Four Strategies to protect and grow your wealth

The past two-and-a-half years have been a tough time for South African investors.

Economic growth has been low, the local market has disappointed and the uncertainty around land expropriation without compensation has thrown the cat among the pigeons.

Speaking at the ‘SA Quo Vadis?’ seminar presented by Brenthurst Wealth and Moneyweb, Jean Pierre Verster, portfolio manager at Fairtree Capital, discussed four strategies investors could consider to turn these threats into opportunities.

1. Activism

In the US, activism has been around for a while. Well-known activist investors include Daniel Loeb, Bill Ackman and Carl Icahn.

With activist investments, someone buys a big chunk of a company’s shares and uses their influence as a shareholder to change the company fortunes by getting involved and adding value along the way, Verster said.

While South Africa is not known for its activist approach, some of the country’s big asset managers have used their muscle to try and force companies to make certain changes where they own a big chunk of shares.

“So it is not as if we are completely passive in this country, but there is definitely scope for a more activist approach when it comes to investing.”

In South African at least two funds are following this approach. One fund is currently active in companies like Altron, Adcorp, African Phoenix, Novus and PPC – so far with a mixed success rate.

A smaller activist investment company has also been busy at Stellar Capital, Santova and Rolfes.

But investors have to be aware of the risk of “shortermism”. Activists may get involved, push the earnings per share higher for a few years in the hope that the share price will rise and once it does, they sell their stake, Verster said.

“That doesn’t create long-term value for the shareholders that are left.”

2. Shorting

Another strategy that could be used to protect and grow wealth is shorting – making money from falling share prices, Verster said.

For example, if an investor decided to short the gold price, he could borrow Gold Kruger Coins from his neighbour with the promise that he would return it in a year’s time. If the price of a Kruger Coin is R200 000, the investor would be able to sell it in the market at R200 000 per coin. A year later, he would have to return to the market to buy Kruger Coins to return it to the neighbour. At that point – one of two things could have happened: The price of a Kruger Coin could have gone up, or it could have gone down.

If the price of a Kruger Coin fell to R150 000 a coin, the investor would be able to buy it back at R150 000 each and return it to the neighbour, thereby making R50 000 from each coin he borrowed.

However, if the price of a Kruger Coin rose to R250 000 per coin, the investor would need to buy at this price. Now he would need to pay R250 000 to give back the coins to his neighbour and would be out of pocket R50 000 per coin, Verster explained.

“Shorting is a higher risk strategy. It is a specialised strategy. It is one that is employed these days in a regulated fund in South Africa.”

The best shorts are fads, frauds and failures, he said.

Steinhoff was one such example.

“If you were invested in Steinhoff you lost 98% of the value of your investment [over the past year]. But if you were short Steinhoff shares, you could have made that.”

With shorting, the risk is that short-sellers could short the share and release false or misleading information about the company into the market – the so-called short and distort strategy. Investors have to be mindful of this, Verster warned.

3. Quants

A third strategy is to use quantitative analysis.

These days computers, robots and algorithms don’t just do mindless work anymore, but have started replacing humans. Big data, artificial intelligence and machine learning are big threats to a lot of employees and certain industries, but it also provides opportunities for the asset management industry.

There is already $1 trillion invested in quantitative analysis-type strategies abroad, Verster said. One example is US hedge fund manager Jim Simons who started Renaissance Technologies and who has successfully used quantitative analysis to compound returns at more than 35% per annum over more than 20 years.

“It is very small in South Africa, but it is starting to gain traction.”

Because quantitative strategies come at a lower cost and fewer analysts can be employed, a lot of people are quite excited about the development, Verster said.

The strategy also avoids human bias – machines don’t get fearful or greedy and can manage money in a more objective way.

Verster warned however that where quantitative funds used the same signals to trade, it could become crowded. For example: If all quants expect property prices to fall as interest rates rise, they could start selling property, prices would drop and it might actually be a buying opportunity.

“It is working now with $1 trillion. We don’t know at what point everyone is going to be doing the same and then you have the herding effect and then you should actually do the exact opposite.”

4. Go global

The fourth strategy is to consider global diversification, Verster said. South Africa only represents 1% of the investable universe of globally-listed shares.

Historically, South African investors have been quite insular in their approach and have invested most of their money in the local market.

“Most of our money is invested in South Africa, in this 1%, while a lot of studies have shown that closer to 50% is a better allocation to offshore investing.”

Verster warned that investors who used their foreign investment allowance to invest directly in shares in the UK, might be liable for estate duty when they pass away.

While Regulation 28 of the Pension Funds Act, which governs the maximum allocation to various asset classes, was recently relaxed (investors can now invest up to 30% of their pension assets offshore), for some people it could be prudent to take even more money offshore, he added.

In a certain sense, local investors have already done this indirectly for some time. Roughly two-thirds of the revenue of JSE-listed companies is generated abroad.

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