By Shane Tremeer, 5 March 2014
In September 2013 South African billionaire Johann Rupert was part of a consortium that bought a Cape Buffalo bull for a record R40 million. A few months later an Irma Stern painting fetched a record R39 million on auction in London. And the historic Constantia Uitsig winery recently came to market with a price tag of around R175 million.
The mind boggles at the sums South Africa’s high net worth investors – people with R10 million and change in investible capital – are prepared to pay for the latest “must have” asset. By latest estimates there are 48 000 investors (and the number is growing) who sport their high net worth “stripes” at wealth and private client managers countrywide.
“It is somewhat counter intuitive that South Africa has an increasing dollar millionaire population against the backdrop of a faltering global economy,” says Shane Tremeer, director at Sanlam Private Investments (SPI). He says sectors of the domestic economy have powered ahead despite the global financial meltdown, and local entrepreneurs have made fortunes by being active in the right sectors at the right time.
What can Joe Average learn from the high net worth investor? A good place to start is with the investment behaviour of the ultra-rich. Tremeer quickly dismisses the notion that South Africa’s high net worth investors are financial “cowboys” who pursue high-risk investment strategies at any cost. In reality, they are cautious individuals who squirrel away their wealth in risk-appropriate investments that match their life stages.
They are also not shy to get appropriate advice to steer their investment decisions. “The ultra-wealthy are multi-advised and multi-banked and – especially in the 60-plus age group – focus on wealth preservation and sensible portfolio diversification rather than taking chances with complex financial structures,” he says.
A common factor that high net worth investors share – albeit in recent times and regardless of age or net worth – is to maximise their offshore exposure. “In our experience wealthy clients are diversifying across asset classes AND geographies,” says Tremeer. “During the first decade of this millennium the South African market – and most emerging markets – was the place to be. This has, however, turned around quite quickly over the past 18 months with developed markets steaming ahead. Geographic diversification ensures that they are financially prepared for the uncertainties that local investors could face over the next decade.”
Maximising offshore exposure is one thing, but what assets does Joe have to buy to benefit from the extraordinary growth that the ultra-rich so obviously enjoy? At first glance, there are a few “for the rich only” asset classes that could give the rich an edge.
Despite the widely publicised political risks associated with land ownership, an interesting trend is that the ultra-rich are investing in agricultural property such as wine, game and crop farms. The penchant for the country’s billionaires to bid up the price of breeding buffalo has been well documented of late – as have the “buy and sells” of boutique wine farms.
“We have also witnessed an uptick in art as an investment category,” says Tremeer. “And it is not uncommon for the right art piece to fetch R1 million-plus on auction.” Sanlam Private Investments’ art advisory service backs up this observation and has noticed greater investor interest in recent years.
The farm and art buying exuberance does not translate well to residential property transactions. Much of the action on the Atlantic Seaboard, for example, is due to offshore buyers rather than wealthy South Africans. “Our clients certainly aren’t liquidating their investment portfolios or gearing up to buy luxury homes,” he says. “If anything, the demand for direct luxury residential property holdings in the high net worth individuals’ portfolio is less than it was five years ago.”
Aside from the above-mentioned oddities, South Africa’s ultra-rich are sticking with plain vanilla equities (shares) to build and protect their wealth. The good news is that sensible asset allocation strategies, wealth preservation, and a healthy appetite for blue chip shares are within Joe Average’s reach.
“People have earned 20%-plus annual returns out of ‘household names’ listed on the JSE,” says Tremeer. “And the local equity market has done exceptionally well this year, led by South African businesses that have internationalised or globalised over the past decade.”
Instead of trying to emulate the buying behaviour of high net worth individuals, we should instead adopt their investment mind set. “We have a number of examples of clients who are in their 60s and have been saving in the equity markets for 30 and 35 years,” says Tremeer. “These high net worth investors did not become rich overnight, but by saving their money in quality stocks and reinvesting their dividends in the same shares over time.”
The three-decade returns on blue chip investments in companies such as Standard Bank, Naspers, Remgro and Richemont are what legend is made of. Your best recipe for riches is the discipline to invest regularly and the patience to give your investments enough time to unleash the magic of compounding.
“If you are saving towards the ultimate goal of becoming a high net worth individual, you cannot afford to constantly switch from one unit trust fund to another in pursuit of this year’s top performer,” he says. The ultra-rich get appropriate advice, pick strong companies, and then persevere with those companies for as long as necessary.
The message to Joe Average is crystal clear. If you want to join the jet set, do what the jet set does. Begin with a goal in mind, select quality stocks, and stick with your selection over time – all the while reinvesting your dividends and allowing the magic of compound interest to work for you.