There are real returns, but beware the risks too
Investors who want to avoid SA risk must be aware of international risks too, writes Stephen Cranston
It is not surprising that there has been a resurgence of interest in offshore investment. There has been increasing scepticism about the leadership of SA and the very real prospect of material tax increases.
With the rand losing 50% of its value over three years, offshore funds have given real returns over the past 12 months in local currencies, even in mediocre international markets. The SA equity category is down 9% compared with a 14% increase in the global equity category.
Many people are buying offshore assets at any cost, and not taking cognisance of the risk in the market. Jo-Anne Bailey, head of Franklin Templeton SA, says many people are nervous about timing offshore investment, “but timing should not matter to the long-term investor. It is time in the market, not timing the market, that matters.”
Bailey recommends drip feeding the investment over several months so that the exchange rate on a specific day is not so crucial. “If the value of the assets goes up that’s great and if it goes down then you can buy more next time.”
Columbia Threadneedle, a large international asset manager, this month changed its view of global risk from dislike to neutral.
But portfolio manager Maya Bhandari says there are four medium-term issues: the shock in the oil price; the US rates rise; the manufacturing recession; and continued Chinese rebalancing.
The low oil price is putting pressure on the fiscus of the Gulf states, not to mention Nigeria and Ghana. It is affecting the US and Europe too as 10% of the US high yield market is made up by energy companies, which are at distressed levels, and this has spilt over to non-energy and European high yield.
Bhandari says the US economy is doing just fine, and the house is overweight US equities. A fall in unemployment, and therefore a shrinking of spare capacity, means the Federal Reserve is likely to increase rates twice over the next year, yet the market is pricing for no increases.
She says the best proxy for the economic cycle is business investment and inventory changes: inventories are now running high and there is overcapacity, which has hit manufacturing profit.
The fourth market driver is the continued Chinese economic rebalancing, from an economy led by physical investment and manufacturing to a consumer and services-led economy. This has hit commodity businesses most of all.
The devaluation of the renminbi in August set off the market slowdown but Bhandari says China needs to relax the peg to the dollar eventually to make its economy more competitive.
Since 2012 the markets have been driven by price rather than earnings. Over the past five years all the increases in equity value have been through changes in forward valuations. This presents its own risks. The current market does not look suitable for a purely passive approach as there will be increased diversity between different markets. Columbia Threadneedle dislikes the US and emerging markets (though it likes foreign exchange-hedged emerging market bonds). It favours industrials, consumer cyclicals and health but dislikes materials, utilities, telecoms and financials.
It is usually easier to opt for a fully discretionary equity or balanced fund. When funds were first approved in 1997 there were specialist funds such as Global Leisure, Global Privatisation and even funds focused on Wireless World. There was some appetite for fad funds before the Nasdaq crash in 2000. Now they can’t be given away.
The closest to a fad fund is the Investec Global Franchise fund, which invests in global brands, some of them obvious such as Nestlé and Johnson & Johnson and a few more unusual, such as Moody’s, the rating agency.
Franklin Templeton (FT) is the first foreign asset manager to launch a range of rand feeder funds, a convenient way to get exposure to international assets without having to externalise assets. It is easier to blend local and international assets through the feeder fund. The first three funds will be global equity, balanced and real estate funds.
Arguably FT is the only large international asset manager to have set up a proper sales operation in SA and has shown commitment to the market by these feeder fund launches.
Many people are buying offshore assets at any cost, and not taking cognisance of the risk in the market
Looking at the funds which are most recently registered with the Financial Services Board, they are plain vanilla index funds, designed primarily for the institutional market. Fund managers can use them to leap from Emerging Markets to Japan and from the Government Bond to the Aggregate Bond Index — nothing that consumers are screaming out to do. The FSB has also approved a wide range of BlackRock’s iShares exchange traded funds.
The list of approved funds used to be dominated by local companies such as Stanlib, Investec and Sanlam. Now more international companies are registering. Last April Dodge & Cox, a boutique manager in San Francisco, registered four active funds: US Stock, Global Stock, International Stock (this excludes the US) and Global Bond. Other recent managers approved have included Aberdeen and VAM.
A popular way of accessing managers and funds that are not on the FSB approved list is through life plans such as Old Mutual International and Sanlam’s Glacier International.
Head of Glacier International Andrew Brotchie says that there was a pick-up in demand even before Nenegate and there were even outflows when the rand touched R18/US$. Clients will struggle to show a decent real return from those levels. Brotchie says there are a number of reasons that clients favour the life wrapper: it is suitable for estate planning and insolvency protection, and allows for the nominating of beneficiaries. About half of the clients choose to invest in a stockbroker portfolio and the rest into funds. The minimum for an investment in funds is $25,000 and Brotchie points out over the past three years it has risen from R160,000 to more like R420,000.
The most popular options are the multimanaged Navigate cautious and moderate funds, which blend local names such as Coronation and Nedgroup with foreign groups such as FT and Dodge & Cox. But very few buy just one fund. The minimum for stockbroker accounts is $200,000. There is quite a lot of overlap between the Glacier and OMI list, which mainly consists of SA-orientated groups such as Investec Wealth, Credo Capital and PSG Konsult.
OMI does not have an equivalent of Navigate but it does include a more condensed research range to make it easier for financial planners. Not surprisingly there are quite a few funds run by Old Mutual Global Investors but it also includes Henderson, JP Morgan, Threadneedle, Fidelity, Newton, Schroders, Artemis, BlackRock, Aberdeen and Invesco Perpetual.
The Glacier global life plan mostly consists of familiar names and a few from the past, such as GAM Global Diversified, which was one of the core funds on the OMI platform before Mutual brought it in-house. One unique feature is the range of P2 protected strategies funds run by Sanlam Investments. P2 used to be available on a wide range of funds but it is now available on specific funds such as Global Equity, an emerging markets fund and North America.
Wayne Sorour, head of sales at Old Mutual International, says there are conservative investors who absolutely cannot lose their capital. For these investors it has launched the Protected European Equity fund which gives 125% (in dollars) of the participation in the Ethical Europe Equity index, an index of 30 large European companies. The index focuses on high dividends, low historical volatility and corporate social responsibility. If there is no growth in the index 100% of capital is returned. It is a useful product for a timid beginner as the only real risk is if product provider BNP Paribas and Old Mutual itself default. But these products are highly profitable for the merchant banks, so perhaps they aren’t such a good deal.
There will always be investors who go against the trend, A good fund for them would be the Coronation Global Emerging Markets fund. It has been highly successful at gathering assets and since launch in July 2008 it has had a dollar return of 5.6% against a benchmark of -12.5%. But over the past year it is down 27% and in January alone had a negative return of 8.9%. Fund managers Gavin Joubert and Suhail Suleman say the underperformance came from Brazil, which accounts for 19% of the fund, as the real declined against the US dollar by 33%. But the fund managers are convinced that the long-term fundamentals for these Brazilian companies are good, with some potentially able to double. There were still winners in the fund, such as X5 Retail, the Russian supermarket group, and JD.com (no relation to the local furniture chain), a Chinese online retailer. China is 22% of the fund and it is mainly focused on Internet shares such as search engine Baidu and online travel agent Ctrip as well as Tencent indirectly through Naspers.
About half of the clients choose to invest in a stockbroker portfolio and the rest into funds
China is shifting to a consumer and services-led economy, which has hit commodity businesses