What SA’s super-wealthy are doing with their money: Offshore alternative investments
17 September 2019
CAPE TOWN – “Given the protracted political and economic uncertainty in South Africa, many high net worth investors are looking to move 50% or more of their investable assets offshore,” says Kerry Fynn, chief executive of AlphaWealth which offers investment and wealth planning services for high net worth individuals and family offices.
Some have lost faith in ‘SA Inc’, are concerned about the devaluation of the rand and have found themselves over exposed to listed equities. Many wealthy South African investors are finding that they are getting very low returns for high risk – and are thus looking for new ways to safely invest offshore.
Fynn continues, “As South Africa represents just 0.59 percent of world GDP and since our clients already have considerable exposure to South Africa via their businesses and fixed assets, it makes sense to invest a significant portion of their investment portfolios globally. This isn’t a new phenomenon, however what has been interesting, is the growing popularity of alternative asset classes. Our exposure, both locally and globally, to these investments has increased noticeably over the past few years.”
Alternatives are generally described as assets or investment strategies other than traditional equities, bonds or cash instruments – common ones are private equity (including venture capital), private debt (non-bank loans), real estate, hedge funds and infrastructure. Since alternatives are perceived to be uncorrelated to typical equity and bond investments, adding them to a portfolio will provide broader diversification, reduce volatility and enhance returns.
Explains Richard Asherson, partner at Westbrooke Alternative Asset Management UK and who oversees the Westbrooke Yield Plus private debt strategy, “Alternatives enhance portfolios through diversification of returns and reduction in volatility, provide downside protection and have a low correlation to traditional fixed income and equity investments as the underlying assets often react independently to market conditions.”
“The shift towards investing in alternative assets is not only in South Africa. There is a worldwide growing trend towards alternative asset classes. As global economic growth is weakening, investors everywhere are finding it challenging to source compelling risk adjusted returns in traditional markets, consequently they are increasing their allocations to alternative assets. This trend has been growing over the past decade and there are no signs of it stopping. In fact, a recent survey indicated that 64% of wealth managers expect demand for alternatives to rise.”
One of the potential drawbacks of this asset class is liquidity. Depending on the investment, some offer short term liquidity like private debt but in general liquidity is more restricted. Less liquid investment options such as private equity tend to offer an ‘illiquidity premium’ – compensating investors with improved returns in return for the lack of liquidity.
Under extreme market stress, such as financial crises would alternatives still perform? Data since the global financial crisis indicates that that alternatives have not typically fallen as low as stocks, providing a cushion for investors.
Alternative assets are more established in developed markets than in SA. Manoj Soni, chief investment officer at Capricorn, a London based private investment office which advises a number of global families (including many South African families) says, “Generally around 25 – 30% of our client’s portfolios go into alternatives. Our main objective is to deliver an attractive risk-return around 6 – 7% in GBP / USD over the long term without taking significant risks. To achieve this, we have to allocate to longer-term, uncorrelated opportunities that others may shy away from due to either their inability to invest for the long term or their desire to avoid complexity.
South Africans tend to be over-invested in South Africa, a phenomenon known as ‘home bias.’ They earn their income in Rands, own a home in the country and this is often a large percentage of their wealth. To truly diversify your investments, you need to consider offshore to benefit from global growth. Successful investors seek asset, sector and geographic diversification.
Soni continues, “In addition to being diversified across different strategies, geography and currency are important. We advise matching assets to liabilities and therefore it makes sense to have a proportion of your investments in your home currency. However, this shouldn’t be at the expense of accessing opportunities in much bigger and deeper markets. For example, while the majority of our clients are UK or SA based, we have biased their portfolios to the US where we see the best growth opportunities, the best managed companies and where the economy remains relatively robust. The avoidance of home bias is critical in building a diversified portfolio.”
Westbrooke Alternative Asset Management’s Asherson says, “The market is very uncertain and investors are taking a more conservative view of allocating capital, in many cases seeking capital preservation rather than capital growth. Capital preservation and global diversification is a core theme, not just for South African private clients but for high net worth investors everywhere.”