OPINION: Investing in the 4th Industrial Revolution: Part 2
Note that this is not about speculation – trying to make a quick buck on short-term fluctuations in a company’s share price. It is about what is known in the investment business as a “buy-and-hold” strategy – in other words, investing in growing companies from which you expect to reap rewards over the long term.
How can you do this?
There are several routes that you can follow, depending on your circumstances and propensity for risk:
1. Venture capital and private equity
Last week, we read how Jeff Bezos started Amazon in his garage. It’s during the start-up phase of a company that it will, if it takes off, show exponential growth. If you invest at this stage, you can do extremely well. The problem is that the failure rate among start-ups is very high, and it’s very difficult to pick a winner.
Here in South Africa, we have a number of innovative young companies in the technology space – so there is certainly scope for local investment.
To boost the economy, the government is offering an attractive tax incentive for venture-capital investors. You can deduct from your taxable income 100% of what you invest in a venture capital investment company registered under section 12J of the Income Tax Act. Terms and conditions apply.
Warning: although reputable section 12J investment companies thoroughly research the start-ups they fund, the risks are still considerable and regulation is limited. Also, the barriers are high – you typically need a minimum of R500 000 to invest.
For more information, visit https://savca.co.za, the website of the South African Venture Capital and Private Equity Association.
2. Listed equity
It’s only when companies go public and list on a stock exchange that they become fully accessible to individual investors. The environment is also far more regulated than private equity, so the risks are lower. The downside is that much exponential growth may already have occurred.
Unfortunately, there is little on the JSE that would be of interest to tech-focused investors, with one big exception: Naspers. Naspers owns 31% of Chinese internet giant Tencent. It is also investing in tech enterprises elsewhere, including fast-growing internet brands PayU, iFood, Swiggy, Delivery Hero, Udemy, eMAG, and MakeMyTrip.
Naspers is hiving off its tech investment business. It will be called NewCo and will have a primary listing in Amsterdam and a secondary listing on the JSE. The parent company will hold at least 73% of NewCo.
If you want to buy shares in global tech companies other than Naspers/Tencent, you will have to go through a stockbroker and take money offshore. And while the taking-money-offshore part is now relatively simple for smaller amounts, most traditional stockbroking firms would probably not consider an investment of anything under R1million.
However, innovation is starting to work its magic in this space, too. For example, online stockbroking platform EasyEquities (www.easyequities.co.za) has opened up the local and US stock markets for lay investors with small amounts to invest. There are no investment minimums, and you can even buy a fraction of a share. Costs are low, but they still mount up if you are investing offshore, and you need to weigh up costs versus returns - the lower your investment amount, the less cost-effective it is likely to be.
3. Collective investments
Of the 1 300-odd retail unit trust and exchange traded funds (ETFs) provided by domestic asset managers, just three – as far as I could ascertain – specifically target offshore companies riding the tech boom. They are:
- The Sygnia 4th Industrial Revolution Global Equity Fund. This fund invests in a number of tech-related indices, “offering investors access to global companies optimally positioned to benefit from new technologies and innovations that have the potential to transform the global economy across a broad range of sectors”, according to its fact sheet.
- The Sygnia FAANG Plus Equity Fund. This fund actively targets the big technology-related stocks in the US and globally. Launched just under a year ago, its five biggest holdings are: Apple (11.9%), Amazon (11.8%), Facebook (11.7%), Alphabet (11.4%) and Alibaba (11.0%).
- The Stanlib S&P500 Info Tech Index Feeder Fund. This passive fund invests in the companies making up the S&P500 Info Tech Index, which includes the major tech companies in the US. Its major holdings are: Apple (15.21%), Microsoft (12.66%), Alphabet (11.30%), Facebook (7.79%), and Visa (3.95%).
Although not targeting the big tech shares specifically, there are several local passive funds that hold them as a large part of their portfolios.
The Satrix Nasdaq 100 tracks the biggest non-financial companies on the Nasdaq exchange. Its biggest holdings are Microsoft (10.12%), Apple (9.72%), Amazon (9.54%), Alphabet (8.91%) and Facebook (4.13%).
There are also several locally managed ETFs or unit trusts tracking the S&P500 Index (including CoreShares, Sygnia Itrix, Stanlib and Satrix), which comprises the 500 largest companies in the US.
Global equity funds are also exposed, typically at low levels, to the world’s tech giants. And domestic equity funds have varying levels of exposure to Naspers/Tencent, some higher than 10%.
For the above funds, you can invest in rands, without the hassle of taking money offshore.
There is also a range of offshore managers that are permitted to market their funds to local investors, and some of these have funds geared to the tech boom – an example is the Franklin Technology Fund. For these you will have to take money offshore.
HEALTH WARNING #1
Be warned that investing in offshore equity markets exposes South African investors to the volatility of the rand, which may make a local investor invested in the S&P 500, for example, subject to double the amount of volatility that a US investor would be subject to. Also, remember that investing in global tech stocks should be part of a diversified long-term investment strategy – talk to a qualified Certified Financial Planner for guidance.
HEALTH WARNING #2
Be extremely wary of online investment platforms based offshore that offer investments in global equity markets. Typically, these are not in shares but in derivatives known as CFDs (contracts for difference). CFDs are designed for speculative trading and should not form part of a long-term portfolio. These operations fall outside the jurisdiction of local regulators. Always check with the Financial Sector Conduct Authority (www.fsca.co.za) before investing through an online platform.