“Experts” are advising savers to externalise large portions of their savings to achieve decent returns. Investment advice is often driven by looking in the rear-view mirror. If someone had told us to sell all our Rands at R7 to the USD and invest in the S&P500 at 1150 in 2011, this would have been great advice. Telling us this when the rand is R15.50 to the dollar and the S&P500 is 2900 is reactionary and probably irresponsible.
Many so-called experts advised people to externalise their assets after the rand blew out in 2001, from around R7 to R13 to the USD. Over the next few years, the rand strengthened to R6 to the USD and international markets stagnated. These people’s expenses grew annually with SA inflation, they got substantially poorer each year. This advice ruined many people’s financial lives, yet I don’t know of one advisor or fund manager who was sanctioned for giving bad or irresponsible advice.
Will the rand strengthen or weaken over the next five years? Will the JSE beat the S&P500? I don’t know. No one does. If they did, they could make a fortune investing in the winning asset and selling the losing asset. They would not need to make a living dispensing investment advice.
GDP ≠ stock market
Much of what’s written and spoken about in the financial media by investment “experts” is nonsense. It’s baseless, factually inaccurate and will harm rather than help people. Given the dire state of our economy and our low to negative GDP growth, we are told that saving for retirement in South Africa is a losing game.
You should ignore headlines telling you not to invest in the JSE because we are in a recession. Economic growth (GDP), or lack thereof, does not equal stock market returns.
The chart above shows the return from the JSE (blue bar) against real GDP growth (grey bar) over the last 20 years, with annual GDP growth averaging a pedestrian 2.7%. Here are some observations:
1. In 1997 and 1998 GDP was 3% and 1% yet the JSE returns were negative. In 1999 GDP fell to 2% yet the JSE returned 71%.
2. In 2000, GDP was 4% (above the 3% average) yet the JSE returned 0%.
3. In 2002, the JSE return was negative yet GDP was 4%.
4. In 2008 GDP was 3% while the JSE returned -23%. In 2009, GDP was negative, yet the JSE returned 32%.
5. GDP was 3% in both 2010 and 2011 yet the JSE returned 19% and 3% respectively.
6. GDP was only 2% in both 2012 and 2013 yet the JSE returned 27% and 21% respectively
7. In 2017, GDP was a mere 1% yet the JSE returned 21%.
What matters for my retirement savings?
It’s important that we all have a basic understanding of the factors driving our retirement savings. I urge you to understand these key principles so that you can make informed decisions that are in your best interest rather than be led astray by others with conflicting interests.
When we retire, we need an income to replace our salary. If we retire in SA, this is a rand income. Assume I will need R30,000 per month when I retire. This amount grows each year with inflation. If I retire in 20 years’ time and inflation averages 6% per year, my R30,000 requirement would grow to R96,000. My savings must grow faster than inflation to ensure I have enough money (rands) to retire.
My portfolio must beat inflation
A long-term retirement saver, anyone with a time horizon of more than five years, should be invested in a high equity balanced portfolio. Regulation allows this portfolio to invest up to 30% outside of SA and a maximum of 75% in shares. Most high equity portfolios have reasonably similar investment (asset class) weightings. 10X’s High Equity Portfolio investment mix is illustrated below.
More than half your portfolio is a rand hedge
In the 10X High Equity Portfolio, international assets (shares and cash) equals 25% of the portfolio. So, a quarter of your portfolio is not impacted by SA GDP, politics or the JSE.
The JSE (SA equity/shares) makes up another 50% of the portfolio. More than half of the JSE comprises companies that are exposed to international markets and not to SA, including heavyweights such as Naspers, Billiton, Richemont, Sasol and Anglo American. So another 25% of your portfolio is non-South African. 5% of your portfolio is exposed to SA property but at least a third of this is offshore property. So, more than 50% of your portfolio is driven by the global economy and the major international currencies including the US dollar, the euro and the Chinese yuan, and has virtually nothing to do with SA.
20% of your portfolio is invested in SA deposits and bonds. This provides exposure to the rand, to match your retirement income requirements, which are also in rands. These investments are not driven by SA GDP, but rather by inflation.
So your investment exposure to corporate SA is relatively small at around 25% and includes blue chip companies like Standard Bank, Bidvest, FirstRand, Shoprite, Aspen, Vodacom, Capitec and Mr. Price.
Facts versus fantasy
The last 10 years has been a poor period for SA’s economy. We have experienced below average GDP growth of a measly 1.8% per year, a global financial crisis in 2008, political uncertainty and large-scale corruption. Given this poor economic and political backdrop and listening to many so-called investment experts and advisors, you would conclude this has been a lousy time for retirement savers. You would be wrong.
A sensibly constructed high equity portfolio has easily beaten inflation over this period, thus creating robust wealth for your retirement savings. R100 invested in the 10X High Equity fund at the end of 2007 would have grown to R306 at the end of August 2018, far outstripping inflation growth of R185. Contrary to many “experts”, SA pension fund portfolios should have delivered decent returns over the last 10 years.
Many retirement fund investors may be shocked by these robust returns as this may differ from their own investment experience. In fact, it’s possible your actual return is below inflation, but this is not because of SA’s poor economy but rather poor industry practices.
Fees matter
The returns shown above are the portfolio returns before fees. The return your savings earn is reduced by fees. The average South African investor pays total fees of around 3%, comprising 0.75% for advice, 0.5% for administration and 1.5% for investment management plus VAT. 10X believes total investment fees should be kept to a maximum of 1%, implying the average investor pays 2% per year too much. Now, 2% may seem small but over a 40-year savings period, it’s huge. Over this 10-year period, applying a 1% or a 3% fee reduces your investment value to R275 or R222.
Investment returns disclosed by many SA investment companies do not account for the total costs you are paying. For example, a fund fact sheet applies to all investors and does not include advisor fees or LISP platform fees. Life company investor statements are notoriously complex, opaque and confusing. You must thus ensure you know the return before and after all fees but probably need to do some investigating to get this detail.
Most fund managers underperform the market
Contrary to popular belief bolstered by the marketing departments of investment managers and many financial advisors, most fund managers destroy value when managing your savings. Put simply, most fund manager returns are below the market, even though you pay them high fees to beat the market. Research by Standard and Poor’s shows that over the 5 years to December 2017, 93% of SA fund managers underperformed the market.
So another reason your retirement portfolio probably did not do as well as it should have is that underperforming fund managers destroy around another 1% per year in returns. 1% underperformance would reduces your investment value to R199. An index fund performs in line with the market, so there is no reduction in the index fund return.
Bad behaviour is costly
Most people, including “experts” and advisors, are emotional investors and tend to switch portfolios at the wrong times. There is a growing profession, called behavioural finance, studying how bad we are at making long-term financial decisions. The bottom line is that our emotions cause us to buy high and sell low, rather than buy low sell high. We feel depressed when stock markets fall and sell our shares at rock bottom prices. A rational person would buy more shares at lower prices as this is akin to buying goods on a sale. Instead, we tend to buy at ever-higher marked-up prices. Independent research by Dalbar and others shows that bad investor behaviour costs investors between 1% and 3% per year in returns. If you or your advisor have switched portfolios in the last 10 years, you have likely lost another 1% to 2% per year from this.
1% lost to switching further reduces your investment value to a mere R179. An index fund is a long-term strategy that does not require switching away from underperforming fund managers.
Inflation is a tough opponent for many investors
Inflation does not have any investment fees, manager underperformance and switching risk, so is a tough opponent for investors paying high fees, using active managers and switching funds. Despite anaemic GDP growth of 1.8% pa over the last 10 years, a well structured high equity fund with low costs would have handsomely beaten inflation. However, paying high fees, investing in underperforming fund managers and switching funds would easily have delivered returns below inflation thus destroying your wealth.
What should we do for the next 10 years and more?
My advice is to ignore anyone who tells you your retirement fund has done badly over the last 10 years without being able to explain why. Now that you are armed with the facts, it should be clear to you why you have or have not done well over the last 10 years. The reasons you may have not done well are likely to be different from those you will probably be told by your fund manager, life company or financial advisor. You will probably be told that investment returns have been poor, blaming SA’s poor economy, currency volatility, Brexit, Trump, trade wars etc. This is rubbish.
The truth is likely to be a combination of high fees, underperforming fund managers and bad investor behaviour.
Commission of inquiry for pension funds
Yes, SA has many challenges. Our economy and currency are weak. We have many corrupt and incompetent politicians, and some large companies have also let us down badly. While we want to blame this (and the Guptas) for many things, we can’t pin poor retirement fund performance and SA’s ticking retirement timebomb on them. The real culprits are likely to be the very investment experts you rely on, that you pay handsomely, to grow your retirement savings. Perhaps it’s time to have your own commission of inquiry into your pension fund.
Thankfully this won’t take nearly as long as the Zondo Commission. You will quickly know if your pension fund has been captured by the industry when your advisor or fund manager can’t answer simple questions, gets defensive or takes forever to get back to you.
Even when GDP was strong, 90% failed to retire adequately
It’s probably time to take charge of your own financial future, lest you end up bankrupt at retirement as so many South Africans have. Since the 1980’s, SA has quoted an intolerable statistic that more than 90% of people retire without adequate savings. This disaster can’t be blamed on the ANC Government, the Guptas, poor economic growth, a weak currency, the Cold War or any other scapegoat.
Independent research has consistently highlighted that SA has amongst the highest investment fees globally. Research also shows the vast majority of fund managers underperform the market. This performance excludes other fees investors pay for advisors, platforms and product fees. So the actual underperformance is far worse than the already poor results show.
If you have read this far, it should be clear that nobody cares more about your money than you. Thankfully with Google in your hand, you can readily find out the value (or lack thereof) provided by fund managers and others in the investment and retirement industry.
To find out exactly how much of any savings you have with another fund manager you are losing to fees request a free, no obligation fee analysis and cost comparison from 10X by clicking on this link https://www.10x.co.za/campaign/fee-comparison.
We can’t immediately change the course of SA but we can change our own financial course.
Read 10X Investment’s review of the first six months of 2018.
