Look­ing for some­thing dif­fer­ent

There are op­tions for in­vestors who look hard

Finweek English Edition - - Creating wealth - BY SHAUN HAR­RIS shaunh@fin­week.co.za

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

Look af­ter

small in­vestors. Hen­drik du Toit

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