5 October 2024
By Andró Griessel

RA has once again outperformed offshore investments over the past 5 years

A South African rugby fan can be quite emotional — and that’s often how we approach investing too. Take Manie Libbok, for instance. He swung from “hero” to “zero” in the hearts of most Bok supporters during the World Cup rugby tournament last year and again recently in the Rugby Championship.

Libbok is undeniably a talented rugby player, though he occasionally struggles when it comes to his kicking. Similarly, just as everyone became optimistic about Libbok after his stellar play against the Pumas in Mbombela, sentiment toward South African investments has improved significantly since May, without any substantial change in the underlying assets themselves.

Regular readers of my columns and those of my colleagues will know that, when it comes to investments, we believe it’s essential to understand whether you are fundamentally dealing with a good “player”/ investment. Then, much like Rassie Erasmus did, you give it a chance to prove itself.

Some players (like Eben Etzebeth) simply seem to have an unfair edge over their competitors. We’ve written several articles arguing that low-cost annuities have an inherent advantage over other types of investments, particularly for investors in a high marginal tax bracket. For these investors, annuities function like a multi-talented player who can pass the ball like Libbok, kick under pressure like Handré Pollard, and own the strength of an Etzebeth.

In April 2019, I made the “controversial” statement that an investment in the median balanced fund within the multi-asset, high-equity sector — with an average return of 9.81% per year over the five years to March 31, 2019 — could outperform the median foreign equity fund’s 14.27% return if the investor simply reinvested the tax savings back into the annuity.

So, what about the past five years?

Surely, this couldn’t have been the case recently? Nothing answers this question better than the numbers. For a real-life example, see the following graphic.

Five years ago, on September 30, 2019, this client’s retirement annuity (RA) had a balance of R273,926.47. This particular client is a high earner and therefore pays tax at the maximum marginal rate (currently 45%). For this reason, he contributed R29,000 to his RA each month.

As of September 30, this year, the RA balance stood at R3,005,893.97, representing an average net return of 13.6% per year over the past five years.

From the graph above, the following figures are significant:

• Even if you had 100% exposure to the MSCI World Index, you would have struggled to outperform an RA investment (subject to Regulation 28 of the Pension Funds Act) over the past three or five years, especially given the significantly higher volatility. Over one year, a pure foreign equity investment would have underperformed by roughly 5%.
• Comparing an RA investment (which must comply with Regulation 28 legislation) to a pure foreign equity investment isn’t comparing apples with apples. If you were to compare it to a foreign investment with similar risk characteristics (including cash and/or foreign bonds), your foreign investment would have underperformed by nearly 7% annually, leaving you with a balance of only R2.4 million today.
• In U.S. dollars: Dollar inflation over the past five years averaged 3.69% annually, while the dollar returns averaged 11.23% annually. Over the last year, returns stood at 36.53% against inflation of 2.06%.
• Average inflation in South Africa over the past five years was 5.28% annually, meaning this client’s investment outpaced inflation by more than 8 percentage points annually.
• What is not shown in the graph is what the investor could have accumulated additionally if he had reinvested his monthly tax savings of approximately R11,600 (based on an assumed tax rate of 40%). With a mere 10% return on these savings, the total investment value would increase by another R900,000 (roughly 33%).

Points for Consideration

An exceptionally strong or weak year for returns can also impact the long-term average. This explains why it sometimes feels like you’re taking a detour but suddenly reach your destination, or that you’re cruising smoothly, only to find yourself on the brink of a cliff. It’s crucial to understand the risks you take on your investment journey. Investments that feel risky often aren’t (because a significant safety margin is built into the price), while those that feel safe often aren’t — for the opposite reason.

There are some low-hanging fruits in terms of investment options due to their structural benefits. If you approach it correctly, and if you are in the higher tax brackets, an RA is one such option. When tax credits are reinvested, it’s almost unbeatable in the long run. In August 2019, a commentator remarked on social media: “Can you sue your financial advisor for NOT shifting your money offshore? Believe it or not, I still hear of financial advisors who don’t believe in offshore! It’s not a belief; it’s survival…”

Well, I don’t expect any apologies from this commentator to advisors who took a more pragmatic and fundamental (rather than emotional) approach. My advice to readers is to avoid being like many South African rugby supporters who swing between extremes of euphoria and despair. Instead, adopt a calm and measured approach with facts — not rhetoric — as the foundation for decision-making.

Andró Griessel is a certified financial planner at Woodland Wealth. Contact him at info@woodlandwealth.co.za.

Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.