Episode Transcript
[00:00:00] Speaker A: This episode of Ghost stories is brought to you by Fed Group, a diversified financial services group offering a range of financial products across investment, long term insurance, lending and fiduciary services. Fedgroup Financial Holdings Pty Limited is a licensed controlling company and entities within the group are authorised financial services providers. Established in 1990, Fedgroup has grown into a specialist financial services provider with over 10 billion rand in assets under management and administration.
Innovators in the impact investing space. Fed Group has extensive experience and expertise in alternative investments, specifically within the renewable energy and smart agri sectors. Combining the specialist expertise with their established licenses and offerings, FedGroup has the capabilities to structure new investment offerings such as their specialist endowment portfolios. As always, nothing you hear on this podcast should be interpreted as advice. This is for informational purposes only only.
[00:00:55] Speaker B: Welcome to this episode of the Ghost Stories podcast and it's going to be a super interesting one today. Although I feel like I always say that because we always have such good guests on the show and such great topics to unpack. And today we've got Michael Field, who is the general manager of investments at Fed Group. And I certainly if you read your ghost bites for a period of a couple of months, you would have seen the Fed group branding on it. You might have seen some of the articles placed in Ghost mail unpacking some really interesting and relevant investment topics. And Michael, I think today we're going to bring a few of them together and just use this podcast as a really good way for you to get Fed groups thinking out there from an investments perspective and a portfolio construction perspective. I think you guys do have some pretty interesting approaches and you do think quite differently to a lot of other people in what you do. So yeah, welcome to the show and I'm excited to do this with you.
[00:01:48] Speaker C: Yeah, thanks so much for having me. Looking forward to it.
[00:01:50] Speaker B: So I think let's start with this concept of capital preservation and what it really means. I mean, I think we very much live in a world right now where inflation is a consistent theme. It hasn't exactly disappeared, not that it ever really disappears in South Africa, but this higher for longer interest rates story just seems to be gaining momentum at the time of recording. There's some big us data releases coming out this week. We'll see what that means for the Fed, but on the whole, it's very much been a narrative of higher interest rates for longer and the rest of the world is largely compelled to follow what the Fed is doing. Otherwise it causes all kinds of other problems for their currency and everything else. So from a capital preservation perspective. In this high inflation environment, high interest rate type environment, is it enough to actually just preserve the nominal value of your capital? I have a million rand today, and I just want to make sure that I still have a million rand next year or a little bit more from a savings account. Or does capital preservation actually mean something different?
[00:02:50] Speaker C: Yeah, so I think, in short, it's probably better phrased as value preservation. I think, as you said, we're in really strange inflationary times. I think it's a bit of an odd one where Covid has kind of synced up everyone's interest rate cycles. And as you say, we are totally beholden on what's happening in the likes of the US. We were actually having a discussion the other day, and remember we were sort of chatting around, when was it? Almost a year and a half ago. And everyone was expecting, you know, Jan. 2023, rates were going to start coming down.
Yeah, we sit so much further down and we're still there. So, yeah, I think inflation is going to be with us a fair while longer. It's about preserving value.
[00:03:41] Speaker B: So in terms of preserving value, is that a nominal thing? Is it this? I have a million rand. I still want a million rand. Or what does it actually mean? Preserving. Buying power and actually making sure that down the line, you're not worse off in two or three years time than you are today?
[00:03:55] Speaker C: Yeah, I think it's about buying power. I think there's also, for us, we tend to operate in a very low volatility, or certainly that's how we look to place our investments. I think there's an element of.
There's that asymmetry with, if you lose 10%, you've got to gain 11% to get back to where you started. So I think that's maybe another angle of it. So it's preserve your buying power, make sure you're still going to get what you used to get.
And I think that extends beyond official inflation. It depends on who the individual is and how they experience inflation. Obviously, food is something that hits all of us, but, you know, depending if you're looking to buy a car or, you know, get into the housing market, whatever it might be, how each person experiences that cost and most their personal inflation is really what it's about.
[00:04:54] Speaker B: I always look at cars and I always think if people actually did the maths, you're not just paying off the car you have right now. Theoretically, you should also have a little sinking fund for the next car you want to replace this one of an equivalent level and that's why you're seeing this proliferation of chinese brands on south african roads is because people who bought a three series seven years ago absolutely cannot replace it with a three series today. You need a million bucks. And that wasn't the case seven years ago. So to your point, inflation, it is. It's very specific to individuals. But you've also touched on an important point there, which is don't lose money. And it sounds so obvious, no one wants to lose money. If it was so easy, then no one would ever lose money. And I guess that's a big part of the thinking. I mean, it is a bit of risk aversion, I suppose. Loss aversion. Would you say that's something that is quite baked into your thinking at Fedgroup?
[00:05:47] Speaker C: Yes, I think we've obviously got a broad range of products, but where we started back in 1990 was a fixed rate product. That was the first product we ever offered. And I suppose a lot of that is carried through in our thinking. For us, there's that broader element as well. We like to think about some of the different elements when it comes to investing, and sometimes that also has to extend to the individual and almost some of those psychological factors for them. And investing 101 is don't sell the dip. But we know that it's avoiding that irrational fear and those types of fears.
And for us, where we can construct products and help people to get past some of their own fears and some of those sorts of things, it's an unconventional way of helping people to meet their outcomes. It's not simply about what is that underlying investment doing, although that's obviously a very important factor. What are some of the other things you can build in there that are going to help people get to that outcome?
[00:06:56] Speaker B: So in your articles and in some of the stuff I've read coming out of fed group, there is a little bit of a bearishness, I think, around south african equities in general, and I'd like to unpack that a little bit with you, where that's coming from and what makes you feel that way and how you think about this. And are South Africans really being paid a premium for the risk they are actually taking by holding south african equities? And obviously it is a cyclical thing. So it's one of those classic stories with, depending on your starting point and your end point, you can come up with five different answers to suit a specific thing. But on the whole, because I actually share a lot of that viewpoint, is around some general bearishness, around SA equities I do most of my stock picking, to be honest, is offshore. There are obviously some gems on the local market which are well worth owning, in my opinion. But a lot of my equity exposure does sit outside of South Africa for a whole lot of reasons. And I'm keen to understand your bearishness around sort of SA equities as an asset class in general.
[00:07:56] Speaker C: Sure. So I think that there's quite a few elements which almost individually wouldn't necessarily paint the same picture, but when you start to stack them up. So I think, and maybe to state the obvious, we're talking about listed equity. That is where we have that more bearish stance.
I think some of it has got to do with the nature of running equities on a larger scale. And particularly if you look at some of the factors in the south african economy, there is more investable assets in terms of the likes of retirement funds in that then almost the scale of the JSE, particularly if you look at so called SA Inc. You know, it's actually a really small, small pool of assets. And if you want to start getting a little bit more creative in some of those stock picks, there's not that much room to maneuver and, you know, take, take some positions. So we see that sort of distorting some of what's going on, on the JSE.
I think, you know, another very different element of it is, you know, no news to anyone. South Africa has got some challenges. And what we see is smaller companies are a bit more nimble and they're actually, in our view, doing better than many of the large listed. And I think maybe we'll come back to it later. But where we play in a lot of the so called alternative sort of space, we're seeing better value there than in some of the listed equities. And to be clear, our stance is not anti equity, is not that we're advocating for, for people not to be holding equities. Absolutely. You know, all our multi asset funds are holding substantial equity positions onshore and offshore.
It's that we think for so long, equities performed relatively predictably.
As long as you're willing to be in there for a five year period, you're going to get really good returns. And we haven't seen that for a while. And I think it's causing people to sort of go back and relook at what is diversification. But what does it actually mean to construct a broader portfolio?
And that's a lot of what we've been doing for quite a while now.
And so we are saying we see a fair bit of stuff we don't like in the equity space, but also we see other areas that we think present better opportunities. And so it's kind of some push, some pull when we're looking at that.
[00:10:49] Speaker B: I think the larger equities in South Africa are struggling because they have these, well, they have this systemic exposure to basically the country. Just look at, I mean, Vodacom is relatively hot off the press looking for growth in somewhere like Egypt and then the challenges that that actually brings. And there are plenty of examples of south african large caps that are really struggling to do revenue growth outside of single digits. It's very, very tough for them to grow. A lot of smaller companies can grow because they're taking market share disruptors. Capitex, the very best example probably of that's probably the biggest success story of democratic South Africa. And a lot of that was because of market share. They've basically just come and eaten the lunch of the, of the traditional banks. So the banking sector can either be this very dull thing, depending who you look at, or it dished up one of the most exciting equity opportunities of modern day South Africa. So I agree, there's a lot of interesting opportunities in the smaller stuff.
[00:11:45] Speaker C: Absolutely. So you know, where the big listed guys have to occupy, you know, most or every market segment. If you get into some of the smaller entities and some of the guys operating outside of that listed space, they can dominate a niche and do really well. And for us, that's, that's some of the more exciting places.
[00:12:06] Speaker B: So let's move on to this topic of balanced portfolios and what these actually are and what this actually means and the rule of thumb, and I'll leave it to you to kind of give those, those traditional thoughts around balanced portfolios. But then to also touch on how you guys think about that, and I think specifically, you already mentioned alternative investments, you raised it earlier in our discussion. So thats also a good time, I think, to bring in that conversation and just explain the fed group thinking around building out a wealth portfolio and what that actually looks like.
[00:12:37] Speaker C: Okay, sure. So I think the traditional approach of a 60 40 split or a 70 30 split, something like that, I mean, the mere fact that I can say two numbers and you know, that I'm talking about equities and bonds as only two asset classes really. And that's what, you know, for so long has meant a balanced, diversified portfolio. And what we're seeing in these sort of somewhat unusual times with what's going on globally.
Many of those funds are not really performing and certainly not performing like people are used to. And in our view, what has come to mean diversification is having a few different flavors of the same thing in a, in a basket. And I sometimes use the example of banks since we touched on them earlier. Let's keep using that.
They are so heavily affected by what's happening to the repo rate. It's such a big driver in those businesses. But whether you've got green bank or blue bank actually makes no difference to what's happening on that lever. And so for us, it's to take that step beyond just the one business and look at what are some of those really big underlying levers that are affecting them. And how does one construct a portfolio that is diversifying away from that?
Of course, one of the other, you know, big overarching themes is just plain sentiment. And again, if we go into the alternatives, that allows you to be less affected by so much of that sentiment. You know, you see some really good businesses sitting at ridiculous multiples just because of sentiment, and vice versa. You see some businesses think, how on earth are people still buying this? For us, it's about saying, okay, what's actually underlying this? What's going to drive it? And so if we then sort of segue that into alternatives, that's a lot of where we are finding this real value for our customers. And so to delve into what are we meaning by alternatives? Very clearly they are not all the same. In many ways, alternatives is just other in terms of the category, it is everything else.
And for us, we were very specific about what we are interested in using within that alternative sort of segment. And so for us, what we're interested in is things that are typically tangible. And so what we're talking about there is how do we get back to so called real investments, things almost closer to your primary activities. So for us, a couple of the sectors that we are very active in is agriculture, another being green energy. So, you know, we're one of the largest solar installers across the country. I'll maybe touch, touch on that again a little bit later.
For us, we also look at, you know, where is it simple business models that are robust, that can offer a lot of the characteristics that an investor is looking for? So, for example, we talked about inflation earlier. Everyone's trying to hedge and protect themselves against inflation. One approach to that might be going down various derivatives and buying inflation cover and whatever it might be, that can be quite an expensive way of trying to cover yourself from that risk. The other approach is to say, okay, within the agri space, we know ultimately we're selling food, and food tends to shift with inflation fairly directly. And so high inflation, low inflation, we've got what we refer to as some of that natural hedging coming through. Similarly, currency is another one that people are trying to protect their buying power. And again, to continue on that agricultural example, about 85% of the agri ventures that we're invested into, that produce is being sold offshore. Again, we look at sectors where there is different options in terms of where it gets sold. So if the US starts to cool off, there are other areas, be it Asia, Europe, that that produce can still be sold into relatively hard currencies versus the likes of the rand. And so you're getting currency hedges there. What we're not interested in is all sorts of. Almost want to call it snake oil. There's a lot of noise in this alternative space. People coming with, you know, all sorts of. We had private equity where it's totally unsecured, lending into all kinds of obscure. You have no idea what's actually under there. That's not at all the space that we're playing in. And for us, it's about saying, how do we get proper security for our clients into assets that are going to provide them the profile of investment and profile of return that they're looking for? And then maybe sort of just the last point around this is for us, we've. We really specialized in these assets. And so when I talk about that we are investing in agriculture, we're not just writing a check and, you know, having a look at the financials to decide if that business is doing what it's supposed to. We have people on those farms at least once a month. We have Internet of things devices on those farms measuring what they're doing. We have teams of agronomists, independent experts across the country, making sure we know what's going on. We've recognized where there is additional value to be unlocked. So we know one of the major shortages in our agricultural sector is actually bees. Fed group are one of, if not the largest beekeepers in the country. And we did that so that we can protect those agricultural investments. More than that, we know that where we go and install beehives, we're seeing sort of 30% yield increases on those farms. There's fairly little an investor can do in the likes of the listed space or something that's going to produce a 30% uplift in that business. And so for us, that's where we've really specialized. We're not simply writing a check and doing a traditional credit or private equity type of investment.
[00:20:00] Speaker B: Yeah, there really are all sorts of things in the private asset space, to your point. And I think what you guys do is pretty unique. I can't say that I've seen anyone else really doing it, certainly not to the scale that you are doing it. It's something that was discussed on a previous Ghost Stories podcast with Grant, the CEO of Fed Group. And we kind of unpacked, you know, just some of the returns in there. I mean, you guys have got that very cool app that lets people go in and invest in these. And, you know, you make the point. It's bees. It literally is as real as that. You know, it's this very, very interesting alternative portfolio. And I think it does maybe speak to just the breadth of the offering at, at fed group because it's really everything from, you know, big balanced portfolios all the way down to literally someone being able to say, I want to start investing, you know, maybe the market scare me a bit, or I'm not sure I understand them, or I want some diversification. I want something a bit more real. There's obviously also the ESG angle to it, frankly, which is to go and invest in things that are actually just good for the planet, like bees, you know, and to go and be able to actually save and invest in this stuff is quite an interesting offering. And of course, it's not just the feel good. I mean, it offers a genuine return, some inflation protection, as you say, decent upside along the way. And I think that's the overarching point here, is by potentially not being fully exposed to just big equities, you can actually still have investments that grow. This is not to say you need to give up growth, but you are bringing in the value of diversification and having something different and a nice yield underpin. And that does talk to your DNA as a group, obviously, which comes from the sort of fixed income style investing. These balanced portfolios do have a place and it's how you balance them is obviously different and what actually goes in there and that changes over time. But I think for a lot of investors who came into the market during the pandemic, I kind of don't understand why you wouldn't just be in equities. Because that's all they've known is zero interest rate environments. What is this thing called yield? I just want to own the fancy Cathie wood stocks. Roaring kitty is back on Twitter. Everyone's in GameStop again. The meme stocks are back. I mean, it's all the chaos, right? But that's not real life. And that's why these interest rates have stayed higher for longer, is because the fed effectively needs to cleanse a whole lot of the, bluntly, the monster that their monetary policy actually created during the pandemic. And that doesn't lend itself so well to equities over the long term. Equities is a great asset class, but it's not going to be the rocket ship that people experience from 2020 into 2021. I mean, if it was like that every year, well, one, we would all be fabulously wealthy, but two, inflation would be completely out of control. The checks and balances would not work there.
[00:22:45] Speaker C: Yeah, absolutely. I mean, I think you've again touched on some of the reasons why we are a little bit bearish.
I think sometimes people are surprised. They see fed group, they see a very innovative company. The reality is, yes, we are very innovative, but we're actually really conservative. That's why we've really developed this name for these very stable investments, whether those are, you know, we offer a lot of fixed rate investments, but we also, you know, where clients are exposed to those underlying assets, they tend to be really quite low volatility type of investments. We also work a lot with the independent advisor market, and I can't tell you the number of advisors said to me, thank goodness I've got you in my clients portfolios. The number of times I've had to go and show them a page full of red numbers. Thank goodness I've got a green number next to fed group. And that's exactly where we see it forming that part of a portfolio. Again, we touched on in the beginning. I'm not advocating for this to be 100% of a person's portfolio. What we're seeing people typically using is in the order of 20 to 50, depending on what it is they're trying to achieve, where they are in their life, whatever it might be. That's where they're using some of these real low volatility type of things that I think we're a bit of a specialist and certainly very well known for. Of course, that's how we're using it in some of our various multi asset funds as well on those types of ratios. Yeah.
[00:24:21] Speaker B: So maybe as we start to bring the podcast to a close, I think the key message to really take out from this is that from what I'm hearing, it is possible to achieve real growth and to do it with stability. So growth ahead of inflation, but to do it with stability and to do it with asset classes that are distinct from your traditional balanced portfolio kind of thinking. Would you say that, in a nutshell, that really is the sort of fed group approach to these things and why someone should actually look to go and do further research into fed group and the offerings that you've got?
[00:24:56] Speaker C: Absolutely. I think it's, for us, it's that solid foundation to a portfolio. Are many of these things going to give you a 20%, 25% turn in a year? No, but at the same time got a very low probability that they're going to do, you know, less than 5%, less than 8%, frankly. Certainly the chance of you getting a red negative number in there is really low. And so we're seeing it. People are really enjoying, frankly, in South Africa today that they're enjoying one less thing to worry about. And so that's where we've seen some phenomenal growth in people coming to us to meet these sorts of needs.
So, yeah, I think people these days are very chuffed with a 10% return that doesn't give them sleepless nights, and that's what we're looking to offer.
[00:25:54] Speaker B: So, fun story. I think when I was a teenager, as I recall, my grandmother had a little bit of money that kind of came our way early, really was a little bit of money. And the deal was we had to invest it. And I'm 99.9% sure that it was a fed group income fund that it went into. I can actually recall getting the statements as this kind of impressionable young teenager. So I actually have a bit of history with fed group too. Going all the way back. Not quite back to when you started. I'm not old enough for that, but, you know, back to my teenage years. I do think Fed group was my first ever investment product. So there's some cool, cool little bit of history with the brand.
[00:26:30] Speaker C: I'll try look up ghost on the system, see if anything comes up.
[00:26:34] Speaker B: Yeah, if you look, if you have a ghost in the machine, you have different problems rather than me.
[00:26:38] Speaker C: No, but that's so cool.
[00:26:39] Speaker B: Yeah, no, I thought you'd appreciate that story. So I would point anyone who wants to go and find out more about what you do and how you do it to go and check out Fedgroup dot co dot catch. Well, by the time you access the site, it might be different, but right now, if you went on, you'd be met by a hand holding some playing cards and a statement that gambling is for the casino, not your investment portfolio, which I think talks quite well to how you guys think and what you guys do. So, Michael, thank you so much for your time today. I'm assuming those who want to connect with you directly can do so on LinkedIn. I would guess.
[00:27:10] Speaker C: Yeah, that's probably the best channel.
[00:27:12] Speaker B: Okay, fantastic. And otherwise, as I said, go check out fakegroup co za. Go have a look at what they do. And Michael, thanks for all the support in Ghost Mail and for bringing ghost bites to people for the months that you did. Really appreciate it. And to the listeners, thank you so much for being here, and I look forward to you joining me on the next podcast.
