GRAYSWAN INVESTMENTS: Gray Swans and Blue Waters

Far away places for far-sighted funds? Offshore assets have always been part of the investment armoury of the super-wealthy.

But now South Africa is seeing a boom in middle-class investors looking to move money offshore for wealth diversification and a more secure retirement.

“Taking money overseas is an on-going activity, but over the last year or two it has really multiplied,” says Duncan Theron, CEO of GraySwan Investments.

“Clients are continuously asking us what they should do with their offshore assets, how do they get them offshore cost effectively, and which jurisdictions and offshore platforms should they use and asset classes and funds should they invest in?”

Johannesburg and Cape Town-based GraySwan Investments delivers wealth management solutions to private and family office investors, along with investment consulting to institutional and corporate investors, currently advising to more than R20 billion in assets.

ROBUST AND SUCCESSFUL

Among the most highly experienced independent advisory businesses in the South African financial sector, GraySwan’s track record is proof of a remarkably successful and robust investment process developed since the company’s founding nearly 10 years ago.

“Our clients are top performers since the inception of our business and are the ambassadors of our business. Our business has always grown by word of mouth. The differentiator for us is that we are truly independent and we are investment advisors with previous offshore investment management backgrounds.

“We are passionate about investments and passionate about doing the right things for the right reasons always.

“Whatever we set ourselves out to do, we do with integrity and do it whole-heartedly. We always go that extra mile. We focus on investments – and we do it well. Our clients see us as their trusted long-term investment thinking partners,” says Theron.

The brand title is a benchmark of prudence; a gray swan being a potentially very significant event; unlikely but still possible. 

Translated into GraySwan’s advisory model it means risks that can be identified and should then either be avoided for their unintended consequences on investors’ portfolios, or otherwise managed to maximise expected returns at predefined levels of risk.

GraySwan has two divisions – GraySwan Investments and GraySwan Wealth – with the first providing investment consulting services to institutional investors such as pension funds, medical aid funds, short-term insurers as well as corporate clients, while the latter offers parallel services to private clients and family offices seeking investment advice.

INSTITUTIONAL FOCUS

The launch of GraySwan Investments in 2010 saw an initial focus on investment advisory to institutional investors. For the founders it was a natural progression as they previously consulted to and managed many of the largest institutional clients in South Africa’s assets. The core team all came from big corporate backgrounds in the investment management or institutional asset advisory spaces.

As a former senior investment consultant at Alexander Forbes and thereafter Riscura and finally Chief Investment Officer for Sanlam’s offshore alternative asset management business, Duncan Theron boasts more than 23 years in the industry. Together with his senior team they have more than 110 years of investment experience and the team is also one of the most stable amongst its peers.

“We set out to provide an independent, non-conflicted, institutional investment advisory business such as we were providing 15 to 25 years back before we headed into offshore asset management.” History had given them a lesson and an opening.

Whilst working in the offshore asset management business, Theron and his partners, had to deal with local investment advisory businesses and during such time witnessed how conflicted and reactive these advisory business models had become.

“Once independent, boutique-focussed businesses, these advisors had mostly become ‘One Stop Shops’, offering all the different services with all the conflicts of interest. They were consultants, administrators, actuaries; employ benefit consultant and asset managers – just about everything. The investment advisory offering had become the low-cost service to attract assets to their other business offerings. As a result, the investment advisory offering as provided by the industry was seldomly a high-quality high offering as it had to be provided at a low cost just to win the client over.

“We saw there was a gap in the market as some clients required a more sophisticated and pro-active service and better returns and decided we would come back, and again start an independent, unconflicted but a high-quality investment advisory business. We knew there were institutional investors that were desperate for a better solution.

“Offering a boutique, owner-managed, focused and tailor-made premium and world-class service, we were very fortunate in immediately attracting a few large pension funds. That gave us the dream start. Today our focus has moved more to smaller and medium-sized pension funds as these clients are typically very entrepreneurial and are desperate for a more dynamic and personalised and high conviction offering.”

More followed, and with success and acclaim came calls for diversification.

“Starting purely as a non-discretionary institutional investment advisor, we only provided advice. The pension fund, medical aid fund or short-term insurer would make the decision and we would thereafter implement such. We had no discretion. During the past two years some of our larger institutional clients has changed our mandates where we no longer provide advice but rather we now actively manage their entire investment program as per our best discretion within a well-defined and agreed investment framework. We call this service ‘Outsourced Chief Investment Officer’ or OCIO in short. Such discretion is testimony to our institutional clients trusting that our advice works and that we can implement such faster and more timeously if we manage their investment programs.”

GOING PRIVATE

Then, in Theron’s words, “Something happened. Trustees of our pension funds and other institutional clients we were working with began saying that if the superior performance was what we could achieve for their funds, what could we do for them as individuals?

“We had never been in private client advising, but always been institutional advisers and investment managers, so our initial response was that we couldn’t really help. This was unchartered territory for us.

“Until one day, the Chairman of one of our biggest institutional clients told me, ‘you’ve got no choice, you are going to help me!’”

This was the kick-start of the private client business, GraySwan Wealth. And with it came a deja vu moment.

“We discovered the same lack of service, poor returns and independence in the private client advisory segment.

“There are only a handful of independent advisory businesses with an institutional pedigree in the private client advisory business; the large majority are all product and commission-driven.

“We are not commission driven and we don’t sell investment products. We have no ties to any stockbroker, bank or asset manager or life insurer. Nothing.

“That was four years back, and since then our business has morphed strongly into the private client space, and now about 20% to 25% of our income is from private clients.

“That doesn’t mean we are picking the stocks, that’s the asset manager’s job. It means we are still picking the best of breed asset managers and the funds in which we invest.

“Most of our private clients have also started giving us discretion rather than simply asking for advice, and with more leeway we can change and re-balance things more dynamically, and manage our best view investment strategy for our clients.”

LEEWAY AND LEVERAGE

And private clients are benefiting from GraySwan’s big institutional base and proprietary research, with the leeway and leverage it gives to negotiate fees and access to unique opportunities.

“With the lower investment manager cost structures which we can access, we have basically passed over all these cost savings through to our private clients. It also gives us a better chance of performing better, especially in the low return investment environment where every half a per cent counts.”

With markets notably choppy and very unpredictable you can’t solely take a long-term buy and hold view anymore, says Theron. “You have to make ongoing tactical changes. And with our offshore alternative investment management backgrounds we can ensure our clients are constantly protected by utilising smart and cost-effective hedging strategies. That’s why our institutional clients have performed so well over the past nine years and because our private clients are now also top performers since we started their offering. Everyone insures their house, their cars and their lives – investors should also protect their investments.” 

Experienced in servicing big institutional investors, GraySwan applies the same thoroughness, proprietary research, methodology and quality service offering to a private client individual and family offices.

“And these private clients and family offices are not used to it. They are mostly used to an advisor tied to a big bank or life insurer or asset manager trying to sell them a product. At GraySwan we have a dedicated research team with more than 110 years of investment experience and which have been together for more than 10 years, an institutionalised investment committee and we travel the world finding investment opportunities for our clients. This institutionalised proprietary research and advisory approach which we now offer to a high net worth individual or family office is very uncommon and we believe therein lies the difference. In a space of a few years we now advise to more than R650 million of private client and family office assets. Such is testimony to the need for a more sophisticated and high conviction advisory service which produces better returns.”

The last two years in the wealth management business has opened a further window of opportunity.

INTO WEALTH MANAGEMENT PRODUCTS

“Realising we were attracting more and more private clients not wealthy enough for us to deliver tailor-made advisory solutions, we started three core wealth management products; a low equity, medium equity and high equity fund of fund unit trust. These unit trusts now have more than a two-year track record and is already outperforming its peers and such at lower costs than the peers. The collective size of the unit trusts is already in excess of R350 million in size and as they continue to grow we will be able to reduce costs further for our clients.

“We had never thought we were going to construct wealth management products, but the need for the more middle ground individual was clearly there. They need better performing and lower cost products to help them save for retirement.”

Another new service that GraySwan has started offering to its corporate clients is Treasury solutions. With South African listed companies sitting with more than R850 billion in cash on their balance sheets, there is a need to invest such monies in enhanced cash-type solutions which offer higher returns but with little volatility. “We not only advise them how to manage the cash better but also assist them with their foreign exchange hedging programs,” says Theron.

FINDING A PARTNER

Originally a family-orientated business, GraySwan enhanced its shareholding structure two years ago when it sold 50% of the business to Mettle Investments, the Cape Town- headquartered holding company of a group of specialised lending businesses operating in South Africa and the UK.

“Mettle is a very dynamic and entrepreneurial company with great aspirations,” says Theron, “and our DNA and culture are a perfect and an easy match. I have known some of the Mettle guys for longer than 20 years, so it was an easy decision. They play in the private debt space – the fastest growing asset class in the world. We’ve learnt a lot about private debt as an unexplored and undiscovered asset class for investors and we’re already invested in such unique under-the-radar opportunities for some of our more sophisticated clients.”

He believes Mettle is the ideal strategic partner to continue to catapult GraySwan to the next level where the company has now started to compete more aggressively in the institutional investment advisory and wealth management industry.

“For us it’s not about being the biggest but being the best. Our propriety analysis and high conviction and sometimes contrarian research is thorough and detailed. We follow a very disciplined processes, which we have refined over the past two decades of working together at GraySwan and other companies. Our superior institutional as well as private client track records are proof that our investment process works.”

POINTS OF SUCCESS

If the success of GraySwan can be seen as a triangle with independence, a proven investment process and cost-effective advice structures as its three points, there is also what its CEO calls “a softer ingredient.”

GraySwan is a signatory to the United Nations Principles of Responsible Investing, has previously been named Responsible Investment Consultant of the Year by industry body BATSETA and also participates on a global reporting committee which focus on responsible investment practices.

“All our clients are investing in responsible investment products. We’ve been industry leaders in South Africa to introduce our clients to such products. Locally, the market is only now waking up, and everybody’s getting on the bandwagon. We’ve always been investing in such products and such track records have outperformed traditional products and such at lower fees.

“And this is going to be a major theme of a range of new very innovative offshore products which we are building for our private clients as well. It’s a core ingredient.”

Offshore is on a roll. “Private clients who had 15 tor 20% of assets, now suddenly want to put as much overseas as possible. To assist them with such we now also provide foreign exchange services to move their Rands offshore seamlessly and cost effectively in additional to our standard advice to move assets tax effectively to the most suitable offshore investment jurisdictions, platforms and range of funds.”

Recently, Theron has been in London and Malta for two weeks.

“A lot of South Africans are looking at Malta as a jurisdiction, and also a place to potentially get a second passport.”

He was on the George Cross island setting up unique offshore funds and creating alternative investment products for GraySwan’s private clients. “This is the next phase of the business. South African private client investors and wealth advisors are looking for something different offshore and that’s the gap which our products are going to fill.”

The London visit saw Theron securing a 50/50 partnership with Absolute Return Partners – “an owner managed business very much like us, focussing on tailor-made institutional advice. We’ve been working together for more than two years and now we have formalised our collective offering. They also think very differently and that’s what we like!

“They have also realised that their clients do not always require a sophisticated tailormade solution but sometimes simply want an offshore cost-effective product that works, so we have teamed up. We are now collectively building a range of very unique and alternative offshore products via the Malta jurisdiction for both our client bases.”

LAST CHANCE SALOON?

Theron’s views on South Africa’s political and economic situation are not short on candour.

“We have a new President in place, and I think the general consensus is that if this President and his team doesn’t change things around in the next year or two, then what real hope is there for the country?

“This is the mind-set of most South Africans. And they are already starting to look at parachute Plan B, and all these residency and passport programmes.

“This is what has catapulted a lot of people taking more money overseas. It’s been ongoing, but over the last year or two it has really multiplied. With so many jurisdictions, platforms and more than 50,000 offshore funds it’s not an easy decision to make. This is where we come in.”

While South Africa’s economic growth outlook is clouded by a lack of clarity and progress on reforms, Theron sees some positive signs that the tide has turned.

“But now it must turn much faster. I believe we have seen the worst, but if these positives do not manifest in material economic growth for at least the next year or two, then I think people will say; ‘Well, this was the last chance.’  And I would find it hard to disagree with that view.”