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Investment Management I Building Wealth

Interpreting the Maze: A Basic Outline of Investment Management

Investment management is a term that often invokes images of fast-paced trading floors and high-powered financiers, but it is so much more than simply buying and selling stocks. It is a complex journey of building and safeguarding wealth. Understanding its intricacies is important for every investor, regardless of their experience.

In this article, the professionals at Efficient Wealth briefly explain the complexities of investment management.

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Financial Services I Achieve Your Financial Goals

Harnessing the Power of Financial Services: Your Personalised Roadmap to Wealth and Wisdom

The world of finance can feel like a maze riddled with complex terms and financial jargon. However, mapping through this terrain becomes significantly smoother when you equip yourself with the right tools and knowledge. Conveniently, this is where financial services can assist you, serving as your compass and guide on the path to achieving your financial goals.

Today, the financial experts at Efficient Wealth explore how to leverage financial services efficiently to build your wealth and secure your financial future.

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Beyond Financial Planning: Unpacking the Power of Wealth Management

Gone are the days when wealth management was seen as managing investments only for the wealthy and famous. Today, it is a sophisticated orchestra, expertly blending financial tools with life goals, risk tolerance, and individual aspirations. It is a journey, not a destination, guiding rich and ordinary individuals and families alike towards long-term financial security and helping them fulfil their dreams.

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What the Tour de France and markets have in common

Dr. Francois Stofberg: Senior Economist at Efficient Wealth and the Managing Director of Efficient Private Clients, with specialist input from Renier van Zyl.

Long-term investing shares parallels with the Tour de France – a strategic journey where endurance prevails over short-term sprints. Much like cyclists navigating diverse terrains, investors navigate market fluctuations from quarter to quarter and year to year. Success demands patience, resilience, and a strategic approach, underscoring the significance of steadfast commitment in the financial race for wealth.

For those unfamiliar with the Tour de France, it is cycling’s premier event, covering 3 500 kilometres in France across three weeks. It was originally started in 1903 to boost the L’Auto newspaper’s circulation and then evolved into a global spectacle. Cyclists face various stages, from challenging mountain climbs to flat sprints. The yellow jersey, introduced in 1919, symbolises the overall leader. The Tour de France has woven a tapestry of legendary battles, captivating audiences with its blend of athleticism and endurance.

The correlation between the Tour de France and financial markets is intriguing. The Tour has never been won by a cyclist who has claimed victory in every stage. During the difficult mountain stages when conditions are challenging, it is usually the climbers who prevail; in the case of markets, defensive funds usually outperform during challenging times. Conversely, flat stages favour speed, akin to high-frequency traders utilising leverage and derivatives. Similarly, financial markets witness varying dominant strategies, whether defensive, growth or quality, each quarter or year, reflecting the Tour’s changing winners from one stage to the next. But, ultimately, success lies in donning the metaphorical yellow jersey or, in our case, achieving financial prosperity. But how do investors win the yellow jersey in the race for wealth?

Renowned investor Howard Marks asserts that success in investing lies not in being consistently right all the time but in being more right than others most of the time. Terry Smith from Fundsmith emphasises that “in order to win or achieve financial success, one needs to be excellent at one discipline, not bad at the others, and to work with your team”, or, in this case, your Efficient financial advisor. In this way, we can assist clients in investing in the correct long-term strategy and not switching strategies during the wrong period, that is, in the wrong stage of the race because they might have temporarily fallen back in that particular period (stage). What we often see happen is that clients switch funds, or even asset classes, incurring fees and taxes at the wrong time, only to discover that their previous approach outperformed after the switch.

In recent decades, quality investing has established itself as the pre-eminent leader among various investment styles, consistently earning the coveted metaphorical yellow jersey. In short-term sprints, quality can underperform but, over the past 25 years, quality investing has consistently outperformed the MSCI World Index in every rolling ten-year period. Or, as Marks put it, being more right most of the time. At Efficient, we align ourselves with long-term, quality investors, prioritising businesses with proven track records over extended periods. These enterprises stand out through attributes such as price leadership, superior quality, robust brand strength, and adept managerial prowess, among other defining characteristics.

In the persistent pursuit of wealth, we implore investors to be resilient like Tour de France cyclists. Steadfast, long-term investors must own quality businesses, unaffected by short-term market fluctuations. Success demands patience, strategic commitment, and a disciplined approach that will steer investors through the different stages to financial triumph.

Best way to invest: Monthly or lump sum?

As the tax year comes to an end, investors assess their retirement annuities and tax-free savings accounts. They also ask: Why is there a variance in my monthly contribution returns? The short answer is that debit order investments benefit from down markets.

But what is the best way for you to invest? Last year, 2023, was a good year in the markets. A typical balanced or pension fund delivered a return of approximately 12%, much higher than the 5.1% inflation and 8% of cash. However, a monthly investment return does not always correspond to the return on the fund fact sheets. This can be because of:
• The initial low value of a monthly contribution; or
• The timing of monthly cash flows.

Initially, market returns have a low impact on a monthly investment as the fund value is low. The table below shows the impact of a 10% market return on a monthly contribution of R1 000 pm versus a lump sum of R12 000.

Note: Monthly contributions on the 1st of each month

The table shows that the monthly growth is more for the lump sum investment. However, the timing of the cash flows also have an impact on the return. Monthly investments tend to perform better than a lump sum investment when the market first declines and then recovers. During a negative market cycle, a monthly investment will accumulate more units when the prices decline. When markets recover, there are more units in the portfolio, resulting in a higher return than a lump sum investment. The table below shows the difference between a negative and positive market cycle.

Source: Morningstar, ASISA South Africa Multi-Asset High Equity

Monthly vs. lump sum? The answer is not as simple as choosing the one over the other: Remain focused on your long-term goals and invest consistently.

 

 

An ear to hear, and some sense to see

Dr. Francois Stofberg: Senior Economist at Efficient Wealth and the Managing Director of Efficient Private Clients.

During the last few years, it seems as though we have started each year in the same way: Warning investors about potential market volatility. This year, as local and global factors converge into a cooking pot of uncertainty, seems to be no different. In the end, however, our advice has been stellar and has rewarded investors who stayed the course.

What we tell investors who are willing to listen
Do not try and time the market – this does not work in the long term. Do not take unnecessary risks – it is one of the quickest ways to destroy wealth. This means that you should not run after returns, especially if you do not know about all of the associated risks. Currently, there is an unhealthy appetite for private-equity investments in South Africa (SA), and many of these managers have taken advantage of needy investors. Desperate investors are quick to forget about Sharemax, Ecsponent, and the like. Investing in cryptocurrencies can fall in the same category but we will speak more about this in future communications. Furthermore, do not be short-sighted and do not let short-term volatility upset you. Try to see past the noise and be objectively aware of your biases. Do not make rash, emotional decisions – make informed, strategic, long-term capital-allocation decisions with the input that we provide together with your financial advisor. In this way, you can not only protect your wealth but even create more in the long term.

Some things we are keeping a close eye on
Locally, we have an important election around the corner, the result of which is still anyone’s guess. Two scenarios seem likely: If the ruling party lose enough votes to force them into a coalition with the Economic Freedom Fighters (EFF) in key provinces like Gauteng, South African markets will most likely have a very bumpy ride. If the ruling party, however, goes into a coalition with some smaller parties, instead of the EFF, we might see favourable capital markets all around. Bonds, equities, and even the rand might outperform a depreciating dollar. Our state finances have also come under severe pressure, which will make for an interesting Budget Speech in February. Overall, something radical will be needed in government to shift the policy focus in SA away from rent-protectionist, social-upliftment policies towards wealth-creative policies. This is the only solution for poverty and unemployment in our country. The solution is definitely not to lean more left.

Globally, we are all aware of the social-political tensions, which a poll recently put as the highest risk factor for 2024. OPEC+ seems determined to keep oil prices elevated, which should keep fuel prices elevated in SA. China is still struggling to open the floodgates of growth, which will probably delay the shift in sentiment towards emerging markets for a little longer. It seems as if inflation has been reasonably taken care of in the developed world. The concern now is over the health of economies in the developed world. The question is no longer if the United States (US) will decrease interest rates but if they will be allowed to do so of their own choosing, or if a struggling economy will force them to do so. We are hopeful that the US will not delay in reducing interest rates because that will probably signal to our own South African Reserve Bank that they can start cutting too. We might see a 1% cut in interest rates this year, which means that each R1 million of household debt will cost about R800 less each month. More money to spend will be welcome news to struggling households in SA.

The tide is turning, especially for the hopeful remnant

Dr. Francois Stofberg: Senior Economist at Efficient Wealth and the Managing Director of Efficient Private Clients.

It has been a tough year for South Africans. In fact, we have been having tough years for as long as we can remember. Inflation has slowly been increasing since the 4% levels that we saw pre-COVID. In 2022, inflation reached nearly 7% and will most likely be around 6% in 2023. Higher inflation means that buying power deteriorates faster, making South Africans feel poorer. Interest rates, which are also higher than they should be, are doing their share to make us feel miserable. Unemployment has slowly been increasing recently but it seems to be stabilising around 32%. Gross domestic product (GDP) per capita (per person), adjusted for inflation, has slowly been decreasing over the last decade, which literally means that South Africans have become poorer. And it does not end there: If you are fortunate enough to be investing for retirement, your total liquid assets have probably not grown by more than 6% to 8% each year for the last five years (and much less over the last ten years); especially not if you adjust for fees and taxes. Once you also adjust for inflation, it means that your assets have been losing value too.

Most South Africans will blame government for their predicament, and rightfully so. The ruling party has been one of the greatest destroyers of wealth (like capital) and livelihoods in South Africa’s (SA’s) history. Corruption, cadre deployment, poor economic policies (like black economic empowerment), and weak employment policies that favour employees over employers are only some of the factors that have contributed to SA’s current and ongoing conundrum.

However, it is not as easy as simply blaming the ruling party. Since the global financial crisis in 2008/2009, rich countries have been artificially boosting their economies and markets with monetary and fiscal policy in a way that has led to a structural change in business cycles, sentiment, and valuations. So, while our government was failing us, the rest of the world was turning against emerging countries and their assets.

It is, however, worthwhile to note that, amidst the mounting obstacles, many individuals have created substantial wealth through legitimate pursuits in SA. These individuals, many of whom are our clients, always look internally, not externally: They observe, learn, and improve themselves and those around them. They do not blame but create. In this way, their skills are always in demand and they end up creating substantial amounts of wealth. We refer to these individuals as ‘the hopeful remnant’.

That being said, the tide is slowly shifting back to emerging economies. Rich countries are no longer able to keep their economies artificially strong and must now unwind their support. Also, while intervention in rich countries was keeping their economies alive, their economic fundamentals deteriorated. Debt-to-GDP ratios in these countries are set to exceed 120% of GDP, more than double the rate in emerging countries. Companies in emerging markets have remained resilient amidst insurmountable odds, whilst many in rich countries have been kept alive by intervention.

A shift in the tide of sentiment is something that we can look forward to in SA, especially the hopeful remnant. However, because of the manoeuvres of rich countries, the business cycle has been extended, meaning that we might have to wait a few more years. This might give us enough time to go through the pain of our local politics. Now, more than ever, it is important to remain patient and follow sound financial principles. Remember to always speak to your financial advisor and investment experts!

How policy continues to fail South Africans

Dr. Francois Stofberg: Senior Economist at Efficient Wealth and the Managing Director of Efficient Private Clients.

To curb inflation, the South African Reserve Bank (SARB) raised interest rates by 4.75% to a 14-year high of 8.25%. Following the various shocks that our economy faced throughout COVID-19, inflation breached the upper limit of the SARB’s target range for 13 consecutive months, which led to the SARB tightening monetary policy since November 2021. While inflation has since eased to an annualised 5.4% in September 2023, rates remain at their highest since 2009, prompting many to criticise the SARB for its approach. Some even believe that the biggest obstacle to growth and job creation in the short term is the SARB’s obsession with inflation targeting; we tend to agree.

Traditionally, real interest rates around 2% are best for long-term sustainable growth, which means that there is a lot of room for the SARB to cut interest rates and to support struggling South African consumers. The SARB’s scope to lower borrowing costs may also improve as its counterpart in the United States (US), the Federal Reserve, potentially nears the end of its rate hiking cycle. More and more analysts are beginning to forecast that US rate cuts are on the horizon. Although analyst predictions vary widely, they all seem to agree that the US will most likely start cutting interest rates in the second half of 2024 and will do so rapidly.

Import inflation, especially that of oil, has been a favourite scapegoat of the SARB, who likes to cite a depreciating rand, elevated global oil price, or even bad weather as credible reasons why the medium-term outlook of inflation does not look rosy enough to cut interest rates. Although the rand will most likely appreciate, the oil price should remain unchanged during 2024. The string of weak macro-economic data, including a slowing global economy, coupled with rising US crude stockpiles, will likely keep prices in check.

Oil headed for a fourth weekly loss after sinking into a bear market when supplies remained healthy, and stockpiles rose to offset attempts by the Organisation of the Petroleum Exporting Countries (OPEC+) to keep price declines in check. Oil price declines have also been supported by the apparent vanishing of an Israel-Hamas war risk premium, as fears about oil production have so far not materialised. OPEC+ will, however, probably do their best to keep the oil price between $80 and $100 during 2024. But even if they do, this will mean that the oil price will remain largely unchanged and, therefore, be no real risk to inflation in South Africa (SA). Global oil demand will most likely also keep the oil price in check. Figures from China, the world’s largest importer of crude, showed that refiners cut daily processing rates in October as apparent oil demand decreased from a month earlier. Meanwhile, US unemployment benefits rose to the highest level in almost two years, signalling a slowdown in the world’s biggest crude consumer.

A scathing report was published by Harvard University’s Growth Lab, whose research aims to help policymakers understand how to accelerate economic growth. The report identified two main reasons for SA’s deterioration: The poor capacity of the state and the government’s inability to address the spatial exclusion it inherited from apartheid. Unfortunately, the researchers found that the policies that have been put in place by the ruling party since then have only worsened the impact of spatial exclusion. A common thread throughout the research is how the government’s poor economic policy fails to yield desired outcomes, such as job creation and economic growth. One of these economic policies is the stringent preferential procurement regulations, which have, at best, supported entrepreneurs from specific ethnic groups but have not led to inclusive growth. Another main growth impediment is labour policies, the forerunner being black economic empowerment, which reduced the overall economic growth in SA. The researchers concluded that SA’s trajectory is not one of growth and inclusion but rather one of stagnation and exclusion.

The allure of Bitcoin

Financial Planning I Your Financial Future

The Power of Professional Financial Planning

 

To reach your desired outcomes, it is vital that you plan the route you wish to follow, and financial planning is one of the most important facets of your future outcomes. It is often said that proper planning prevents poor performance; whilst financial planning does not take place on a sports field, everyone wants to live with confidence, secure in the knowledge that they have the measure of their financial strength as they prepare for their retirement years.

With this in mind, in this article, our certified financial planning professionals at Efficient Wealth offer a few hints and tips to plot a course for your financial future and to prepare for life’s unexpected occurrences. Moreover, we will briefly delve into the crucial concept of financial planning and how it can pave the way for you to a secure and prosperous future.

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