DIY VERSUS UNIT TRUSTS
Individual stock picking offshore can be daunting to new investors. Investing in unit trusts, however, eases much of the pressure of building a share portfolio.
“Unit trusts are a good choice for most investors,” says Pieter Koekemoer, head of personal investments at Coronation Fund Managers. “You’re diversified across a spread of investments from your very first rand in a fund that’s professionally managed to fit your specific objectives.”
However, there are as many collective investment schemes (unit trusts) today as there are individual stocks, and some groundwork still needs to be laid. “The principle when starting an investment portfolio,” says Koekemoer, “is that you need to be quite clear as to what you need as an investor. These needs typically differ between wanting long-term growth, which is what most unit trusts seek to provide, immediate income, or a combination of income and growth, which is typically the requirement of people already in retirement. The time horizon of an investor informs these decisions. The appropriate level of offshore exposure will depend very much on these factors – investors looking for growth over a long period of time can justify significantly more offshore exposure than an investor looking for an income in rands today.”
For someone with long-term growth needs, the solution would be a multi-asset fund with a relatively large allocation towards riskier higher growth assets such as equities and property. “It is also vital to have a spread of domestic and offshore assets. In this type of fund you are instructing your manager to get the balance between local and offshore assets right.”
A further refinement is that a discretionary investor should look at a flexible fund, while retirement savings should look more towards a multi-asset high equity fund, often called a balanced fund, explains Koekemoer. “Once you have identified the right mandate, you have a ready-made solution that saves you from having to be concerned about monitoring what’s happening in the market all the time.”
Some investors prefer to take a more hands-on approach to investing, and for them Koekemoer offers some advice too.
It’s been a tough market for the past three years, with classic balanced funds delivering just 6 to 7 percent – much the same as cash. “All local asset classes have under-delivered compared to what you’d normally expect. Local shares delivered less than 6 per cent a% per year, and the listed property index gave no return over this period. Global equities is the only asset class that met expectations over this period, having delivered an annualised 12 per cent – but that total would have looked quite a bit worse just a few weeks ago. The rand has recently weakened about 15 per cent and that has helped the return on global assets look better in rand terms.”
The performance of the rand has a big impact on how investors perceive offshore investments. While most investors expect the rand to be volatile, recent experience was unusual. TAfter the rand lost half of its value between 2012 and 2015, butit strengthened by 25 per cent% in 2016 to 2017 despite a very weak local environment. While domestic confidence improved in early 2018, the rand lost ground due to a rampant US dollar creating headwinds for all emerging markets. “The sudden switch from local fundamentals to global investor risk sentiment as driver of the exchange rate serves as a reminder that investors should always invest with a strategic asset allocation in mind.”
“This same sentiment has had a big impact on the JSE which has become more depressed than it should be. We’re out of synch with the rest of the world where the economy is generally doing well.” Koekemoer says that disappointing periods of performance typically holds promise for the future: “If share prices remain the same while earnings grow, it means that the shares have derated and become cheaper – presaging a return to more ‘normal’ returns in the coming years, even without the need for any improvement in the economy.”
How this will affect the returns from offshore investments is trickier, as he believes the rand is neither particularly under-valued nor over-valued. The global markets are late in a nine-year bull run, one of the longest on record, and many shares in expensive territory. He believes this may favour the local market in coming years, not forgetting that many of the big stocks on the JSE earn a majority of their revenue abroad, and therefore are essentially also ‘offshore’.
“What’s difficult to gauge is how much longer the current trend of interest rate normaliszation in the US creating a negative outlook for emerging markets will continue – no one really knows if it is going to be months or years,” cautions Koekemoer.