What SA's super-wealthy are doing with their money

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Some have lost faith in SA Inc, are concerned about the devaluation of the rand and have found themselves over exposed to listed equities. Many wealthy South African investors are finding that they are getting very low returns for high risk – and are thus looking for new ways to safely invest offshore.

“As South Africa represents just 0,59% of world GDP and since our clients already have considerable exposure to South Africa via their businesses and fixed assets, it makes sense to invest a significant portion of their investment portfolios globally. This isn’t a new phenomenon, however what has been interesting, is the growing popularity of alternative asset classes. Our exposure, both locally and globally, to these investments has increased noticeably over the past few years," says Kerry Fynn, CEO of AlphaWealth.

Alternatives are generally described as assets or investment strategies other than traditional equities, bonds or cash instruments – common ones are private equity (including venture capital), private debt (non-bank loans), real estate, hedge funds and infrastructure. Since alternatives are perceived to be uncorrelated to typical equity and bond investments, adding them to a portfolio will provide broader diversification, reduce volatility and enhance returns.

Global trend

The shift towards investing in alternative assets is not only in South Africa. There is a worldwide growing trend towards alternative asset classes. As global economic growth is weakening, investors everywhere are finding it challenging to source compelling risk adjusted returns in traditional markets, consequently they are increasing their allocations to alternative assets. This trend has been growing over the past decade and there are no signs of it stopping. In fact, a recent survey indicated that 64% of wealth managers expect demand for alternatives to rise.”

One of the potential drawbacks of this asset class is liquidity. Depending on the investment, some offer short term liquidity like private debt but in general liquidity is more restricted. Less liquid investment options such as private equity tend to offer an ‘illiquidity premium’ – compensating investors with improved returns in return for the lack of liquidity.

Under extreme market stress, such as financial crises would alternatives still perform? Data since the global financial crisis indicates that that alternatives have not typically fallen as low as stocks, providing a cushion for investors.