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Welcome to Taking Stock
Spring 2019

November 2019
By Sangeeth Sewnath, Deputy Managing Director

Domestic stocks fell 4.6% in the three months to the end of September. Before getting too despondent, it’s worth noting that the year-to-date returns still look healthy. The All Share Index delivered 7.1% over the nine months; the All Bond Index was up 8.4% and the property sector managed to stem the bleeding to end 1.5% down.

At the Taking Stock event at the beginning of the year, Clyde Rossouw predicted double-digit returns for SA and global equities. So, the dismal third quarter notwithstanding, his five-year predictions remain intact. It is encouraging that the Quality range over which he presides has performed particularly well.

Continuing to invest for the future

We do not have to look beyond the daily newspaper headlines to know that the South African economy remains in the doldrums. For the first time in five years, advisors are telling us their businesses are more affected by market conditions than regulation. Many advisors have asked us how to navigate this difficult environment. From our experience, it is critical that you keep a tight rein on costs to ensure your business is sustainable for the long term, but also that you continue to invest in the right places to grow for the future.

In our case, despite flat markets and revenues to some extent flatlining, we have continued to invest in talent. Testament to this is the recent hire of Duane Cable as Portfolio Manager and Head of our SA Quality team, and the appointment of Rehana Khan, who will join us shortly as Portfolio Manager in the SA Equity & Multi-Asset team.

Passive versus active: cost versus value

We welcome the discussion around the perceived benefits of passive investing, with much of the focus on costs. Investec Asset Management is unashamedly an active manager, and we believe that consistent active returns deliver significant value to investors.

Consider the Investec Equity Fund, which over 25 years has outperformed the benchmark by 2% net of fees.1 This outperformance of 2% net of fees delivers a fund value that is 60% better than a passive outcome (assuming no fees for passive) after 25 years. The difference is stark when you view the value of 2% additional returns in terms of your income after retirement. If the active portfolio provides an income of R100 (assuming a 5% income drawdown), the passive portfolio will only deliver an income of R65 at zero fees.

The focus on the short term misses the value add of active returns in the long term. Investors forget that by taking into account their pre- and post-retirement years, they actually have an investment horizon of 40 to 60 years.

Considerations when selling

Most investment letters have started to become a bit predictable in that – without fail – they reiterate the importance of staying invested. What is equally important, as highlighted by the above statistics, is that investors also ensure they are in the right investment. Sales Manager, Paul Hutchinson, recently wrote an article on the warning signals that should trigger a re-evaluation of the investment. For investors and advisors alike, however, selling is not easy behaviourally. The reason is quite simple – making an investment is only one decision, but selling requires two separate decisions – not only what and when to sell but also what to buy.

Capital gains tax (CGT) is frequently cited as a deterrent to selling. While that is true, it is useful to understand the actual value of the CGT impact. Paul has also considered this question in further detail. The conclusion is if you’re targeting a real return of 5-6% and switch every five years, the fund into which you switch must generate an additional 40-50 basis points per annum over the five-year period to justify the CGT impact. If you assume the period is longer, the additional return required reduces.

Retirement tax benefits are material

Emigration is an emotional decision and the Moody’s outlook downgrade will no doubt likely add further impetus to those considering greener pastures abroad. From an investment point of view, it raises questions about the merits of continuing to contribute to a Regulation 28-compliant fund. In this edition of Taking Stock, we interrogate the tax benefits of Regulation 28-compliant investments versus the impact of the investment restrictions imposed by the legislation. While the emotional decision is harder, the maths is simple: continue investing in your Regulation 28-compliant fund, as a fully discretionary portfolio has to generate returns of approximately 2.5% per annum more than a Regulation 28 portfolio to exceed the tax benefit you receive from the latter.

In conclusion

As we have recently communicated to you, our demerger is on track. When we speak about the global business we have built, our clients continue to be surprised by our size and reach. We now have assets under management in excess of R2.1 trillion. Ours is a truly South African success story, but none of this would have been possible without the partnerships we have built with you over the last three decades.

Thank you for your continued support.

Sangeeth Sewnath
Deputy Managing Director


1Morningstar, as at 30.09.19, R class to 30.04.00 and then A class onwards, NAV based, inclusive of all annual management fees but excluding any initial charges, gross income reinvested. Comparison index: 87.5% Capped SWIX +12.5% MSCI ACWI; 87.5% ALSI + 12.5% MSCI ACWI pre 01.11.2017; ALSI pre 15.07.2016. Highest and lowest annualised return (12-month rolling): April 2006: 65.8% and Feb 2009: -34.8%, respectively.


Important information

All information provided is product related and is not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security. Collective investment scheme funds are generally medium to long term investments and the manager, Investec Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing and scrip lending. The fund may borrow up to 10% of its market value to bridge insufficient liquidity. A schedule of charges, fees and advisor fees is available on request from the manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant Total Expense Ratio (TER). A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The ratio does not include transaction costs. The TER of the Investec Equity Fund (A) class is 1.13%. The current TER cannot be regarded as an indication of the future TERs. Additional information on the funds may be obtained, free of charge, at The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. The scheme trustee is FirstRand Bank Limited, PO Box 7713, Johannesburg, 2000, Tel: (011) 282 1808. Investec Asset Management (Pty) Ltd (“Investec”) is an authorised financial services provider and a member of the Association for Savings and Investment SA (ASISA).
This document is the copyright of Investec and its contents may not be re-used without Investec’s prior permission. Investec Asset Management (Pty) Ltd is an authorised financial services provider. Issued, November 2019.