Fedgroup is a specialist financial services provider with a legacy of putting people before profit, offering a range of stable and diversified investment options that help investors steer clear of market scares. With billions under management, Fedgroup ensures your investment decisions are stable so you don’t have to worry about them coming back to haunt you.

And in the month of Halloween, with ghosts everywhere (including on this podcast of course), it was great to be able to chat to Paul Counihan from Fedgroup about how to make the markets less scary and daunting, a topic close to my heart. For more information on Fedgroup, visit their website here.

Fedgroup Financial Holdings (Pty) Ltd is a licensed controlling company, and companies within the Group are authorised FSPs. Ts and Cs apply.

Listen the podcast here:

Podcast transcript:

The Finance Ghost: Welcome to this episode of the Ghost Stories podcast. It is nearly Halloween, and I guess as ghosts go, that means it’s probably my favourite month. I suppose, more importantly, it’s summertime, or at least it’s trying to be in Cape Town, so maybe that’s more the reason why it’s my favourite month.

If anyone is prepping for a Halloween party, you might have all your decorations ready and all sorts of interesting food. Not too many of you will put stock price charts up as scary things, but you could certainly pick a few because there’s some crazy stuff that happens in the markets, and investing can be pretty daunting, pretty scary – ghosts as well, but luckily not this one! I always said that this business was designed to help make the markets less scary and Paul, it’s going to be what we do today, which I’m really, really looking forward to.

Fedgroup is running this kind of Halloween themed month around not letting your investments scare you, which I think is just such a fun idea. And joining me today on this podcast is Paul Counihan, who is at Fedgroup. He’s been in the markets for a good couple of decades, so he’s seen it all, which is wonderful. Paul, you’ve worked at a variety of financial institutions, and today you head up Fedgroup’s direct wealth advisory business.

Thank you for joining me. You bring tons of experience to this conversation and obviously a deep understanding of Fedgroup, a brand that a lot of Finance Ghost readers have really gotten to know over some excellent podcasts. So yeah, thanks for your time. I’m very happy to have you on here.

Paul Counihan: Yeah, thanks, Finance Ghost. It’s great to be chatting with you today. And, yeah, we really, really wanted to bring across and cement the message of taking the scare factor out of your day-to-day investing. That’s really what we’re here to do and what we’ve done for over three decades.

The Finance Ghost: Absolutely. It is scary, and we never want to downplay that because the markets are daunting, they’re risky, but that’s how finance works. If you don’t take risk, you don’t get rewards. That’s literally how it works.

Over a couple of decades, you would have had a lot of conversations with clients. You would have no doubt invested your own money and experienced the ups and downs of the markets. What do you think is the most daunting thing about the markets? What do you think actually makes it that scary?

Paul Counihan: I think the biggest thing that makes it scary is the fact that no one has a crystal ball, that the future is uncertain. I was recently looking at what I think a lot of your savvy investors and your listeners will understand as a “smartie box” – it’s that view where you can see the different asset classes represented over a timeframe, and it then ranks the asset classes on a scaling down of returns. If you just look at a smartie box, it really is a smartie box – the sector in the market that’s up this year is down the next year. You can never predict what’s going to go on as we’re a global economy.

The fear factor is around the unknown. And for the general investor, my general observation over the last two, three decades has been that the level of complexity in the market has gone up and that your general investor has really, really struggled to keep up with that complexity. If you’re not invested in this day-to-day, it’s not going to come naturally.

That’s why we at Fedgroup, we highly advocate talking to an independent financial advisor that can really help navigate through these waters. This is what they do every day of their life.

The Finance Ghost: Yeah, absolutely. I think people are just so scared of risk, ultimately they’re worried about losing their money. It’s really interesting when you speak to people, that’s the bias, right? It’s “I don’t want to lose money. How do I avoid losing money?” They don’t necessarily – very few, in fact, I don’t think I’ve ever spoken to anyone who straight off the bat says: “Well, I’m scared of doing worse than inflation.” You know, no one says that. They just say, I don’t want to lose money. But if you have R100 today and you still have R100 in twelve months, you have in fact lost money. People tend to forget that because it’s not a natural way to think. We kind of anchor to “there’s R100 in my pocket, I want to still have at least R100.” The correct way to think about it is a year from now I want to have at least R105. So that then you genuinely haven’t gone backwards, right?

Paul Counihan: Absolutely. You’re talking about that concept of absolute returns. The absolute return philosophy is you always make positive return on your money. And that’s what people seek. What it really talks to is the fact that investing your money is a highly emotional thing and the best investment professionals around have this incredible ability to take the emotion out of investing. That really is the key. I think you’ve won the game if you can take the emotion out, because emotional decisions when it comes to investing money are the worst. You have to avoid those. And you’re right, inflation is the biggest eater of returns over time. And the problem with inflation is for so many investors, it’s something that sits on an article that they read – they don’t often feel it unless they know what things are costing. It’s not that direct link. It’s the silent erosion of value. And it’s so important to know that assets exceed inflation and people are getting what they call real returns as an inflation plus return so they’re getting wealthier in the future. And that’s really what we’re about at Fedgroup.

The Finance Ghost: It’s not easy to achieve. One feature of the South African market is that every year in the budget speech, the tax brackets go up by less than inflation. In fact, sometimes they don’t go up at all. That bracket creep happens and in reality, your effective tax rate actually goes up a little bit every year now. It just gets harder and harder to actually get yourself ahead and to build up that balance sheet that is starting to generate those returns.

I’m in my mid-thirties now. I think if you asked me ten years ago: what does success look like? I would have had all the typical, I’m in my twenties kind of answers around, oh, you know, a really nice car and a really big house, blah, blah, blah, blah, blah, and you get to a point where actually it’s that freedom: freedom of your time, freedom to do what you want to do with your life. And that doesn’t come unless you’ve built up enough of a balance sheet to actually start doing that. I’m definitely not someone who advocates for frugality above all else, don’t spend your money and never travel etc. I’m not one of those people at all, but I do think that there’s a strong balance and if you can understand what inflation is doing to your money, then you understand the importance of actually building that balance sheet, getting those returns and just treating that as the scary outcome.

It’s not about sitting on your hands and doing nothing because you freeze and you’re nervous and you’re worried. You’ve got to understand that you’re on a treadmill whether you like it or not. It might be set to walking pace at your local Virgin Active, inflation sometimes is at walking pace, sometimes it’s not. Sometimes as South Africans it feels like you’re jogging at 10km/h and it’s uphill at that big gradient and that’s just to keep going. That’s unfortunately how it is and I think people need to reframe it to understand that that’s what they’re up against. And you can’t beat that by having money under your mattress.

Paul Counihan: That’s such a great point. I was just about to say, in the theme with October, what do you do if you think you’ve seen a ghost? You freeze – that’s what people do. Often they’re so fearful of getting stuck into their investments and seeing what else is out there, that they freeze and do nothing. And doing nothing is probably the worst thing that someone can do with their investments.

Maybe another point on inflation, there’s obviously CPI, core inflation etc. that is publicised and measured. You know, it’s often a wonderful exercise to go into: what is your actual household inflation? What is your real inflation rate now? And unfortunately, talking about scariness, that gets a little scary.

But I think what makes it not scary, and that’s really what we’re wanting to offer the market now and we’ve really honed our skills at Fedgroup, is offering alternatives to what your normal, call it, 60/40 strategies, bonds, equities offer in the market now. And what’s really, really nice and what I’ve observed over the last two decades is that the amount of additional options that are available and accessible to your investors have really sort of exploded. But again, that complexity requires advisors to navigate them through it. Carving out stable returns for clients, which has always been what we’ve done, suddenly becomes a very, very non-scary option. And it’s a big one as well – the majority amount of work we do in the financial services industry is dealing with independent financial advisors. And why that’s important is an independent financial advisor, by virtue of their independence, has the choice to use a product provider in part of creating that solution for their clients. And we’re really happy that we have in excess of 1,800 independent brokerages that have used us over the last 30 years in creating a part of that portfolio.

I think we’ll talk about it further in this conversation around diversification. That is still, I’m afraid, really the only tried and tested way to really combat against the scariness of investing. It’s just, it really is, you know, it’s almost that concept of if you’re going to go into a dark alley or a dark room where there might be ghosts and ghouls and whatnot, going in with a team of people, a few people, is far less scary than going by yourself or just maybe someone, your best friend. That’s the analogy I align with it.

The Finance Ghost: Yeah, absolutely. I think survivorship bias is a real challenge in this. People point to the great investors who took five or six huge punts and they worked. And it’s like, look, concentration is the answer. Concentration that works is the answer, sure. But now get that right, and we don’t talk about everyone who lost money because they were concentrated. We only talk about the heroes. And that’s the survivorship bias coming through. I am very much a fan of having a whole bunch of smaller positions and recognizing that there is so much variability in the world that you cannot possibly hope to know with such certainty how something is going to turn out. You only kidding yourself. If you think that it’s because you just haven’t been hurt yet. And it will come, and it will hurt.

Paul Counihan: And I think right about now, we’re experiencing one of the best examples of this concentration risk. And there’s potentially room for hurt if you are totally concentrated. If you look at that growth sector in the equity market now, where a lot of the magnificent seven – your Alphabets – the market is now suddenly 63% concentrated in that market. There are some worrying statistics. Those stocks constitute 23% of the market, but only contributing 12% to the profit.

There’s this imbalance. It’s an amazing statistic. And again, why I mentioned this is because it’s now a worry. Have exposure to potentially concentrated markets, but don’t let it be your sole, your sole concentration at the moment.

Now, this is a crazy, scary statistic, in relation to what we’re talking about. Your average forward multiple on the S&P is sitting around 22x. If you just extract your magnificent seven, your Teslas, your Microsoft, that average multiple drops to 18x by extracting seven shares. Now, again, it’s very hard to explain to someone that’s made a lot of money over the last few years that listen, maybe this has run its course, but until you get hurt, you wake up the next day, you just cannot understand what’s around the next corner. So diversification is absolutely key to us.

The Finance Ghost: Yeah, because I’ll tell you what is scary and what people forget all the time is the impact of competition. And this is the Tesla debate that I’ve had for years with people.

If you look at Tesla over the last couple of years, it’s actually been really disappointing. If you bought in at the right time, you’ve made a fortune, absolutely, you know, and well done to you. But it was when Tesla was already very hot and I was looking at these cars and having these debates with people around competition and everything, and being shouted down from every corner of “You don’t understand, and Musk is going to do this”. And obviously Cathie Wood is out there predicting that Musk will be emperor of all the universe in the next, know, seven weeks. Anyway, I’m being facetious, obviously, but you read some of that stuff and it’s honestly just crazy.

And actually, as time has proven, you know, guess what? Tesla is not the only car manufacturer in town. There’s some really good electric stuff. I think the Chinese were a force that people didn’t necessarily see coming. But that’s my point: something will come, you don’t know what it is.

Nvidia is now the next big one. Can that carry on the way it has? Is AI going to continue being that strong? And will anyone else come in? Because when there’s such a lucrative market, then it’s going to attract a ton of R&D, lots of new competitors.

Ulta Beauty, another great example in the US market. You know, they disrupted beauty retail. Now they are facing disruption from tons and tons of competitors. And their share price is having a pretty rough time this year. So this is more of a single stocks thing maybe, than buying an index. Although, as you point out, this is the importance of not just blindly going into things and thinking, oh, I’m buying this very diversified ETF. Go and have a look what’s in it, because if it’s got six or seven stocks that are making up the bulk of the story, actually, you’re not buying something that is diversified in the slightest. You are buying basically a tech index and some other stuff.

It’s not the same thing as being diversified. Right?

Paul Counihan: Yeah, 100%. And that’s where we are. That’s where we sit at this point in time now. But you raise such a great point around this elevated focus on where success lies. And that’s the worry in the markets, by the way. It’s quite an interesting point. I think we even sit with it where we are in South Africa today.

Suddenly you take an Nvidia, the expectations on Nvidia are so much higher. And remember, that’s where the market is absolutely heartless. They will judge you on their expectations. Now, suddenly the expectations have doubled.

It’s the same in South Africa. I mean, we’re in a purple patch. I think you’d agree it’s been almost a tale of two worlds this year. The first half of the year versus second half of the year for SA. What people don’t realize, is that suddenly interest rates are dropping a bit now, SA GNU is really starting to sort of show some of the fruits, there’s some great public private partnerships working – but what that does though for SA as well, is just increase the expectation levels.

In the event SA, you know, listed equities or SA Inc. doesn’t deliver on expectations, the fall is harder. And that is a wonderful position to be. You want to be in those positions, but people must understand the responsibility around these elevated expectations. I mean, it’s like the Springboks. I use this analogy quite a lot now. It’s a wonderful analogy for where we are and what Rassie’s done with the Springboks. But right about now, we sit down and watch a match. I don’t know about you, but I expect the Boks to win!

The Finance Ghost: Absolutely. Against anyone. All Blacks, no problem. You know, we can win this. Imagine that seven, eight years ago, 100% different expectation levels.

Paul Counihan: So that’s where I really believe in what we’ve done at Fedgroup is right from the beginning. It’s been around strategically deciding what sectors we’re in and that was the decision around which sectors can we properly understand, manage, monitor and that we believe can give those stable returns. Alternative in nature but always giving stable returns – that’s been our mantra over the last while, responsible, well-diversified investments in sustainable tangible asset classes. That’s what’s been our magic sauce. We’ve been very focused and continue to be very focused on what works for us. Many, many clients have been happy with what we’ve delivered.

The Finance Ghost: Yeah and I absolutely agree with you about what I like to call the GNU-phoria, pick your term. The stock prices move first. And actually, if you go and draw a chart of ArcelorMittal, you can go and see an extreme example of this. I love pointing to extreme examples because they teach you how the markets work. Sometimes the markets do it over twelve months and sometimes they do it over three weeks.

ArcelorMittal went absolutely nuts with the news of Chinese stimulus because a big problem there is that Chinese demand for steel has been down. The Chinese produce an enormous amount of steel and so what they’ve had to do is dump their steel on global markets including South Africa. And that has severely hurt ArcelorMittal. That’s the TL;DR of what’s gone wrong there and a bunch of other things too.

So with the announcements of Chinese stimulus – and ArcelorMittal is a broken stock, it really is, it’s a loss making group, it’s terrible. And people jumped in and said, well you know, this is what’s going to drive the improvement. And you could have made some really great returns on ArcelorMittal, but you needed to have the skill and frankly the luck to get out because literally just the other day they went and released an announcement that basically said hi everyone, you know, please remember actually we are in huge trouble. Basically here are all the issues we’re making. Losses, it’s awful. And the stock has lost almost everything that it gained from the stimulus.

So it’s very much this buy the rumour, sell the deal approach. I literally wrote about that in Ghost Mail this week and it’s an M&A lesson, but it’s actually a very useful thing to apply in the markets as well.

This GNU-upswing this year might just be a slower version of that. There was the sort of buy the rumor, which was the election going well and everything’s going to get better in South Africa. Whoosh go all the share prices, lovely, but things need to now get better. And I’m watching a few sectors of where that might start happening. I can tell you where it’s not happening yet, for example, is construction. You go and read PPC’s results, there’s not really any positive move there at all. Afrimat also not amazing, so it’s not happening there.

I think where it might start happening is somewhere like the clothing retailers. You might start to see it coming through, but it’s going to take time and by then share prices might have washed away. This is what happens in the markets: people run to where the success is. And that’s actually the scariest thing – it’s too late! Not always, but it often is. It often is too late. You’ve missed it and now you need to just be very careful.

When every South African stock is suddenly a double digit P/E, all of a sudden, we’re not there yet. We all want to be there. We all want to be the Springboks winning World Cups, but we’re not there yet. We’re still a development team. It’s going to take a while and if it takes longer than people think, it’s a problem.

Paul Counihan: And that’s exactly it, quite right, the length of time is a big one. It’s similar to our grey status. It’s no great shakes that we’re in it. It really isn’t. I mean there are another two G20s, Turkey and Argentina. We’re in, out. look, I always say the list of countries that are currently in grey status now, it’s like being in the wrong crowd at school. You don’t really want to be in that crowd to be honest. But it’s more around the expectation when we should be coming out. That time extends and that hurts us.

So infrastructure, there’s that concept of fixed capital formation, gross fixed capital formation as part of GDP which is spending on value creating stuff in SA which is mainly infrastructure. You’re quite right, that is lagging and that actually has to grow at double our target to GDP. If we’re targeting GDP growth of 2%, you need that fixed capital expansion to be running at 4%, 5% now and it’s slow.

One of the interesting things that’s happened which we’re looking at now is – I’m not sure if you’ve seen the statistic, but foreign investors in listed SA equity have dropped over the last few years from 40% down to 28%. Now that that’s got to do with mandates, global mandates funds, you know, not being allowed to invest in sub-investment grade, etc. But believe me, on the street we’re rubbing shoulders with industry. The amount of money that’s committed and ready to go is mammoth. It’s better than ever because people understand the potential of South Africa, but they’re wanting to see more tangible results before they pile in. So it’s just ours to lose. I agree with you.

I spoke earlier about the average forward multiple P/E of the S&P. SA sits at between 11x and 12.5x. But the worry is that if SA equity and SA companies don’t deliver the earnings growth that the market expects, you aren’t going to get the returns. And I suppose that’s where we have chosen these sectors where, and you talk about, if you read about something, it’s too late. We genuinely are invested in sectors of the market – property, agriculture, renewables – where we take a very tech engineering approach to our investment philosophy. We have technology that’s been deployed into our assets where we can very, very accurately predict what potentially is going to happen.

We’ve got the finger on the pulse. I always talk about if we’ve got the equivalent of having a camera and a mic on a boardroom of a listed entity or global boardroom of a company, we just know the inside – whether it’s measuring an agricultural farm or measuring a property, we’ve got that. And of course, yes, there are external influences that come in there, but we’ve got that deep integration around managing these assets now. We realized that it allows us to give a bit more of a stable component to someone’s portfolio because of all these other risks now.

I always say, as a financial advisory guy, you’ve gotta have a bit of everything. And, you know what’s an important one as well? I wanted to raise the point for all the listeners as well. You know, this diversification concept, there’s actually something that comes even before it that takes this emotion out of it. You spoke about biases. I mean, these cognitive biases are just such a fascinating world, but there’s this concept of asset liability matching, and that’s just such an important component that actually precedes diversification as well. Sitting down with clients and people and saying, right, when do you need certain bits of money? Putting these things in boxes and then aligning unemotionally the assets and where they should be invested to actually when these liquidity events are happening in life. That actually trumps everything. Only then can you even start conceptually.

That’s the sort of guidance that SA investors need. And that, we really believe that that’s where we are. A huge, a critical part of someone’s portfolio is around those planned events in life where, you know, you need money x, five years from now, you don’t want capital risk. That’s really the component where we play, because, I mean, we have that level of stability. It’s our game. We are stable.

The Finance Ghost: Yeah. And I really appreciate that about Fedgroup’s business, sincerely, is that there’s some stuff in there that is quite unique and different and unusual. And, you know, to your point, it’s almost straddling capital allocation and also the operational side. You’re not just sitting there doing the desktop research. And with the greatest of respect to long-only fund managers, I understand the constraints under which they need to operate, but there’s a lot of benchmark hugging. There’s a lot of looking at the top 40 and making slight changes to what the weightings are sitting on. It’s not actually different. It’s not really diversification. If you go and buy five funds like that, you are really just – in fact, you should probably just be buying a top 40 ETF, let’s be honest, that’s not diversification.

I think part of what you guys do is genuine diversification. And some of which we’ve talked about on podcasts before with other members of the Fedgroup team, I’m thinking specifically around some of the agricultural assets, etc.

I think just to bring the show to a close, I’d love to just open the floor to you to give an overview, just high-level some of the elements of the product suite effectively at Fedgroup and how you guys use it to achieve diversification.

Paul Counihan: Okay, great. That’s a great opportunity to map it out. The tangibility is such an important aspect of what we offer. A bit of a silly story. When I joined the group, I was asked by our head of impact team to come and join on one of the farms. And I rocked up there in my fancy brogue shoes and my suits, and I was very quickly reprimanded for that. But now I’m very happy in my vellies and realising it’s the on-the-ground stuff and understanding what’s going on, which is absolutely fantastic.

With regard to what we offer, we’re a specialised financial services company. We’re highly diversified, we have a nice diverse set of licences, and that allows us to bring to the market our alternative assets in a stable way through a range of products ranging from tax-free savings accounts to endowments on a fixed and asset-linked basis and our secured investment, which we’ve been running for over three decades, etc. We really offer a huge amount of tax efficient options as well, which has been a huge evolution in our world over the last few years around adding the stable asset components and the stable returns, but in tax efficient ways.

It’s been a wonderful journey over the last five years, where we’ve really wanted to become more relevant to the market. Also the important thing is just scale up the business. There’s so much wonderful opportunity in the market to leverage these assets now. We’ve been able to bring far more availability into the market, which has been wonderful. And there’s been so much positive reception from the advisors and clients. Our aim, we live and breathe here to make sure that we continue to give those stable returns year on year and continue into the future.

The Finance Ghost: Paul, thanks very much. I think that’s a really great overview. I must say the culture at Fedgroup is also quite fun. I did see someone in the background there dressed up in a sheet waving at me. So that was great. Purple sheets, I mean, you’ve got to really get them on brand here. That white sheet, it’s just far too cliche!

And Fedgroup is not about cliche. It’s about doing unusual stuff, which I think is great. And I would encourage anyone listening to this, go check out the Fed group website because it really does range from your more traditional sort of investment products through to, as I say, some of what you guys have done in your impact farming ventures, for example, from pistachios through to nursery saplings through to beehives, macadamias – I mean, these are really just interesting assets. I think the way you’ve done some of that stuff is particularly cool in that it actually makes investing feel more real to people.

For a lot of people, for the majority of people – let’s face it, we live in this financial world, but most people absolutely don’t. They do not get a kick out of going and picking their investment products or whatever. They pretty much outsource this to their financial advisor. And half the time my goal is to just get them to a point where at least they can ask better questions to their financial advisors and get better outcomes. But I think with stuff like the impact farming assets, it’s a lot easier to say to someone, especially younger investors or people who haven’t really dabbled in the markets: “Hey, did you know that you can invest in growing nursery saplings or blueberries or whatever and actually earn a decent return and most likely beat inflation from this thing?” So that kind of stuff is really great. I really enjoy the work you guys do in that regard.

Thank you for coming back onto the podcast – well, Paul, it’s actually your first time, hopefully not your last time, because I think it was a great discussion. And for those who want to reach out to you, learn more about Fedgroup or perhaps engage with you directly, what is the best way?

Paul Counihan: Yeah, so as I said, best way is get in touch with us is on our website. All the contact details are there. We’re a high touch environment with traditional values, old-school values. A computer will not call you, a person with blood running through their body will call you. We love those conversations. And importantly, a unique culture fit around us is we get the senior execs in front of clients on a regular basis. We like to keep our finger on the pulse and that is the tangibility element of what we do.

But you summed it up beautifully, that really is it. Tangible assets that give a nice hedge against inflation and currency risk, but that you can feel, touch and experience for yourself. We love giving those experiences, by the way, to our, to our clients, visiting our various investments. It’s the way to go. It’s a wonderful experience.

The Finance Ghost: Yeah, absolutely. Well done and thank you for your time, Paul. And I look forward to doing another one of these with you.

Paul Counihan: Yeah, anytime. Thanks for the time today.