ABSA’s empowerment deal, Batho Bonke (BB), is unwinding at a very interesting time for investment markets. All local asset classes apart from cash have delivered excellent returns over the past year, the stock market is at all time highs, and currency depreciation has resulted in offshore assets giving good returns as well.

This however seems to contradict economic reality as local consumers strain under the pressure of high prices for petrol, electricity, medical aid, food, etc. Global economic and market risks also appear to be elevated levels with issues such as the fiscal cliff in the US, slowing economic growth rates in emerging markets, and the European debt crisis.

With local equity and listed property markets having run so hard in the past year smart investors are finding it increasingly difficult to commit and allocate capital at this time. At GM Investments we have been reducing risk in client portfolios and adopting a more cautious stance compared to the past three years.

Many BB investors though would have a number of options beyond the traditional markets. Many of them will qualify to invest in BBBEE public investments which are open for secondary trading among black South Africans. Individuals could consider the likes of Sasol Inzalo, Sasol BEE Ordinary shares, Eyomhlaba, Hlumisa, Phuthuma Nathi, and Thembeka Capital for lump sum investments. For regular contributions they could also consider Sanlam’s Empowerment Solutions offering. Groups however have a smaller universe as they would not be able to invest in Eyomhlaba, Hlumisa or Thembeka Capital as these are only open to individuals.

Sasol BEE Ordinary shares (SOLBE1) Sasol’s discounted BEE share scheme is trading at an attractive dividend yield which would provide investors with a decent yield while they wait for the empowerment period to end. At this point their SOLBE1 shares convert to Sasol ordinary shares. SOLBE1s trade at around R280 a share compared to Sasol ordinary shares at around R360 each. Sasol Inzalo shares (the funded scheme) has been trading at what we believe are elevated levels – around the R90 mark. However, they have pulled back quite strongly since mid November and appear more reasonably priced. They are not yielding any dividends at the moment meaning that investors will have to rely purely on capital growth to get some kind of return.

Eyomhlaba and Hlumisa: African Bank’s two deals are both trading at reasonable discounts to net asset value (NAV). These deals have less than four years to go before they convert to ABIL ordinary shares, at which point the discounts disappear and value is unlocked in shareholder hands. Both shares also pay dividends, although they trade on very low dividend yields.

Phuthuma Nathi (PN) looks attractive at current prices of R60 a share but there remains a lot of uncertainty around the exit strategy for black shareholders. PN is invested in unlisted Multi Choice SA (MCSA) together with listed media giant Naspers. It is difficult to value unlisted shares and valuations for PN are above R100 at the low end, and over R150 on the top end. This implies a huge discount on the average of the range of valuations. There is no obvious catalyst at the moment which would cause this discount to disappear anytime soon. However, it does pay dividends and is a solid investment prospect given the dominance of MCSA and its ability to generate cash. Dividend yields are low and investors will be expected to be patient to realise value in this one.

Thembeka Capital also looks a solid, if unspectacular, option for investors at the moment. The share is trading at a smaller discount compared to other shares. It is a great prospect for patient investors with a long investment horizon though. It is a diversified investment holding company with great underlying investments in companies such as Capitec, MTN Zakhele, Sasol Inzalo, PSG, Pioneer Foods, and a host of unlisted companies. However, it is an active buyer of stock – listed and unlisted – in the market with a group of shrewd investors in charge of the business.

Have patience

The challenge with investing in BEE schemes is that investors have to stay invested for a long period of time if they are to benefit from the deal. BB investors will be familiar with the concept of liquidity having sat with these BB shares for the best part of the last decade and not being able to access significant economic benefit from them. Liquidity constraints can lead to wild swings in the share price – in both directions – and can definitely work against a forced or hurried seller. The discounts investors receive when buying into a scheme is meant to offset the lack of liquidity.

Take care of retirement

Investors should consider investing a portion of their proceeds into traditional, more liquid, investment options such as unit trusts, share portfolios, ETFs, and new generation retirement annuities (RAs). Retirement annuities are useful in helping investors from a tax perspective. They qualify for tax rebates on contributions, and all returns inside of the RA are tax free as well.

Get advice

BB investors are encouraged to engage with a certified financial adviser to go through a proper investment process to determine how to allocate capital between the BBBEE investment options and traditional options. This process would also help in structuring an appropriate traditional portfolio  for investors. The investment process should entail a conversation and structured information gathering around risk tolerance, investment objectives, the balance sheet of the investor, tax status, and a host of other factors. The outcome should always be a diversified portfolio of assets.

Craig Gradidge CFP® is Head of Investments at Gradidge-Mahura Investments, a new generation financial planning business. See www.gminvestments.co.za for more information.

 This article first appeared in City Press