By Darryn Faulds, Fund Manager at MeTTa Capital
Negativity around South Africa Inc. has been building for some time with questions swirling over the performance of the country’s economy, its struggling equities market, corporate scandals as well as heated politics.
Amid strained performances for many stocks on the JSE, a growing chorus of commentators have called on wealthy South Africans to move more of their money offshore and to do this as quickly as possible.
While having offshore exposure is always advisable and critical to diversifying portfolio risk, being over-reliant on global markets can also knock local investors. One just needs to look at the strength of the South African rand in recent weeks to realise this.
At this point, these same commentators may argue that increasing your offshore investment portfolio still has benefits as other jurisdictions like Mauritius offer more tax breaks.
While this may be true, the reality is that South Africa also has an encouraging piece of tax legislation that rewards and incentivises investors for taking a risk in the local SME space.
This regime is called Section 12J and it’s becoming a fast-growing alternative asset class in South Africa that puts your money to work in an economy that needs more enterprises and jobs than ever before.
The likes of large financial institutions such as Investec have already started offering this asset class to their clients. And for those of us working in the 12J space, we expect more financial institutions to come aboard in the years to come.
What is 12J and how does it work?
Section 12J is woven into South Africa’s Income Tax Act and enables investors to provide much-needed capital to Small-to-Medium Enterprises (SMEs).
With Section 12J funds, investors have 100% of their investment value deducted from their taxable income in the year of assessment in which the investment is made.
This type of investment is open to all South African taxpayers — including corporates, trusts and retail investors. High income earners, in particular, can obtain up to a 45% return in the form of tax savings in the first year of their investment.
Furthermore, a Section 12J fund can provide regular future investment returns, thanks to an already established business model.
In addition to this, an SME has access to the capital it needs in order to grow. Since 2015, a cumulative R6 billion was ploughed into Section 12J funds with more growth expected in years ahead.
A strong alternative for financial advisors and their clients
At a time when financial advisors are under pressure to prove their value to clients, 12J can become a viable alternative.
Because the 12J space is highly regulated and audited, it is equivalent in many ways to the listed small-caps space in South Africa.
The 12J idustry has also been maturing rapidly with an ever-growing array of options for the investor — options that suit a more moderate risk appetite into attractive sectors of the economy.
An example of the ongoing maturity within the asset class is that of an aggregated offering called MeTTa Capital. MeTTa Capital is similar to a unit trust or mutual fund where investors, through a single entry point, can invest in a basket of market-leading Section 12J companies — at no additional fees.
The funds within MeTTa Capital operate in a variety of sectors, spanning the renewable energy space to hospitality.
It’s clear then that rather looking to cash, or offshore options, financial advisors and wealth managers can offer their client base an alternative, tax-efficient 12J product that is diversified and well regulated.
There’s no doubt that the next big wave for 12J investments will come from forward thinking wealth institutions who look to offer bespoke solutions to their clients that allow them to maximise the high yielding opportunities in this space.
Section 12J has the potential to create a win-win situation for all, and it’s time that local investors start considering it more seriously, especially as it’s becomes ever easier to invest in.
- This is the first article in a three-part series focusing on Section 12J investments in South Africa. In our next article we look at how Section 12J is playing its part in democratising investing in South Africa.