefully not to commodify them but to use them I guess for myself, but who knows what might happen within AI, and what that might lead to? But I want to thank the pair of you for giving us your time today as Zenkosi Dyomfana an investment manager and Chris Holdsworth, chief investment strategist, both of them at Investec Wealth & Investment. Thank you very much for your time. That brings us to the end of this informative discussion. Again, I'd like to remind you that Investec’s My Investments has reduced investment minimums on local unit trust from just R1000.00 a month, making it easier to start your wealth creation journey today. Do join us for our upcoming episode where we'll discuss single asset versus multi asset portfolios. It's sure to be another riveting educational experience. Until then take, care.

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[00:00] Introduction of guests and topic

[04:40] Key considerations when investing in property

[09:20] Storage, data centres and other property segments

[12:07] The importance of diversification

[16:34] Managing risks in a property portfolio 

[20:14] The role of gearing in a property portfolio

[24:20] Other risks in the property sector

[27:19] Closing remarks

[00:00] Introduction of guests and topic

Ayabonga Cawe: Welcome to the fourth instalment of the Wealth Creation Podcast series. In today’s episode, I’m joined by Kyle Lasarow, a portfolio manager and Marc Fellner, a fund manager, both from Investec Wealth & Investment. Today, we answer a question that I’m sure most of us have already asked ourselves at some stage or we might be asking ourselves at some point in the future, and that is, is property the right investment for you. Kyle and Marc are going to be taking us through what to look at when you’re buying property, how to think of property in the context of the rest of your investment portfolio and the dynamics between different types of property, such as residential, commercial, office and of course investing in property offshore and internationally. We’ll close off the conversation by talking about some of the risks of investing in property and the key pitfalls one might want to consider. It’s sure to be a rather insightful conversation and so please do stay tuned. Marc, I’ll kick things off with you. When you were in high school, were already reading, I guess, the business news, you'd already have got some interest and I must say we’re quite excited about the stockbroking industry and were triggered by the 1987 market collapse. Now, I wasn't born in 1987 so you might maybe want to tell us a bit more about what happened then and how that segued you into a career and investing.

Marc Fellner: Hi, thank you Ayabonga. I suppose as a youngster living through that market crash of '87 although I wasn't involved in the markets at all so, please don't put me into that age bracket. There were some seminal movies that came out around Wall Street at the time and I just remember the flurry, the haste, the excitement and the buzz although mainly negative obviously, given the market circumstances that prevailed at the time and, and it did bite me as such and sparked an interest in me as a young boy moving into teenagerhood. And so I started investing at a fairly young age in unit trusts with the wages that I'd accumulated over time. And I suppose, through other podcasts, you may have picked up that the earlier you get going with your investments, the better the ability for that investment to compound. So it was that when I left university and I needed to buy my first car, those investments came through and provided me with a very nice deposit on what I considered to be a magnificent car at the time.

Ayabonga Cawe: And I guess, 25 years later Marc, from when you formally started, you're still in the markets and we'll come back to some of the, I guess, big lessons that you've learned in particular about property as an asset class in that quarter of a century in the markets. Kyle, let me bring you in because you also, I guess, have a similar journey into the marketplace. You started with penny stocks. You also had a short gap year teaching English in a monastery in Nepal and also studied martial arts in the Shaolin Academy in China. So certainly not the kind of guy you want to mess with here. Kyle, just some of your journey and more importantly, I guess, the seminal role of Rich Dad Poor Dad, in your interest and journey in the markets?

Kyle Lasarow: I started my journey in finance in high school. I was pushed by my dad to get involved with trading shares and learning about the markets about grade eight, grade nine, I can't remember exactly when. And, for one of my birthdays, he opened up a share trading account and asked me to get involved. At that age, you didn't know much but you tried your best to make a lot of money quickly and that's where I started investing in penny-type stocks. So, these would be shares that would trade at like 50c or less and you'd see them go up 50% in one day, down 80% the next day and, I thought that excited me. Obviously it didn't work very well. I like to think that I used technical analysis to find opportunities but really it was gambling in a sense but it was only during varsity where I started to get involved in investing at a fundamental level. So, we started learning about the Intelligent Investor, reading books like the Buffett Way and that grew my understanding about how these shares traded.

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[04:40] Key considerations when investing in property

Ayabonga Cawe: Great and it’s real pleasure to meet the pair of you because today you're going to be walking me through what are some of the considerations we think about when we think about property. Marc, I want to start just with you. What are some of the characteristics of a particular property or what consideration should we factor into our decision-making mix when we think about buying a property? I mean there's so much that happens in the press as you were saying. People talking about real estate investment trusts in the listed space. And it can get very, very confusing. So, let's maybe just start off with, first principles, what are some of the things that we consider, and more importantly, what are the differences in our decision-making mix between listed property and maybe considering property in the unlisted space?

Marc Fellner: I think that's a very important question and maybe if we just take it one step further back and just recognise that property inherently provides you with shelter and that's one of man’s primary drivers, to seek out shelter. I think we need to divorce the investments and property from living in a property, buying a property for financial gain versus buying a property to have that shelter and that security, a place to raise a family. Although we can't discard the fact that you can make a profit, primarily a capital profit off your residential property, I think most people ultimately make that investment decision on comfort levels and the security that that property provides. So, potentially we should stay away from that and stay away from including that primary residential property in the whole asset mix and in the decision making that you ultimately make around investments. Secondly, a lot of people, especially the client base that we would be speaking to, would have a second recreational property, a holiday home, maybe it's a time-share or a dedicated week somewhere in the bush and I think to a large extent that also really isn't an investment property. That's a lifestyle asset and the financial metrics around that I think are an allocation of surplus funds to that asset with no real intention of making a return. Probably about 10/15 years ago, I went out and bought a residential property that I had the sole intention of renting out and trying to make a return. And I suppose that's where a lot of people would get started when it comes to property and Kyle alluded to Rich Dad Poor Dad, Robert Kiyosaki and access to passive income and that is in my mind, the most primitive, primary source of generating that primary income. I mean, it does come with quite a few risks, tenant risks, location risks, etcetera, etcetera but, but ultimately, I think that's a good place to start with a property investment. For ease of use though, it is much quicker and transactionally cheaper to buy into a listed property structure where you have a hopefully highly competent and incentivised management team that makes those decisions for you. And, through scale and aggregation, you have big instruments listed that can acquire significant property portfolios. And what we find is those property portfolios are typically focussed on the retail space, owning big shopping centres and also strip malls and smaller shopping centres, office space and industrial businesses. And I think the purpose of those structures, very similar to investing directly into rental property yourself, is ultimately to make a capital return but as importantly on an annual basis, to get an income off that asset. And I think those are the two cornerstones of a property investment, is you've got to look at that total return but ultimately recognise that a significant portion of that total return may come in the form of a taxable distribution. And, if we look back over time, it's been a volatile market of late, yes, but on average, since the listing of the index, the return profile has been approximately half distribution and half capital and I think when people make investments into, into this asset class, that is the mindset that they should have. But ultimately, total return is what you're driving after.

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[09:20] Storage, data centres and other property segments

Ayabonga Cawe: You mentioned something very interesting there, around the more commercial property, strip malls, and I would venture to add even the office and even, I guess, the retail elements to that. And Kyle, when we think about those property segments, just outside of the residential space for a second, or even other sorts of offshore markets, like hotels. Massive boom at the moment in storage. There's even, I guess, data centres and even network towers and the like. Are the considerations in any way different from what Marc has spoken us through which is really around, I guess, the capital gain but also potentially, some of the liquidity that comes from distributions?

Kyle Lasarow: Yes, so, definitely. It's one of the yeah factors, the key factors that make this asset class so exciting, is how differentiated it is. There are so many different sectors within the property sector itself, so many, different factors that affect different property holdings. For example, the main one is obviously residential. We all have our own view on owning our own property. And now in a world where remote working is definitely a reality that we could find ourselves in for the foreseeable future, it changes the view of it on residential, for example. You don't have to work in the big city centres to be close to work. You can work just as easily on the coast in a small town and work for one of the biggest corporations in the country or even in the world. So, there are different factors when you do consider investing in property but what you're speaking about is the different types of property that you can hold and, and how they affect you. So, for example, during the Covid pandemic, what we did see is that hotels really did take a knock. This is obviously because tourism took a major knock. Not many people were flying into the country, going to the beaches, visiting, going on safari. But, if you look at property sectors that did do well, it's things like data centres. Everyone was going onto using ZOOM, using Microsoft Teams. The data usage was extreme. The whole world went through a revamp so those sectors did really well. They gave really high dividend yields during that time. So, if you see those different areas of the market and you think well, I can do well in different cycles, it means that that the diversity that you get when investing in the property sector can be quite a big contributor to your total return as Marc was referring to in the comments he just made.

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[12:07] The importance of diversification

Ayabonga Cawe: I like the point you're raising around diversification and we're going to come back to, I guess, what it means in one's broader portfolio mix, but Marc, let me bring you in here. In one's broad portfolio, the fact that you have different property types with different drivers of pay-offs, how does that influence diversification within property as an asset class and also, there's this mix between lease-hold property and maybe titled property?

Marc Fellner:  Excellent point. We didn't really touch on it earlier and if you speak to an estate agent and you're buying a residential property, they say so there are only three important things. It's location, location, location. But obviously that can also play against you because if you get the location wrong and you've got a single asset as a residential property, you may find yourself in trouble. And we have seen a lot of that in Gauteng inner cities and the peripheral suburbs around those and so diversification becomes very important and also in the context of listed companies you can also develop a portfolio of diversified property investments. And the way that we think about that or the way that I think about that is firstly just in terms of a macro structure and the framework in which you're investing, is to identify sectoral opportunities and tilt your portfolios towards those. So, we're talking about Covid and, and the impact that it had on data centres and Kyle was making an excellent point that there was a great opportunity there. The other side of the same coin is office space has been under a lot of pressure and it's been under a lot of pressure because of the work-from-home situation that we experienced. Not to say that office space is dead and it'll never come back but the opportunity may have been lost if you weren't diversified in your portfolio and you didn't have the sectoral split with access to a specialised asset class which you also mentioned earlier being storage. Storage in itself, self-storage in particular, is a very interesting market and it has a very interesting dynamic and, from a macro sense, it isn't linked to what we would see in something like a retail space. So, having a shopping centre and owning a portion of a shopping centre through a listed structure and owning self-storage, counter-balances a lot of the macro risks that you would encounter in an environment. So, that diversification that you want to put into your investment needs to consider diversification of the, the sub-sectors within property, the location of property and also, to a large degree, the management teams. And all of that becomes very important in constructing a portfolio but we also can't under emphasise the importance of the capital structure of the businesses that you're buying. And diversifying all of these things within a portfolio, we strongly believe reduces the overall risk that you're taking and are exposed to in the property market and at the same time, should still give you good returns. So just to expand on that slightly further, there's no reason why you shouldn't hold a property investment for capital return only but at the same time, it's quite prudent to diversify that type of investment with an investment where that there's quite a significant yield coming off the property portfolio. And that's paying back to you, providing you with some liquidity. Those two held in combination on the portfolio, I think give you a much sounder investment platform than just taking on one of those investments. So, diversification is key inside the property sector and we're very fortunate in South Africa that we've got a large listed property sector and there's large diversification through those listings into the primary retail, office and industrial sectors but also very importantly, big acquisitions have been made over the last decade into international assets. So, as well as having only access to South Africa for diversification, we have significant access to off-shore assets through on-shore listed structures, which makes my work a little bit easier. It gives me a bigger opportunity set and diversification through the portfolio is less challenging than it was a decade ago.

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[16:34] Managing risks in a property portfolio 

Ayabonga Cawe: Thanks for that remark Marc because, I guess, it makes for a perfect segue into my next question to Kyle.  Kyle, I guess the same considerations that Marc has painted for us within the asset class of property would apply when you are thinking about your broader portfolio and the configuration of different asset types inside of that portfolio. I'm quite interested in what type of position property holds in relation to say, other asset classes and more importantly, how does it stand up to some of the risks that one might face for their portfolio over time? Chief among those of course being inflation or the rate of change in prices over time.

Kyle Lasarow: Just drawing on what Marc just said, what makes his job a bit easier makes our job a little bit harder. When what you started to see is a few of these property stocks going offshore and buying property. When you think about it in a portfolio context, what that means is you're getting some offshore exposure within your property sector so you have to take into account the currency risk. If your property is earning some of its return in euros and some of its return in South African rands, it means it's a very different asset class to if the property position only was earning its returns in rands. So, you have to take that into account when you build up your portfolio and include property in it. So, the way we look at property from a multi-asset approach, is we see the property sector holistically and we ask the question, well, how does this sector or asset class fit in regarding equities? How does it fit with fixed income and how do we position it so that the diversification benefit really plays its part in the portfolio? One of the key considerations when you look at property in a portfolio is it does bring in a characteristic that adds a lot of value and is quite relevant. It's hedged against inflation. So, what happens with property stocks is as prices increase, which is called inflation, you tend to have the property, the property portfolios increase their rentals. So, that means that as property rent increases, it feeds into the overall investor's portfolio and it leads to an increase in dividend yields which kind of hedges you against the inflation exposure.

Marc Fellner:  Kyle, I think that's absolutely dead right. You've got escalation clauses built into these listed property companies. In Europe, those are very much indexed against prevailing inflation rates. In South Africa, they typically are a fixed rate but at or higher than inflation. And that inflates your distribution off the asset in time, which ultimately means you have that inflation hedged. But one also needs to remember that the value of the asset is also determined by its replacement cost and as you see in an inflationary environment in an economy, the replacement cost of the bricks and mortar as such also escalate. So there’re two aspects there that provide you in a normalised environment, some kind of protection against inflation on a cash flow basis as well as on a replacement basis so when you're looking at the net asset value of these businesses. So a very good point then in terms of the way that it hedges and it hedges both on a capital and on an income basis.

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[20:14] The role of gearing in a property portfolio

Ayabonga Cawe: I find this very interesting and I want to come back, to you Kyle as well before we come to what I also see as a big element, least of all in a low interest rate environment, which is the role of gearing or the role of debt, not only in the acquisition of property, but also, I guess, in the investments in the listed space. But before we go there, just the tax implications of different approaches as we think about diversifying our portfolios? Marc?

Marc Fellner: We've got structures that we have mimicked from the UK and in Australia and South Africa called real estate investment trusts which give you a very interesting tax situation globally, where you have a pass-through mechanism. So all of the profitability earned within these property companies effectively are paid out to shareholders without the corporation or, or the Real Estate Investment Trust, the REIT, incurring any tax. There are some parameters and regulations around how that mechanism works but effectively that income then comes through to the investor and is included in their gross taxable income. So, unlike an equity where you're receiving a dividend and paying a dividend holdings tax, in the property, listed property space, on most of the instruments, you are picking up a distribution that is fully taxable. And I think that leads quite nicely into your comments around gearing. It effectively means that these REITs, through acquisition, like to have a reasonable split between debt and equity and the financing of those transactions and that in itself does magnify the return that gets passed through to shareholders. So you get all of the benefits of gearing coming through, both positive and negative, one must say and provided you have a solid management team in place that looks after that capital structure and doesn't take on too much debt and the debt servicing costs don't become an issue, you actually get quite a nice magnification of the operating earnings within the business as they pass through into the distribution. Quite interestingly though Ayabonga, what we do see from our client base is another level of gearing coming in, which is clients recognising that they're receiving taxable income and to mitigate some of the taxability of that income, putting gearing into the structure that they hold that investment in and creating a tax buffer on the income that comes through. And effectively, there’re mechanisms to put these portfolios together in such a way that they're cash-flow neutral and ultimately, the distributions of paying for the interest and you've got additional property exposure through the gearing. And what we've seen over an extended period of time, is significant wealth creation through these structures where, as I suggested much earlier in the conversation, you have this prospect of capital return coming through. So there are two ways of playing the taxability of these structures. Firstly, inside the REIT itself and then secondly in the portfolio and I suspect what's happened as we've seen market corrections in 2018 and again last year in 2020, is a flushing out of these markets as capital values have decreased. The level of gearing has been too high, specifically at the client level and put them into a situation where they've been forced sellers of their listed structures, which has created a lot of volatility in the asset class and I mean Kyle can talk to how that volatility either hinders or benefits an overall portfolio, but ultimately it has placed pressure onto some of those investors and you've seen it coming through in price action. So interesting regulation in place that allows for the receipt of these distributions free of tax. Gearing up inside this structure, a second level of gearing and provided you can manage that risk, over the medium to long term I think that you've got an asset class that really lends itself to gearing.

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[24:20] Other risks in the property sector

Ayabonga Cawe: Just that discussion and that contribution Marc just makes me realise I should've listened a bit more in finance class when they were talking about Miller and Modigliani, because I think a big part of what you’re talking about the level of leverage in your capital structure is a critical part of our discussion here on property. Kyle, on the issue of volatility and maybe just as we touch on that, I'd like some of your thoughts also on some of the other risks that we certainly haven't spoken about. We've spoken about liquidity risks, inflation risks. We've spoken about the role of gearing, but there would also I guess be other micro risks. I mean, if I don't maintain my property, the risks of location, the risks of capital flight from inner cities, something we've experienced in Johannesburg and of course, I guess, any tenure risks associated with some shifts in any property regime.

Kyle Lasarow: That's where things become a little bit more complicated and the devil's always in the detail. If you buy a residential property in the city and you’ve got a bunch of people basically moving out of the city to more suburban areas or smaller towns, what happens to your property? You can't sell it at the same rate if there's no demand, and that's where Marc's earlier comments on an agent telling you it's all about location, location, location. You can actually put a question mark against that statement because in this digital world where you're available 24/7 at any given point in time and at any location in time, does location really matter? When you're purchasing a property and I'm talking purely a residential property, you have to take into account and think that in five/ten years’ time, will this property still be in demand? We've seen mega shifts in the world where cities are evolving over time and everyone wants to be there where there's a new buzz and a new atmosphere and there are new things. We've also got to consider infrastructure, and how that's being built to determine where you should actually prepare to live for the next ten years. And as a youngster who doesn't actually own his own property at this point in time, like that's a question I constantly ask myself, is it worth actually buying a property or should I just rent for the next ten years? And invest in things like REITs which gives you a key component when considering property assets as liquidity. If I put all my money in a REIT, I can exit that position almost instantaneously at any point in time whenever I need the money, but if you purchase a property now and you want to sell it, there's a time delay. You've got to find a willing buyer and your asset is only true value of an asset is what someone's willing to pay for it. So those are some of the key considerations when purchasing property.

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[27:19] Closing remarks

Ayabonga Cawe: That point is such a critical one. I mean, this notion of exit risk because we've spoken about quite a few risks here, which balance out whatever returns we might expect, in particular the liquidity benefits and the yields that come with that, but also some of the capital gains associated with that. Maybe let's just get some closing remarks. And Marc, I'll start off with you and Kyle, we’ll wrap things up off with you around how we then harmonise all of what we've discussed today. And more importantly, if you had in 30 seconds Marc, to give any advice, be it to me or anybody who's listening to this around making a foray into property, be it in the real sense or even in the listed instrument sense in the form of REITs, what would that advice be?

Marc Fellner: Ayabonga, I still firmly believe you need diversification, you need location and you need specialisation and the one aspect we haven't really spoken about is valuation. Everything that has risk needs to be assessed from a valuation point of view as well. We've discussed what all of those risks are and I think in the property space it's a very dynamic, fluid environment. We've got off-shore opportunities, on-shore opportunities and I think that it's such a diverse and big market that to be a specialist as an individual in that whole space is a perilous exercise I think, and rather investing into a listed structure and or into a fund where somebody else is making decisions around what should be in that portfolio and when is it right to move in and out of certain assets, is very important. And, I think at its core, property has an inflation aspect to it. It typically has performed better than it should, given the risks that we see associated with the property sector. Ultimately, I think that it is not necessarily a cornerstone of an overall portfolio solution but definitely needs to be a part of the overall asset allocation that a client requires in delivering returns. And I think it's something that's very personal and everybody has a property, everybody understands property but it's very difficult to get access to this broad, global opportunity by sitting at home and buying one residential property or building out a Robert Kiyosaki passive portfolio. In the listed space you get away from the frictional charges of owning property and tenant risk, occupation risk and all of these types of things. I know that's much longer than 30 seconds but if I had to steer you, I'd steer you towards a listed direction where you've got excellent management teams making good decisions with you, appropriate capital allocation and balance sheets; and overlay that with some kind of fund management experience and I think you've got a solution that fits very nicely into an overall global portfolio and does diversify away a lot of the risks. Ultimately, at its core though, macro factors will drive the returns of this asset class. We haven't really spoken too much about interest rate cycle and its linkages back to property, but those are very key to some of the dynamics that play out in this space both from a funding point of view and also from a valuation point of view. So there's a lot to be said about property. I know we've just touched the surface here. It's a very exciting space and it's always dynamic and fluid.

Ayabonga Cawe: Don't give too much away because we still want many of the people who are listening to us, who might be potential clients to be giving you a call so, we don't want you to give too much away. Thanks a lot for that. Kyle, I can't say you've got 30 seconds. I guess the best response in maybe 90.

Kyle Lasarow: Marc, as always, covers a wide range in this particular asset class. What I'd like to remind everyone about is that property is one of the oldest asset classes in the world. 2000 years ago, people were still talking about buying houses and businesses like farms, etcetera and still today, it's just as important. And in the future, I mean you already can purchase plots on other planets, like the moon and soon Mars and maybe asteroids. So property will always be relevant. It will always be a real asset that you can see, feel and touch and a lot of people find that very comforting in this new world of intangible assets, it's still an asset that brings some sense of security to it. It will always be a topic to speak of and one of the more important factors in my view when you think of property is how it fits in your overall portfolio. That obviously is a point that Marc touched on and when you look at your personal portfolio you don't want to hold a single asset in it. You don't want your most valuable asset to be one property because the risks there are quite immense. You want to diversify with different assets, different asset classes and try ensure that you're not putting too much capital at risk at .at any given point.

Ayabonga Cawe: Awesome stuff. Kyle Lasarow and Marc Fellner, thank you to the pair of you for your time. They are a portfolio manager and fund manager respectively, both from Investec Wealth & Investment, talking to us about the importance of property as an asset class but also the role, more importantly, of property in multi-asset portfolios, the return-risk matrix that is associated with this asset class. A really fascinating discussion. Which brings us to the end of yet another informative session here. We do hope that these nuggets of insight that we've shared over the past few episodes are edging you a bit closer in your wealth creation journey, to your aspirations; and please do visit Investec Focus to catch up on any of our previous episodes and to stay updated on some of our upcoming episodes in this part of the series. Till we meet again.

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[00:00] Introduction of guests and topic

[02:03] Why should you invest offshore?

[03:37] Can you get the same offshore diversification, onshore?

[11:52] Diverse asset classes

[15:20] Exchange rate risk and commodities

[21:11] Alternative investments instruments and asset classes

[25:35] Closing remarks

[00:00] Introduction of guests and topic

Ayabonga Cawe: In this 5^th episode of The Wealth Creation Podcast Series, I’m joined by Ronelle Hutchinson and Rick Cardo. Both of them are Portfolio Managers from Investec Wealth and Investment, and Rick joins us all the way from Investec Wealth and Investments UK office out in cold London. Now, there’s no better pair suited for today’s conversation that to answer the question of why you should invest offshore. We’ve recorded the 3^rd episode, we introduced some themes around global investing and the impact that the global economy has on your investments. And in this episode, Rick and Ronelle will expand on this and take us through why, how and what you want to invest in offshore. We look at why you should invest offshore, the mechanics and accessibility of these offshore markets and what investment options are available for you to consider. But before we get into it, let me first introduce Rick and Ronelle. I start with Ronelle, Portfolio Manager at Investec, for 14 years now, having started there as a Fund Analyst and a CFA charter holder, holding an Economics degree, but also a Red Devil and Amakhosi for life. And just like me, I guess a big Chiefs supporter and I certainly hope, Ronelle, that you’ve accustomed yourself to disappointment. That being said, let me also introduce Rick, who’s an admitted attorney of the High Court of South Africa and a Chartered Financial Analyst holder. And somebody who had some grounding in Law, which has certainly helped him with research analysis, reasoning, rationalising, and of course rioting as well, but also acting in the fiduciary interests of many of his clients. He’s competitive by nature. He works smart and he engages many of his colleagues at Investec on his constant learning curve, as he says. And a big passion for the stock market, reading business books and trying to discover investment opportunities. 

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[02:03] Why should you invest offshore?

Ayabonga Cawe: Now, Ronelle, I’m going to start off with you and, I guess pose the same question to Rick as well. What are the reasons for why somebody would even want to consider investing offshore? I mean, do we not have, in our investable universe here in South Africa, you know, enough assets that one could be putting their money behind? Or, I guess it’s just a matter of returns.

Ronelle Hutchinson: Thanks for the introduction, Ayabonga. I think the fate of football teams is as treacherous as the fate of fund managers. I think the first point to consider, Ayabonga, is, you know, why South African investors want to go offshore. And one of the fundamental reasons for going offshore, is to diversify the portfolio from SA specific risks. So, the key element from a South African perspective is the diversification and if you also take into account the level of volatility that South African investors are exposed to, with respect to the Rand, by going offshore, by accessing foreign currencies, hard currency assets, SA investors can mitigate SA specific risks, mitigate the currency risks, and diversify their exposure offshore.

Ayabonga Cawe: Thanks for that Ronelle, because I guess, in a sense, it does suggest to us that we ideally don’t want to put all of our eggs in one South African basket. 

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[03:37] Can you get the same offshore diversification, onshore?

Ayabonga Cawe: And I’m interested Rick, I guess in the context of many of these large South African firms who might have operations in other markets as well, whether or not they contribute to the local opportunities set, in any meaningful way that gives us the same diversification. And why, I guess we would still want beyond those, to still go offshore and invest there. And some of the industries that we might want to consider investing in, and even the sectors that might be an attractive investment proposition offshore.

Rick Cardo: Thanks, Ayabonga. Well, firstly, you know, it’s great to be here and thanks for the opportunity to chat to you and your audience. This is really an important topic, I believe, should form a key part of anyone’s investment strategy. So, so it’s kind of key in what we do. I think, just to hone in on some of those benefits and opportunities that you allude to. You know, from our perspective, going offshore provides an investor with a far greater investment growth opportunity set, than only being in South Africa. It effectively allows you to grow your wealth in a way which isn’t just limited to the SA economy. So, Ronelle quite rightly spoke about some of the risks, the political risk, the currency risk of being only invested in South Africa. But, you know, I kind of look at it as the opportunity set for growth by going offshore. So, now let me just put some of that in perspective. You know, if you just look at our economy in South Africa, it makes up less than 0.5% of the world’s global economic growth. So, so we’re a kind of, a tiny dot in the ocean. You know, South African economy here, over the last 10 years, has probably grown at less than 2% per annum. Whereas, you know, offshore, the global economy’s grown at about double that rate, and with more predictability. So, so better growth with less volatility and more predictability. And then just, you know, honing in perhaps on your question, we do have some global champions listed on our stock market, but they’re less than 400 companies on the South African stock market. Overseas we’ve got 45 000 to choose from. So, you’re spoilt for choice. And if you look at some of the big companies – I mean, I’ll just look at the biggest company in the world – Apple. Apple’s market cap or value, is around about $ 2.5 trillion. That’s almost double the size of each and every company put together, on the Johannesburg Stock Exchange. So, you know, when you start looking at some of the facts and figures, you kind of, you get a sense of the opportunity that allows you offshore. You know, just, it’s just honing in again to perhaps the South African market, we’ve got one big technology company, which is effectively Naspers Prosus, with its main asset being a, kind of, Chinese internet platform company, Ten Cent. Again, you know, if you go offshore, you’re spoilt for choice. You’ve got the Apples, the Alphabets, the Googles, the Amazon’s of the world, all those stocks with market caps or values in excess of $ 1 trillion. And even if you get a world champion company, stock like Richmond – which, you know, for those that are brand aware, you’ll know by their brands, Mont Blanc, IWC, Cartier, etcetera – again, you just have that much more choice if you go global. So, you know, what do I mean by that? You’ve got companies like Louis Vuitton, Moe Hennessey, iconic brands like Louis Vuitton, Dior, TAG, you’ve got Kieran – which is Gucci – and a very popular brand amongst the millennials, Yves Saint Laurent. And, you know, it doesn’t stop there. You’ve got Hermes, Burberry, Mont Claire, Hugo Boss, the list goes on and on. So, I think it’s just that wider opportunity set and being exposed to parts of the market that you really don’t have that much exposure to in South Africa.

Ayabonga Cawe: And, and, I guess Rick, the other question is, how do we, how would one go about accessing some of this diversification benefit? I mean, and also, I would argue, I guess the scale benefits. I mean, if you’re talking about the type of, you know, market capitalisations that you’ve made mention of, it certainly does, you know, this notion of a wider opportunity set that is growing, that is predictable, that is stable. It does have that benefit in any diversified portfolio. What are some of the mechanics that allow, I guess, some of these offshore investable opportunities to be accessible to the South African investor?

Rick Cardo: Ja, that’s a great question, Ayabonga. I mean, you know, you can start simply, by perhaps focusing on the stocks listed on that JSE, that are mainly exposed to global markets. And I’ve mentioned a couple of them earlier on. I mean, there are others, British American Tobacco in the tobacco space, Bidcorp, which is a food services company, globally. There are quite a few. But again, that’s quite a limited opportunity set. So, you know, as a South African, there are, kind of, two direct ways or methods of how to take money offshore and convert your rands into hard currency. The one is using what’s called your single discretionary allowance, what used to be called a travel allowance. Basically, every adult person, over the age of 18 in South Africa, can take up to R 1 million overseas each year, and you can kind of do with it what you want. You can invest it, you can spend it, but that gives you quite a bit of leeway to kind of get started and invest in the market. And we can help you, help you with that, Investec Wealth and Investment, utilising that allowance and, you know, putting you into the right investment, depending on your particular requirements. You don’t need any approvals from any regulatory authority. You get that R 1 million a year. Just be aware that, you know, if you go travelling overseas and you’re spending money on your credit card, that kind of gets deducted from that R 1 million amount. There is another way, it’s called your foreign investment allowance. For that you need to be a registered taxpayer, have all your tax affairs in order and you can apply to SARS to get what’s called a tax clearance certificate. That runs for a period of 12 months, and that will actually allow you, subject to you actually having, you know, the money to back it up, and the assets, to take up to R 10 million a year offshore, and effectively convert your Rands into hard currency. And again, you can invest it pretty much in whatever you like and you can keep the money offshore, it never has to come back into Rands. So, so those are kind of, you know, two of the direct ways. There are other ways and Ron, maybe you want to allude to a couple of those?

Ronelle Hutchinson: Ja, thanks, thanks Rick. Ayabonga, yes, there are a lot more accessible ways for investors to invest offshore. I think for the investor, at the early stage of their wealth creation journey, one must consider the options of unit trusts, for example. So, there are accessible options for investors, you know, younger professionals at the early stages of their wealth creation. And, I think, if you look at Investec, I think there are options available, via the My Investments platform – which is our digital online platform – that allows young professionals to access our full suite of local and global products. So, I think the world has changed. We recognise that we have to provide access, we have to make saving and investing more accessible to all types of, all ranges of people at various stages in their lifecycle. And I think the investment community has gone a long way to bridge that gap, by these unit trust solutions and also, nowadays, the availability of ETF’s.

Ayabonga Cawe: I like that comment because in a way, you know, the earlier comment that Rick was making suggests that there’s certain regulatory, I guess, issues that one might need to navigate, if you’re going above the R 10 million investment, directly offshore. But through some of these, I guess, delegated instruments, you have the possibility and the opportunity to be able even, you know, with a debit order of R 1 000.00 a month, to invest offshore and get the benefits of diversification, or geographic diversification, into your portfolio, at a very early stage. 

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[11: 52] Diverse asset classes

Ayabonga Cawe: Now Ronelle, here’s my other question. I’m interested, because we’ve spoken quite a bit about equities and I found, I guess, you know, the contribution Rick was making earlier on around some of the big champions in South Africa are very, very interesting, because it’s a brand we interact with every single day. So, it’s quite interesting to explore that. Outside of equities, I mean, should South African investors, I guess, be considering other asset classes? You know, fixed income, property, we certainly see all manner of adverts out there, speaking about property investments, even as an avenue to access citizenship. So, it seems that there’s quite a diverse asset class set. Talk to us about that.

Ronelle Hutchinson: Yes, there are a range of investment opportunities for investors when they go offshore. As said, there is property. Property is an opportunity, and I guess, you know, during COVID and the impact to the real estate market for COVID, both locally and offshore, obviously, with changes to how we live, how we work, etcetera, there are implications for both residential and commercial property. So, we are, there are opportunities to invest in property offshore. There’s a range of investment opportunities. I think the key thing for an investor to consider when they go offshore, is what are their objectives. And the reason why I say that, is because if you’re at an early stage of your lifecycle, in terms of investing, you want to have maximum risk exposure. You want your assets to grow at a maximum rate and if you look at historically, equities generally tends to be your highest returning asset class, and what we find when we go into other classes like a fixed income et cetera, is that we use that to mitigate the level of volatility that comes with equity risk. So, the key thing when you’re going offshore, is what is your level of risk you’re willing to take. If you’re more of a moderate risk investor then you want to have a more diversified portfolio, to mitigate some of that equity risk. But today, there is a whole host of options. But I think the key thing to consider is, what is the attractiveness of these asset classes because investors want to maximise their return, while, obviously, managing the risk that comes, that comes with these asset classes as well.

Rick Cardo: I think Ronelle’s, again, pretty spot on. You’ve got a plethora of choice across asset classes overseas. I mean, you know, if I look at our Real Investment Trust, property trust market in South Africa, again it’s pretty tiny in a global context. It’s less than 1%. So, you know, you do have property opportunities overseas. There are corporate bonds, if you look at another asset class that you, you know, is really a tiny market in South Africa. I mean, South African government bonds are currently sub-investment grade. So, in fact, we don’t have an investment grade, kind of, corporate bond market in South Africa. And that’s a $ 50 trillion industry globally. So, you’re not going to get exposure to it in South Africa, you’ve got to go offshore. So, absolutely, really dependent on your kind of risk and return objectives, you know, whether your goal is, is it kind of for growth, or capital stability, you know, there’s a plethora of choice out there. 

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[15:20] Exchange rate risk and commodities

Ayabonga Cawe: When we talk offshore, and I guess we’ve been speaking about it in very broad terms, an investment in Kazakhstan is a bit different to an investment, you know, in Canada, or even in the, you know, financial centre of the world, in the United Kingdom. I’m quite interested in, I guess how much exchange rate risk might influence the type of returns that one wants. So, if you’re going in, you know, to invest in an asset class that’s attractive today, how much, I guess, by way of exchange rate risk do you have to shoulder for whatever returns you might want, sort of, year 3 from now?

Rick Cardo: Principally, you know, when we go offshore, you’re kind of looking to, to be exposed to, I guess, asset classes of underlying investments that have that low correlation with South African assets. I mean, I think, over time it’s been proven that the Rand will weaken or depreciate against most hard currencies. You know, if we go back to our economic textbooks in university, we were taught that, you know, basically, the Rand should depreciate by the inflation differentials between South Africa and its main trading partners. Now that’s probably going to be 4%-5% per annum, over the long term. So, it’s kind of a given that the Rand should weaken over time. And possibly you add on some sort of, you know, emerging market risk premium to that. So, you know, the Rand’s a very volatile currency. I mean, it’s a big trader, it trades very liquid, there are a lot of investors that get into and out of the Rand. So, over the short term it can be pretty volatile, but you know, I would argue that, you know, if you’re investing offshore, don’t try and time the currency. The Rand is likely to weaken over the long term and, you know, that should add to your investment return. But ultimately, you’re going offshore to get some hard currency growth. You know, any Rand weakness is kind of a plus on top of that.

Ronelle Hutchinson: I just want to bring in a relevant, real-life example of what happened during the COVID crisis. I mean, going into COVID, the Rand spiked from R14.00 to the Dollar, to R 19.00 to the Dollar, so, the volatility of the local currency is significant, particularly around these crisis dynamics. And none of us can predict when these crises will happen. As Rick points out, given, you know, the inflation differentials between South Africa and foreign countries, you’re going to have steadily deprecation, but you are going to have these shock events. And hence, diversifying the portfolio and mitigating against this significant draw down risk that SA investors are exposed to at crisis events, is just a prudent approach. You can never time it, so, just diversification shields investors from these crisis events. So, it’s just, just to give you an, a real-life illustration of what actually happened, so, you know, so volatility is a day-to-day reality in local and global markets.

Rick Cardo: I mean, the other thing, if I can just add there – sorry Ayabonga – is that, you know, it’s also probably key to note that we’re mainly, in South Africa, commodity-based economy. So, you know, if you look at our exports, a large chunk of them still come from, you know, our commodities. And we all know that commodity economies tend to grow and out-perform in specific types, sort of cycles, or time periods. But they can also under-perform pretty spectacularly in others. So, you know, by virtue of us being mainly a commodity-based, kind of, economy and then hence a, I guess, the currency and the Rand that is dictated to by, you know, what’s happening in commodity markets, that’s going to lend itself to a lot of volatility, certainly in the short term.

Ayabonga Cawe: And I guess that’s what you guys mean when you speak about a Rand-hedge, because even the strength, the relative strength of the Rand at the moment, has a lot to do with the, I guess, the strong price of the minerals export basket that’s coming out of South Africa at the moment. What implication, I guess, does that have? Because, as you’re suggesting that offshore, you’re going offshore to diversify your risk, but you’re also, in instances where the Rand is weak, are benefiting from that diversification because, I guess, the relative potential return of what you might be getting, might be a lot better in South African Rand, which is, I assume, the currency that you’re going to spend the money in.

Rick Cardo: Ja, that’s a good question. I mean, if you plot, kind of, the Rand/Dollar against a basket of commodity prices, you tend to see a pretty strong correlation, so, that kind of attest to that, that point I was making about the Rand being largely dictated to by commodity prices and in fact that we’re kind of a commodity-based economy. You know, I think we’re all kind of aware of some of the structural impediments to the South African economy, you know, electricity constraints, unfortunately that are, kind of, ongoing at the moment. You know, the state of, kind of, some of the debt that we see at State Owned Enterprises, and although there are like lots of measures, I think, and the progress is pretty good in the main, you know, those are structural imbalances in our economy, that might keep the Rand on the backfoot, you know, for a period of time, unless they, you know, really are sorted out. So, you know, I think when we go offshore, typically we probably don’t want to replicate the exposure that you can get in South Africa. So, you know, I’m not going go and, certainly in my perspective, if I’m managing an offshore equity portfolio, going to wholesale, populate it with a whole lot of mining stocks. I can get that in South Africa. But again, I’m not going to be too short sighted, you know. As an investor, you want to go where there’s opportunities, you know, I’m not going to cut off my nose to spite my face. If I think the opportunity’s in mining stocks, and that they’re good mining companies overseas, absolutely, I’ll look at those. 

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[21:11] Alternative investments instruments and asset classes

Ayabonga Cawe: Ronelle, we were speaking earlier on about the accessibility of some of the instruments that are available for an investor. I’m quite interested in the other asset classes. You know, Investec’s Wealth and Investments offering, when it comes to accessing, I guess, through some of these instruments, offshore markets and offshore investment opportunities. What, normally, do, I guess, place on offer for many of the investors that are looking for some of this geographic diversification?

Ronelle Hutchinson: Good, good question Ayabonga. Rick runs a portfolio known as The Investec Wealth and Investment BCI Global Leaders Equity Fund. It is 100% equity exposure. We offer a Rand-denominated unit trust, which feeds into this Dollar-based Global Leaders Portfolio, and Rick can talk to that portfolio specifically. So, The Global Leaders Portfolio is a Rand-denominated unit trust vehicle that will give you exposure to global equities. It’s 100% equity exposure. So, for investors with a higher risk appetite, who want to maximise their returns, it’s a great strategy. If you look at some of the other products that we offer, I run a multi-managers strategy locally. It’s, allows investors up to a maximum 30% global exposure. So, you get a combination of both local and global assets. This is also accessible. It’s a unit trust, so, it’s not as The Investec Wealth and Investment BCI balanced fund of funds. So, it gives investors the best of both worlds. And the other benefit is that, you know, not all of us have time to spend, you know, studying markets, researching markets. So, with these investment vehicles, you’ve got an option which is actively managed by portfolio managers who do this for a living, who have the experience, who have the skill, who have the team and the research and the resources to manage the portfolio actively for those investors, who obviously are more focussed on their career ambitions, etcetera. You can invest in these portfolios and have the peace of mind that, you know, you’ve got the expertise that are going to navigate the volatility of market conditions in your best interests. Rick?

Rick Cardo: Ja, ja, well-said Ron. I think it’s also probably fair to note, Ayabonga, that we do have some Dollar funds, which aren’t just equity. They’re multi-asset class. So, absolutely, they’re going to tap into fixed income, you know, some of those corporate bonds, property, you know, industrial properties, residential – maybe – certainly commercial properties. And there might be some alternative asset classes. So, it’s not just the traditional asset classes, you know, equities, bonds, property, cash. It’s the non-traditionals. So, there could be some hedge funds and some alternative-type investments. So, we do offer those. One quite interesting proposition that, you know, is available to investors – and it’s kind of topical, given that we’ve got the UN Climate Change Conference on, COP26, about to kick-off in Glasgow – is that, you know, we launched late last year, a colleague of mine in Cape Town is running it, together with a colleague in our London office. The Investec Global Sustainable Equity Fund. You know, it is equity, but it’s kind of, absolutely at the forefront of kind of a transition away from dirty energy to clean and green, renewables. It taps into the whole, kind of, decarbonisation theme and, you know, there’s some really interesting companies that are going, you’re going to find in that, that fund, that, you know, tap into wind, you know. There’s a Danish wind turbine manufacturer and seller, for example, Vestas Wind, that’s in there. There are going to be players on solar and hydrogen, etcetera. So, again, getting back to what we spoke about, perhaps you’re right out in the beginning, some investment themes were, you know, it’s a pretty tiny market in South Africa. But, if you go offshore, you know, the world’s your oyster. 

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[25: 35] Closing remarks

Ayabonga Cawe: Interesting fun fact, Vestas runs a very interesting windfarm, not too far from Port Alfred in the Eastern Cape, so, ja. Offshore diversification, but they certainly do have some operations in South Africa. So, a bit of a, ja, a bit of a interesting trivia there at the end. Rick and Ronelle, we’re going to have to leave it here, and a real pleasure to have had the opportunity to chat to the pair of you. Thanks to both of you for sharing your insights with us in today’s conversation. And if you missed any of our previous episodes, please do visit Investec Focus, to access the entire series and get updates on our upcoming episodes. Until next time.

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[00:00] Introduction of guests and topic

[04:22] Alpha explained

[07:47] Looking at the different passive investment options

[11:25] Fees and performance

[15:15] Is active the right approach at this point in the markets? 

[20:21] Where passive investments fit into the capital allocation process 

[21:44] Concluding remarks

[00:00] Introduction of guests and topic

Ayabonga Cawe: As you navigate your wealth creation journey, you’ve probably asked yourself how involved you should be in the investment process and whether an active as opposed to a passive investor would yield better results. Now, in these turbulent times, where the markets have experienced, certainly a lot of uncertainty, we’ve had the temptation to react to short term movements, but it’s important to understand how to apply different investment approaches during fluctuating market conditions. Today, we talk about that and I’m joined by Fabrice Muhizi and Lisa Stride, who are both investment managers from Investec Wealth & Investment. They’re going to be taking us through the intricacies of active and passive investing. Lisa is a 29-year-old fitness enthusiast, who enjoys HITT exercise, yoga and running. She also has a genuine love for people, family and friends and she considers herself an extrovert, a meticulous planner and an organiser and has also, I guess, taken the role of coordinating and planning the lives of many in her family as well. Fabrice joins me; he’s a 34-year-old, married with two kids and enjoys spending time with friends and family, avid soccer fan and ja, Arsenal for his sins it seems. And he also enjoys playing basketball and reading a good book from time to time. And he started very early in the world of investment, in Grade 10 – what many of the older folk might know as Standard 8. So Fabrice and Lisa, welcome to the pair of you, and Lisa, I’m going to start off with you and just get, maybe, some ground level definitions here. When we talk about active versus passive forms of investment, what exactly are we talking about?

Lisa Stride: Hi Ayabonga, it’s a pleasure to be with you today. I think that where the lines can be blurred is that for both types of investing, a decision has to be made. So, when we talk about the term active versus passive, it therefore speaks to how often an investment decision or asset allocation decision needs to be made or reviewed. In terms of passive investing, it’s a strategy that attracts market-weighted indexes or portfolios. Generally, and most commonly, it’s equity focused, but is becoming a lot more popular in the other asset classes, such as bonds, commodities and hedge funds. In terms of our active investing approach, it’s a lot more hands-on. There is a team of research analysts and portfolio managers constructing the final portfolio within a specific mandate. And the main objective with active investing is to create alpha, beat the market benchmark, and, as a simple example, in a pure equity scenario that would mean beating the general equity market returns over the same period. 

Ayabonga Cawe: Hmm, so a big part of this Lisa, is really about, I guess, taking a buy and hold approach, much longer term, rather than maybe tinkering and tailoring within your portfolio in response to what might be, I guess, short-term developments, news and new information in the marketplace.

Lisa Stride: Absolutely. I think if you partner yourself with a quality active manager, they are making those decisions on your behalf. So, if you employ a unit trust vehicle, you’re not paying on-going tax, or having on-going tax events, because the portfolio and fund can be repositioned and rebalanced on an ongoing basis without any consequences. And you should be partnering with a manager that you believe is well-positioned to understand what is the next best position for, for the investor, or for, for the mandate that the fund promises to, to stick by. Yes, passive investing, generally is a buy and hold approach. Typically, as an investor, you should be committed to, to understanding, what, what your exposures are. And that may mean that you do need to rebalance your exposure within your passive portfolio, whereas in an actively managed solution, it is being done for you.

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[04:22] Alpha explained 

Ayabonga Cawe: Hmm, Fabrice, let me bring you in here, because Lisa made mention of alpha, as really, I guess beating whatever benchmark we might look at. And, Investec subscribes to active management; you guys back yourselves to generate alpha. Talk to me a bit more about what alpha is and why you find an active approach to generating those benchmark-beating returns as critical to your particular approach.

Fabrice Muhizi: Thank you, Ayabonga for having me this morning. Alpha is, essentially, the excess returns earned on investment above the benchmark. This is the bottom line of active management. Ultimately, you want to deliver value above what the market is achieving for your clients. The way we do that, is conducting fundamental analysis to really understand what the businesses are, what the sectors are, prospects, promise and positioning our clients for the best outcome, given the information we have. And as, as per Lisa’s definition, active management really talks to how frequently we’re reviewing the investment decisions. How often do we do the homework, to say, do we like this stock, is it one we want to hold for the long term? Ideally, we want to be holders of a stock indefinitely. But we want to make sure that that isn’t a default decision and rather an active one, where we look at what the numbers tell us, and we decide fine, we’re going to keep it. Not just a default, buy and hold approach. And fundamental to this whole process, is the belief that markets are not perfectly priced. So, there is mispricing in the market, and our job is to try and find that and position ourselves accordingly.

Ayabonga Cawe: Ja, there would also be, Fabrice, one would think, a set of objective and subjective reasons for why people might not want to hold particular stocks. Aside from just being over-valued, there’s all manner of questions now around ESG, the quality of the management teams. Talk to us about how that, I guess, fits into the universe of what not to invest in.

Fabrice Muhizi: So, a very good point. I think the idea of active management, by definition, is holistic. So we’re looking at valuation, we’re looking at the quality of managers, we’re looking at how these managers’ decisions affect the environment and the communities in which they serve. It’s a very holistic and on-going process that requires a lot of resources. So, we’ve got teams of analysts meeting managers, doing work to understand the industries that they’re operating in and that we want to be invested in. So, that level of due diligence gives us comfort and we’ve been fortunate that over the years we’ve made more right calls than wrong, which ultimately is what delivers the alpha for our clients.

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[07:47] Looking at the different passive investment options

Ayabonga Cawe: Lisa, I want to bring you back in here. Let’s talk a bit more about, I guess, the passive options. Fabrice has helped us walk through the holistic approach to active management. But let’s talk about the passive investment options, both here at home and also abroad. And one would think, I guess, the benefits of passive investment or index tracking, only makes senses if you’ve got a very wide and a diverse set of investable assets that constitute that index. South Africa is not so big a market in the bigger scheme of things. And so, those indexes would, I guess, be much smaller and give you less by way of diversification benefits than if you were, maybe, taking a more global index that picks particular stock from not just South Africa, but across the world.

Lisa Stride: Absolutely, Ayabonga, and I think you need to join the team, because you’ve hit the nail on the head there. The South African market does have limited differentiated options when compared to global peers. Albeit the industry here in South Africa is growing exponentially, the size of the South African market is tiny compared to global peers. And as you rightly said, this leads to less diversification and concentration risk. Now, what that means, simply, is that that can mean you’ve got overweight to certain sectors, which is great. If the markets are going up, that’s fantastic because the larger shares pull up the index, in a more aggressive manner compared to the smaller counterparts. And you will see yourself doing well. But in times where markets have run strongly, and there is a level of volatility, or a downward trend in the market due to a certain event – such as COVID – you can, , equally feel the pain on the other side. Now, obviously investing and generally, when you’ve got equity exposure of any nature, you should be investing for the long term. To just give you some insights on potentially a tracker that would track the, the index of our Top 40 shares here in South Africa, is that the Top 10 holdings make up 60-65% of the index. Which is huge compared with the S&P 500, the American market, you’ve got the FANG stocks, which are mega tech stocks, known as Facebook; which is now called META, Apple, Amazon, Netflix and Alphabet – which is Google – makes up 20% of the S&P 500. So, you can see the difference in concentration you achieve when selecting either the JSE Top 40 versus your S&P 500. One obvious difference, I suppose, is the pricing. As the market in South Africa does develop, you will probably see the pricing being pushed down. But SA passives tend to be a lot more expensive than the offshore options. And the global sphere has reached a level of about $15 trillion. So, totally different, and I think that’s great. I think investors should always seek to have greater diversification, whether it’s from local to offshore, and market to market.

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[11:25] Fees and performance

Ayabonga Cawe: Many of the people who’ve been listening to us, Lisa, might be asking themselves, I guess, the question that you’ve touched on there, which is around fees and the cost of this. In general, would a passive approach – be it here, at home or even globally, where you’re benefitting more from diversification – be a much lower fee-type play than having an actively managed portfolio?

Lisa Stride: Absolutely, in general though, the answer is yes. And I think that as you’re making investment decisions, if you are happy to own the market, and accept that you will never out-perform the market … fees. Then passive may be a good option for you. What active does provide and where the fees are justified, is that if you look or select and do due diligence, and find some of the best active managers out there, if they are continuously beating their benchmark and the market returns, within their mandate of expertise, then the fees are justified, and those fees are in place to have a sustained commitment with that research and portfolio management team, to make the decisions for you, as markets change, and as we navigate new challenges that, that face us.

Ayabonga Cawe: Fabrice, let me bring you in here, because, I remember, in the theory we were learning at school, there was always this idea, markets follow a random walk and that an index will never be outperformed over a long time horizon by an active strategy. So, why, I guess, would you undertake active management when really the theory is suggesting that there’s really no scope to outperform a passive index tracking-type fund over a long period of time?

Fabrice Muhizi: Maybe let me start off by saying that never is too strong a word. I think active, in many cases, isn’t able to outperform passive. But there is a sub-set of active managers that certainly outperforms passive and the market in general, and what you want to be is in that bloc. Because that’s the only opportunity you have to achieve above market returns. Ultimately, it comes down to cost, right, to your point earlier, Lisa. All asset managers, whether active or passive, own the aggregate index, on average, because active investing is generally associated with higher implementation costs. Many managers fail to overcome this hurdle, and beat the index. And consequently, on average, passive investing has often outperformed active, because it’s giving you the average return of the market. At the same time though, a passive investor can never outperform the market, because your return is what the market is minus some applicable fees. So, we back ourselves to be better than average in the sub-set of active managers. And our track record speaks for itself. So, as Lisa’s just said, I think you need to look at what returns have been achieved, net of fees. And if that’s ahead of the market, then we’ve justified the fee that we have charged. But the reality is, to have any chance of beating the market, you have to be an active investor. It’s that simple.

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[15:15] Is active the right approach at this point in the markets?

Ayabonga Cawe: Hmm, and with where we are now, Lisa, why would we, I guess, encourage people to consider active management? Just in your reading of where capital markets are at the moment, heightened uncertainty brought about by COVID-19, but also, I guess, much of the risk sentiment in the marketplace. Why is an active type of approach good for where we are now?

Lisa Stride: Thank you, I think that’s a great question. And, like all things, investments are cyclical. So, where you’re at is, is a good place to start. First off, it would be remiss of me as wealth manager not to say that it’s important for investors to decide upfront what type of investor they are. Considering the sophistication and time you’ve got to dedicate to your investments, are you able to choose the right investment option for yourself. You, as I said earlier, are you happy to simply own the market? Or do you want something a little bit more bespoke that can be designed according to your risk return profile? If you marry quality financial advice and quality actively managed solutions, I believe you get far down the road in appropriately structuring your long-term family and financial objectives. Speaking specifically to where we see the markets now, we’ve experienced a very strong performance, globally and locally, and what tends to happen when markets heat up, as you’ll tend to see people say, you’ll see an increased level of volatility in the market. And this is due to a few things: future uncertainty, are economies going to be able to sustain the economic activity that we’ve achieved in the last few months due to COVID and the COVID period that we’ve all experienced? When is the US going to raise rates. You’ve seen South Africa start to raise rates now. And most importantly, you see investors and asset managers start to rotate their positions within their portfolios, from positions and sectors that they’ve probably and typically done well in, and probably your more expensive part of the market, into other spheres and, and other parts of the market. And what that translates into, is a choppy environment where it’s harder to make decisions on when to execute, when to invest, and where to from here. So on from that, I genuinely believe that at this stage in the market, active management is the way to go. Because when you choose an actively managed portfolio, in that quality sector, they probably have a much better idea of how to navigate the rough choppy waters that are ahead of us. And having said that, we are pro and bullish on markets. But it is going to be a volatile ride, with the prevailing conditions that need to play out post our COVID recovery. So, I believe that active management at this stage in the cycle has a relative advantage to find the value in the market and be nimble in asset manager or stock allocation.

Ayabonga Cawe: Hmm, and of course a big part, Fabrice, of that process requires some fundamental analysis and what you guys would call technical analysis as well. Because the basis on which you decide whether or not this is a suitable stock to invest in, based on your underlying valuation and the consideration of many of the operational industry and sectorial issues, is what I guess is some of the value to clients who might look towards an active approach.

Fabrice Muhizi: Indeed, to Lisa’s point, now more than ever, you get your value for money from an active manager because the dispersion of outcomes is so wide that simply being in the market is not going to give you; there’s a high risk the outcome might be very negative for you. So, we use fundamental analysis to increase the probability of achieving a better outcome. Then, it’s not to say that we have a crystal ball that tells us exactly what’s going to happen. It’s a numbers game. You do your homework and you increase your chances of having a better-than-average outcome. So, we are fundamentally a research-based sort of institution. Our approach is active for that reason. And we take pride in that, and we’ve been fortunate that we’ve gotten more right than wrong, as I alluded to earlier.

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[20:21] Where passive investments fit into the capital allocation process

Ayabonga Cawe: Hmm, hmm, but you also use passive approaches Fabrice. And maybe talk to me about how, I guess, that fits into the investment and capital allocative approach of Investec.

Fabrice Muhizi: So, we are primarily an active manager, but we do use passive instruments. One area that we use passive instruments most is structured products where we construct a solution on the back of an index. We also look to use passive instruments for, let’s say for example we have a positive view on the Biotech industry. But that sector, we do not have fully fledged expertise internally to conduct stock-specific analysis to then decide what stock in that sector we want to be invested in. But, on aggregate, we think there’s a positive thesis for that sector. The way we would use our active approach to participate in that view, would be to buy an index that’s tracking that sector. So, even within the passive sector, or the passive space, we remain active investors.

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[21:44] Concluding remarks

Ayabonga Cawe: I guess what you’re suggesting is that you do have some structured products that are constructed on the back of some indexes, which themselves are passive instruments. So, I certainly get that particular one. But, Fabrice, just as we wrap up; and Lisa, I’ll also get your perspective on this as well. If you had any message for an investor who’s just trying to wrap their heads around whether or not, they need to consider more than just fees, in terms of their investment approach – be it active or passive – what would that parting message be?

Fabrice Muhizi: I would say if your starting point is looking at fees, then you may not end up with the best outcome for you. Look at what you’re getting for what you’re paying. I think, ultimately, if you’re paying for a service, it needs to be justified by the value that that service accrues to you. So, look at it relatively speaking, to then arrive at what is best for you. There’s a place for both, depending on what the need is. But I would say that that trade-off is an important consideration. If you focus on one side too much, I think you may miss the boat. But if it’s a balanced assessment, I think that’ll serve you well.

Ayabonga Cawe: Lisa, you have the last word.

Lisa Stride: Thank you, I think firstly start. So, I would say to all individuals looking to invest, just start. You have to start somewhere. The longer you invest the higher the reward’s going to be. It’s often time in the market and not timing the market. You can time the market and miss the 10 best days and for that particular market cycle, you’ve missed a lot of the return that was available to you.

Ayabonga Cawe: Hmm.

Lisa Stride: I think find out where your, your natural bias is, find out your risk-return profile. Do you have the stomach to have 100% in equities? And those are the types of conversations that you should have with your adviser or wealth manager. And then on from that, select something that interests you. And grow through the growth and the fund. Understand your exposures, get excited about seeing a label on a water bottle and knowing that’s in the fund, little things like that. I think, the interest will drive your understanding over time as well. So, that would be my parting message.

Ayabonga Cawe: Lisa and Fabrice, I want to thank the pair of you for taking time out to speak to us this morning. Fabrice Muhizi and Lisa Stride are both investment managers from Investec Wealth & Investment. And they’ve been very generous in taking us through the intricacies of active and passive investing. For episode 6 of our Wealth Creation Podcast series, my name is Ayabonga Cawe, and we’re going to have to leave it here and ‘til we meet again.

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