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Why South Africa’s Brenthurst Wealth walked away from Sec 12J Investments

The curtain falling on Section 12J funds signals the end of a contentious era in the country’s investment industry.

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Brenthurst Wealth Management Managing Director Brian Butchart.

By Brian Butchart, Managing Director, Brenthurst Wealth Management — Content Partner

South African wealth management firm Brenthurst has been discouraging clients from investing in Section 12J funds, as they are unregulated and offer limited information or access to financials. We consider some to be downright risky and expect that tears will follow for investors in some of these ventures.

The curtain falling on Section 12J funds at the end of June signals the end of a rather contentious era in the country’s investment industry. Although the tax incentive scheme was well-intentioned, flawed execution meant that the investment case has been severely diluted.

People familiar with the Brenthurst Wealth investment philosophy will know that we’ve been discouraging clients from investing in these funds.

Purely from a risk point of view, we objected because these funds are unregulated and offer limited information or access to financials. We consider some to be downright risky and expect that tears will follow for investors in some of these ventures.

As regulated and licensed advisors we have to be 100-percent comfortable with the investment solutions we advise clients to invest in and we certainly can’t advise on products or investments on which we haven’t been able to conduct a thorough due diligence.

The question is, who is going to be left holding the can at the end of the day? Investors definitely, and quite possibly the advisors that encouraged clients to invest in these funds.

Questionable investment case

Governance issues aside, the majority of the 12J funds had much deeper flaws that disqualified them from inclusion in our clients’ portfolios.

Firstly, many funds’ minimum investment requirements of R100,000 ($6,730) — which was more often R500,000 ($33,650) — excluded the bulk of South African investors. Only someone earning taxable income of R1.5 million ($100,959) or more a year who had exhausted all other tax-efficient vehicles would likely turn to a 12J fund for the tax benefits. This means it’s either beyond their means or not the right vehicle for your average investor.

And if it does happen to be the right vehicle, the investment universe is rather limited — by regulations as much as the limitations of the structures of the local economy.

This limited range of choice in itself should cause investors pause to consider the entire investment universe and whether a niche, unregulated fund is the best decision given the risk. Take, for instance, the concentration risk in property sector-focused 12J funds. Regulations prohibited investment into the asset class, unless it was in one that has been decimated by the COVID pandemic — the hospitality sector.

More broadly, South Africa’s property sector has been left in tatters over the past 10-15 years, resulting in untold value destruction.

The final reason we have not supported investments into 12J funds is because investors could end up with an illiquid asset — especially in property — after the five-year mandatory investment period lapses.

Ultimately, the Section 12J funds have been sold on the tax benefit, and that cannot be denied. But tax deductions do not make for an investment case alone.

Local tax vs Global growth

A recent article in Business Day tried unsuccessfully to equate 12J fund returns with those that offshore funds have delivered. It may be true that some funds have produced reasonable returns for investors, but that’s not true across the 12J fund universe.

We have grave concerns about the majority of the funds because of the doubtful governance, returns and liquidity as already explained. An accusation in the article laid at the feet of advisors encouraging clients to look offshore was that these clients have lost 30 percent in the past year due to rand strengthening. This superficial assumption is based on the misperception funds were shipped offshore at R19 to the dollar or more, which is simply not true.

This argument doesn’t hold water as a one-year currency fluctuation doesn’t account for the long-term investment strategy or longer-term trend of the rand.

An offshore investment is a long-term strategy and the success should be measured over seven years or longer, and in our experience no investors who take money offshore redeem these investments for decades.

Also, the rand has depreciated by 7.56 percent annually over the past 10 years, and 107.07 percent cumulatively over this period.

It’s difficult to argue against this reality, and in addition South African investors are exposed to a far broader and diverse investment universe across international markets, which delivered far superior returns to thelocal market or Sect 12J investments especially across robust thematic megatrend investment opportunities.

An uncertain future?

It’s almost certainly too late to dissuade other investors from responding to the Section 12J funds’ last-gasp calls to take advantage of this tax-beneficial opportunity. And only time will tell how successful these funds have been in delivering investment returns.

The risk for investors is that they often place their faith in the 12J venture capital companies with little insight to where and how their investment is being used, with some remaining in cash for several months until an appropriate investment opportunity arises.That exerts even greater pressure on a high-risk investment scenario, and one that we as trusted advisors strongly encourage clients to either ensure they understand the underlying investment and risks thoroughly or avoid them all together.

Brian Butchart is managing director and key individual for Brenthurst Wealth. He was recognized as one of the country’s top three wealth managers in South Africa’s Intellidex Top Private Banks and Wealth Manager’s Awards twice, consecutively in 2020 and 2021. Brian is responsible for compliance and operations nationally across all seven offices. He has been in the financial services industry since 1998, for more than 21 years, and previously gained experience at Citadel and Magnus Heystek International. Brian is also a key individual and representative for Brenthurst Capital (Pty) Limited and a senior member of the investment committee dealing with all investment and asset allocation decisions. Brian is a certified financial planner and a member of the Financial Planning Institute of South Africa and is fully qualified to give advice on all investment matters.

Reach out to Brian for investment-related issues here: BrianB@brenthurstwealth.co.za.

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Financial services firm linked to Egypt’s Sawiris family suffers over $12 million in losses in H1 2022

OFH was founded in 1997 by the late Onsi Sawiris, a member of Egypt’s billionaire Sawiris family.

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Naguib Sawiris.

Orascom Financial Holding (OFH), a technology-driven financial services investment company led by the Sawiris family, reported losses in excess of $12 million at the end of the first half of 2022, owing to rising operating expenses.

Founded in 1997 by the late Onsi Sawiris, a member of Egypt’s billionaire Sawiris family, and led by his son Naguib Sawiris, OFH incurred standalone net losses of EGP234.45 million ($12.23 million) in the first half of 2022, compared to net profits of EGP 55.17 million ($2.87 million) in the same period in 2021.

Its financial performance in the six months ending June 30 was hampered by a loss of EGP320.5 million ($16.75 million) in the second quarter. The news comes after the group reported a consolidated net profit of EGP27.43 million ($1.43 million) in the first three months of 2022.

Despite a 30.8-percent increase in revenue from EGP57.9 million ($3.02 million) to EGP75.75 million ($3.96 million), the group was in the red at the end of the first six months of its 2022 fiscal year due to a surge in operating expenses.

This represents a decline from the EGP27.43 million ($1.43 million) in profit reported in the first three months of the year.

Despite its poor financial performance in the first half of 2022, its shares on the Egyptian Stock Exchange were slightly higher at EGP0.19 ($0.0099) per share, up from an opening price of EGP0.18 ($0.0094) per share earlier this month.

OFH’s share price has fallen from EGP0.23 ($0.012) to EGP0.19 ($0.0099) since the start of the year, bringing its market capitalization on the local bourse below EGP1 billion ($52.3 million), while the Sawiris family’s 51.6-percent stake in the group is valued at EGP510 million ($26.66 million).

OFH sold a portion of its holdings in one of its subsidiaries, Beltone Financial Holding, to Chimera Investment, an Abu Dhabi-based firm led by Pakistani businessman Syed Basar Shueb, as part of its efforts to exit its recent loss position.

It is unclear how much of OFH’s 59.22-percent stake was acquired during the share-purchase transaction.

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Aga Khan IV-backed Jubilee to receive $2.27 million from sale of Mauritian insurance subsidiary

Jubilee Holdings is a Kenyan investment holding company.

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Aga Khan IV.

Jubilee Holdings is on course to pocket a total of Ksh270 million ($2.26 million) from the sale of a 54.15-percent stake in its Mauritian subsidiary Jubilee Insurance Company of Mauritius Limited to Allianz SE.

Alliansz SE is a German multinational financial services company headquartered in Munich.

The transaction is the fifth to be concluded under a 2020 agreement in which Allianz began the process of purchasing majority stakes in Jubilee’s general insurance units in five countries, including Mauritius.

“We expect to close the Mauritius transaction in September… For Jubilee, the total consideration is Sh270 million,” Nizar Juma, chairman of Jubilee Holdings, said, setting the timeline for the $2.26-million deal with the German multinational insurer.

Jubilee Holdings is a Kenyan investment holding company with active operations and investments in Kenya, Uganda, Tanzania, Burundi, and Mauritius. It owns 88.15 percent of Jubilee Insurance Company of Mauritius Limited.

Shah Karim al-Husayni, also known as Aga Khan IV, is best known for founding Nation Media Group, Africa’s largest independent media organization. Through the Aga Khan Fund for Economic Development, he owns 37.98 percent of Jubilee Holdings and 11.85 percent of its Mauritian subsidiary.

According to BusinessDaily, Allianz will purchase additional shares from Aga Khan IV, who will sell his 11.85-percent stake in the Mauritian subsidiary as part of the deal.

With the deal expected to close next month, Jubilee Holdings will see its ownership interest drop to 34 percent as part of its partial divestiture in its general insurance businesses, which follows the sale of similar assets in Kenya, Uganda, Tanzania, and Burundi.

Over two months ago, Jubilee received Ksh1.4 billion ($11.7 million) from the sale of a majority stake in its Tanzanian general insurance business to Allianz.

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Nigerian billionaire Femi Otedola gains $12.7 million from stake in FBNH

FBNH is one of Nigeria’s largest financial services conglomerates.

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Femi Otedola. ©Billionaires.Africa

Nigerian billionaire Femi Otedola’s stake in the country’s oldest commercial bank, First Bank of Nigeria Holdings Plc (FBNH), has risen by more than $12 million in recent months, as shares in the financial services group rebounded strongly after falling below key levels.

According to data tracked by Billionaires.Africa, Otedola’s stake in FBNH has increased in value by N5.34 billion ($12.7 million) in the past 54 days, as investors continued to cherry-pick stakes in the commercial banking group after its price fell below N9 ($0.0214) in June.

FBNH is one of Nigeria’s largest financial services conglomerates. It is the non-operating holding company of First Bank of Nigeria Limited, the country’s oldest commercial bank, with active operations in 10 countries.

According to a flurry of trading updates published on the Nigerian Stock Exchange in June, Otedola sold 664,939,764 shares in four separate transactions, reducing his stake in the Nigerian lender from 2,717,282,140 shares, or 7.57 percent, to 2,052,342,376 shares, or 5.72 percent.

Shares in the financial group have increased by 31 percent since June 21, nearly 54 days ago, from N8.4 ($0.02) to N11 ($0.026) at the time of writing, amid renewed buying interest in the bank’s shares on the local bourse.

As a result of the double-digit increase in the shares of FBNH, the market value of Otedola’s 5.72 percent stake in FBNH has increased by N5.34 billion ($12.73 million), from N17.24 billion ($41.12 million) on June 21 to N22.58 billion ($53.85 million) at the time of writing this report.

The recent gains in his stake follow a dividend of N951.05 million ($2.29 million) from his equity stake in the financial services group that he received earlier this year.

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