Spread your bets
Safety nets for the adventurous investor
● The destruction of value on global stock markets in the wake of the coronavirus pandemic underlines the obvious — investors shouldn’t place all their eggs in one basket.
While it is uncertain what the world will look like in the coming months as countries shut down to curb the infection rate of Covid-19, stock markets have crashed before and recovered and it is likely this will happen again.
Investors can consider a host of alternatives to provide them with a safety net.
This could include holding cash in hard currencies such as the US dollar or an offshore property in Europe.
It could even extend to more adventurous investments such as fine art, vintage cars and luxury watches.
That doesn’t mean you shouldn’t hold equities. It just means spread your risk. One thing stock markets — although down 20% to 30% on average around the world at the moment — do offer is liquidity. It’s easy to get in and out of investments on any bourse.
Piet Viljoen, a director of Counterpoint Asset Management, says investors have to “ignore the noise” when it comes to investing in the stock market, especially at times of panic selling.
“If you buy the equity of good companies, they will look after you over time,” he says.
Alternatives such as fine art, watches or vintage cars can offer attractive returns but beware of the pitfalls in these markets too.
“Art can be a good investment as there are always parts of the art market that are increasing in value. But art is more a passion than an investment,” says Viljoen, who is an art collector himself.
He warns that over long periods, art values increase in line with inflation and that the holding costs, in terms of storage and maintenance, can be expensive. You also cannot sell a painting in a matter of days.
“Another thing to bear in mind is if you are looking to buy and sell, the bid/offer spread is very, very wide. There are often big mark-ups by dealers.”
Classic car broker Brian Noik says prospective vintage car buyers must do their research. Holding costs, storage, insurance and mechanical expenses have to be taken into account. Noik says there are also nuances that newbies might not understand.
For instance, in the Porsche market, hardtops are preferred by collectors to convertibles, whereas the opposite holds true when it comes to Ferraris.
Just because it is old and rare doesn’t necessarily make a car more valuable than a more common make.
Noik says a 1928 DeSoto is a “very rare car”, fetching R220,000 to R250,000, but the more common 1928 Ford Model A would sell for almost double that because there is a strong spare parts market, as well as an active club, associated with it.
Lourens Reichert, a senior partner at Holborn Asset Management, says the investment world as a whole has “become very, very strange and people don’t know where to look for their investments any more”.
Even before the pandemic, the domestic investment market wasn’t growing because the economy hadn’t been expanding.
This means SA’s local pension funds and units trusts have been subject to little or no growth locally. The local stock market, after adjusting for inflation, has not delivered any real growth in the past five years.
While this may change in the future, depending on their risk profile, investors would have been better served investing their money in other assets.
Holding cash in rands wouldn’t have been a good idea either because of the high tax on any interest earned on it, says Reichert.
But if an investor had moved a portion of his or her investment into dollars over the past five years they would have made real returns just by holding them in this currency.
“If you had a balanced portfolio abroad, over the last five years you would have made 10% a year in dollars.”
Reichert says vintage cars can also be strong investments, citing the example of one of his clients in Cape Town, who is a collector of vintage Porsches and has bought 28 of them over the past 10 years.
“She bought her cars for a total of R10m over the last 10 years. Today that collection is probably worth R40m. That is a 400% return,” he says.
Watches, which are also priced mainly in dollars, would have delivered much more than the local stock market over the past year, up to a 20% return in some cases.
“Take a Rolex, for example; by its very name it is a very sought-after brand. Certain Rolex models will trade higher on a secondary market than they were priced at the shop to begin with.”
Reichert says a Rolex Submariner bought in SA for R100,000 a year ago, would fetch R120,000 today, based on the exchange rate alone.
Offshore property — especially in countries such as Ireland, Portugal, the UK and Germany, where nonresidents can borrow capital and aren’t taxed more than locals — also offers opportunity.
The Berlin property market, for example, has been growing in euros at 11% per annum over five years.
The investment world has become very, very strange and people don’t know where to look any more