When we talk to potential clients about their local investment portfolios, we are given figures of huge returns that clients could see each year and they seem taken aback when we say that from a well-balanced and diversified international portfolio, they should look to achieve between 8 – 10% p.a. To begin with, these potential clients do not see the benefit of exploring international options when the growth figures differ so drastically. Let us just break a few things down for you.
Interest rates: In South Africa you start with 8.25% interest from the Reserve Bank. So, your base 8.25% is already “built” into the above 20% figure, so in reality this then becomes nearer to 12% (we are going to round figures up for ease of following us here!). In tax-efficient jurisdictions there is 3 – 5% interest.
Inflation: In South Africa as a member of the emerging markets, there is an inflation rate of somewhere between 6 and 8% based on the official figures. As Austen Morris Associates only sources investments from the Isle of Man, Guernsey, and Luxembourg, where the typical inflation rates are between 2 – 4%. So, including these figures, your S.A. investment growth figure is nearer to 10%.
Currency fluctuations: South Africa being an emerging market has high currency fluctuations against the major global ones. The biggest currency pair is against USD and to really put this caveat into context: around 10 years ago, 1 million Rand was almost $75,000 USD. Today the same Rand value is under $54,000 USD!
Assets: This doesn’t have any actual bearing on performance figures, but a local South African investment portfolio can only invest in assets listed in this country. i.e., on the Johannesburg Securities Exchange. The JSE equates to less than 1% of all the global markets and by having an international investment, there is the ability to access these global markets. So, you are not just limited to the 400 listed companies. Some local investments will offer a portion of the portfolio as “international assets” but typically these are property-based.
You can see from the above, a local 20% growth portfolio can be beaten by an asset allocation, a risk-balanced and sector-diversified international portfolio that looks to return around 8% p.a. And if you do happen to stumble upon an international advisor that says he can achieve 20%… run away!
Austen Morris Associates specialises in helping individuals reach their personal financial wealth targets. If you would like an introduction to Austen Morris Associates and how we can help with many investment options, then please do contact us, at https://austenmorris.com/contact-us/
** Austen Morris Associates Africa (Pty) Ltd is an authorised financial services provider, FSP Number: 43758
From the desk of: Kirk Mcardle, Austen Morris Associates Associate Partner