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

Financial Mail - Investors Monthly - - Contents -

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

Pic­tures: iSTOCK

China is shift­ing to a con­sumer and ser­vices-led econ­omy, which has hit com­mod­ity busi­nesses

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