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Source: BusinessDay 

Whether the JSE’s banks index will score a hat-trick in 2018 and hand investors the outperformance it has, against all odds, delivered the previous two years is anyone’s guess.

While the index is up a modest 2.8% in 2018, consider that it was down about 12% over the same period in 2017 yet went on to end the year 24% higher. This compared with a 15.4% gain in the JSE’s all share index (Alsi).

Banks staged a spectacular run at the eleventh hour, in response to Cyril Ramaphosa’s victory in the ANC’s nail-biting election battle.

Still, 2017 was a year in which there were attempts at meddling with the Reserve Bank’s mandate and SA lost its investment-grade credit rating, along with a well-respected finance minister — hardly the best environment for banks.

Things were looking similarly dire for the country’s largest lenders at the beginning of 2016.

 They began the year in the doldrums, hammered by the abrupt firing of finance minister Nhlanhla Nene in December 2015. Still, as the Alsi’s gains remained flat, banks had jumped 26% by the end of 2016.

Over the past five years, the banks index has returned 85.5%, relative to the Alsi’s 36.4% gain.

Arguably, banks are unlikely to run hard for yet another year. Then again, as business and consumer confidence returns to SA’s economy, they may just be getting started.

Section 12J investment vehicles have nowhere near the mainstream appeal of the multitude of index-tracking or exchange-traded funds. But there are signs that this tax-efficient investment class is gradually gaining traction with local investors.

On Tuesday, Westbrooke Alternative Asset Management, which ranks as the country’s largest S12J manager, confirmed closing its 2018 financial year fund-raising exercise with more than R565m raised for four investment ventures.

S12J was introduced by the South African Revenue Services (SARS) in 2009, but it was only in 2014, when SARS made a number of favourable amendments to legislation, that the industry really started ticking.

The bigger picture is that the S12J initiative is aimed at boosting the local economy by promoting the backing of smaller private companies.

The incentive gives individuals, companies and trusts the ability to write off 100% of their investment against their taxable income in the year they invest. Investors can therefore benefit from up to 45% immediate tax relief, which reduces the cost of the investment, provides downside protection and enhances overall returns.

The latest Westbrooke fundraising exercise is not huge in the greater scheme of things, perhaps equivalent to the size of a new listing on the JSE’s AltX platform. But the progressive buy-in is encouraging.

Westbrooke managed to raise R420m in 2016 and R470m more in 2017, which means 2018’s is markedly bigger and hopefully also includes many new participants. There are about 100 registered S12J companies in SA with an estimated value of more than R3bn.

Considering Westbrooke’s dominant position it seems safe to assume some S12J funds are very small or have not yet got off the ground.

It is to be hoped that more S12J investment companies can produce returns that spur increased investment in this important niche.

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