Looking for something different
There are options for investors who look hard
PRIVATE INVESTORS are looking for alternatives to straight equity portfolios, at the same time that alternative investments are coming very much into vogue. But are there really alternatives for private investors?
For very wealthy individuals there are. Hedge funds would probably be the most obvious example, but we’re talking millions here. And a lot of investment knowledge or specialist advice – choosing the most appropriate hedge fund manager is a demanding task that taxes even the professionals who do this for the construction of hedge funds-offunds. The investor I’m talking about tends to be the middle- to upper-income person who wants to build and run his own portfolio, either because he enjoys doing things on his own or objects to the fees charged by stockbrokers. A stockbroker offering private client services is the way to go for a client who doesn’t mind the fees and wants the peace of mind of letting experts make the decisions and do the worrying – but I know many of my readers like to live on the edge and do it on their own.
So what is the alternatives? A hedge fundof-funds possibly, but we’re still talking pretty big money. I’ve always been an advocate of hedge funds, but they certainly aren’t ideal for all investors.
Many will be uncomfortable that the industry still isn’t regulated. It probably never will be, but I don’t think that’s the issue. An investor wanting to get out of or lighten up on equities should note than many of our local hedge funds still seem to have a lot of correlation with the JSE, despite trying to get away from this. The debate is on about how much extra value (or alpha) hedge fund managers add to the overall performance of the market, par- ticularly the long/short equity and so-called market neutral funds. We will probably only know once we’ve been through a sharp and sustained downturn.
There are variations, like the investable hedge fund index run by Clade. It’s also about to launch, in conjunction with the Bond Exchange SA, the Government Bond Exchange Traded Fund (Govex). That could be an alternative for investors interested in bonds, but I want to have a closer look at it after it’s launched later this week.
Preference shares that have been issued by all the major banks and some large companies, have been a most viable alternative for investors seeking income away from the equities market, and still are, according to Mark Appleton, chief investment officer for Barnard Jacobs Mellet Private Client Services. But there’s some confusion and investor concern about the effect on preference shares from the upcoming abolition of secondary tax on companies (STC) and change to tax on dividends.
For ordinary shares, the change in tax will probably be beneficial to investors. The tax will shift to the investor but the company is likely to pass on its STC saving in the form of higher dividends. “In fact, shareholders could be slightly better off as the rate of tax has been reduced from 12,5% to 10%,” Appleton says.
The problem with preference shares is that there’s no legal obligation on the issuer to pass on its tax savings to the investor, who in future will be paying tax at 10% on preference share dividends. However, Apple- ton believes the issuers of preference shares will be under considerable pressure to pass on STC savings, “even though the letter of the law does not require them to do so”.
His argument is that preference shares remain a cheap source of funding for the banks, and failure to pass on STC savings would inhibit them from raising funds from this source in the future.
Appleton urges private investors not to be tempted to sell their preference shares, and says current weakness in the preference share market presents an opportunity to buy investments that are becoming “an increasingly attractive source of after-tax income”. Then there’s private equity, the first wave of which has already crashed on to our shores and churned up some big potential deals. Hendrik du Toit, CEO of Investec Asset Management, says it’s a trend that’s arrived here from the US and the “rocket fuel” is low interest rates.
He’s not averse to companies going private at the right time, but says the small investor must also be looked after. “Mechanisms should be created for investors to remain invested, or offer them a reinvestment option,” he says.
Right now the fight in the potential private equity deals on the table is about the takeout price. But Du Toit is right – shareholders should also push for the right to remain invested in the company after it has delisted. That would create a new and accessible asset class for smaller investors in South Africa.
Don’t sell those prefs. Mark Appleton
small investors. Hendrik du Toit