Financial Mail - Investors Monthly
FAR AND WIDE
South Africans concerned about the local economy may think investing offshore is the solution. But it should form part of bigger-picture portfolio planning, writes Johann Barnard
Investing offshore should form part of bigger-picture portfolio planning for South African investors
SA investors’ appetite for diversifying their portfolios beyond our borders is continuing apace. With the economy all but stalled, ratings agencies still pessimistic about an improvement and political uncertainty fuelling fears, it’s not surprising that offshore options are looking attractive.
One measure of this interest is the R5.5bn net inflows into locally registered foreign collective investment portfolios there have been in the first quarter of this year. According to the Association for Savings and Investment SA this pushed assets under management in these funds by end-March to R383bn, from R363bn at the end of December last year.
These figures exclude randdenominated collective investment schemes offering access to or tracking international markets.
The interest in global assets as a way to de-risk exposure to the local economy makes sense on many levels, but is no guarantee of a risk-free investment strategy.
The exact impact of the UK’s withdrawal from the European Union, for instance, is still unclear, and may remain so for many more months. On the opposite side of the Atlantic, the US equity bull market is forging ahead despite fears of an impending correction.
The dilemma for investors is made all the more puzzling by the continued strength of the rand in spite of local headwinds. The conviction that peo- ple’s fortunes are best served by investing offshore is being tested to the full as the expected gains from a weakening currency are being nullified.
However, the wisdom of diversifying offshore still holds true — though as part of a welldevised investment strategy rather than in panicked reaction to local economic and political turmoil. Maintaining such discipline is far easier said than done for investors who have been rocked by a series of gut-wrenching events that would shake the confidence of the most accomplished investment manager.
“We tell clients they should rather decide how much they want to go offshore in the long term and not be influenced by how negative or positive they feel about the local market or the rand, [otherwise] they run the risk of making decisions for the wrong reasons,” advises Tamryn Lamb, who looks after client servicing for Orbis, Allan Gray’s offshore investment partner.
“When I speak to clients about investing offshore, I encourage them to view it as a structural, core part of their long-term plan to diversify their portfolio. Investing offshore has two main benefits; diversification and protecting your local purchasing power. SA is a very small part of a very big investment opportunity set — we are less than 1% of the global investable universe. Access to a wider set of investment opportunities should enable you to increase your returns, and lower your risk over the long term.”
While the eventual proportion will differ from investor to investor, Lamb considers a 25% offshore allocation as a minimum. This is what you achieve by investing in a local multiasset class fund. Regulation 28 caps overseas investment to that percentage, though another 5% can go to the rest of Africa.
The questions that investors need to ask themselves once they’ve decided to look abroad is where the best opportunities lie and which asset class is best suited to their needs.
The bad news is that there is neither a simple nor a single answer to these questions.
US markets, for instance, have run very hard for nearly a decade now, pushing popular stocks to extreme valuations that appear to defy logic. Lamb says that while Orbis research analysts see some opportunities in the US, they have increasingly been finding individual stocks in emerging markets such as China, South Korea, Russia and Brazil that could offer long-term value.
SA’s comparatively high inflation rate is an important factor to consider if investors are looking to grow their money, especially if that money will be used to fund a local lifestyle.
For that reason, equities are favoured over low-yield alternatives such as government bonds and cash or money market options.
Pieter Koekemoer, head of personal investments at Coronation Fund Managers, gives some context to the complexity of the decisions that need to be considered.
He explains that the local equity market has delivered mediocre returns of around 5% a year over the past three years, which is significantly below the roughly 13% in the
MSCI All Country World Index (ACWI) over the same period. In the past year, local returns have been at about the same level, while ACWI returns have fallen to 7%.
“That 7% in rand terms would be a little on the light side,” Koekemoer says.
“The expected rand return that an investor would want from equities in the long run would be somewhere around 11%-12% a year.
“The rand strength has surprised people given how much the local fundamentals have deteriorated over the past year and a half. If you had asked pundits at the time of the midnight cabinet reshuffle in March, not many would have forecast a rand at around R13/US$.”
The point about the impact of a strong currency and how this factor can hurt SA investors is that the ACWI returned 19% in dollar terms over the past year.
Koekemoer believes significant risks still exist in the rand, which he says does not at present fully reflect the economic and political threats to the country’s immediate future.
“From an SA investor point of view, we think you still want to be overweight global assets, because the potential downside in the case of a poor political and economic outcome is not fully priced into the rand exchange rate. But we think that in that offshore allocation you probably want to be more circumspect than normal about equity and bond holdings and probably want to be overweight cash.”
This cautious approach is in response to the nine-year bull market, particularly in the US, that has pushed valuations to historical highs.
Michael Sassoon, Sasfin’s head of wealth, says the value of assets under management in the firm’s private client offshore funds has grown 20 times over the past several years to about R8bn.
“A lot of those clients have moved their money from local to offshore portfolios,” he says. “Our global positioning is based on offering access to offshore markets as it is important to view one’s wealth in global terms. In [recent] months quite a few of our clients have adopted an offshore approach because of their concerns about the country.
“We met with some very high-net worth individuals after the cabinet reshuffle who mentioned that they wanted to move every cent they could out of the country. So there is no doubt that there is a fear factor driving certain clients, even though we still see opportunities in SA.”
Sasfin wealth has been quick to respond to client needs, though, building a set of products to cater for the demand for offshore options. At the core of the Sasfin wealth offering is managed global share portfolios that offer investors tailored solutions. This offering has now been complemented with a global equity fund together with capital-guaranteed structured notes, which are suitable options for certain investors.
The opportunity for fund managers to develop bespoke portfolios or funds that cater for the offshore appetite is therefore great. It is a source of expertise investors would be well advised to tap into.
“The global market is huge, so it depends quite a bit on the clients themselves. If they lack expertise in investing and they’re looking to build their investment portfolio we obviously encourage them to engage with a portfolio manager. If they’re just starting out and don’t have that much money to invest, they should probably focus on buying into a fund or potentially an exchange traded fund,” Sassoon suggests.
In either event, it is dangerous to consider any and all offshore exposure as the silver bullet to protect against threats to the local economy.
This is a point highlighted by Rob Forsyth, head of quality research at Investec.
“It’s not a simple strategy of taking money offshore, but a matter of being able to put that money to work in a consistent fashion where it makes sense. In terms of a multi-asset portfolio, we like SA government bonds plus offshore high-quality equities that give you better risk-adjusted return.
“It’s important for any person that we can access these high-quality counters at twothirds of the dollar-based volatility of global markets and much lower correlation, so it’s a good risk diversification strategy for SA investors.”
Forsyth adds that risk mitigation also depends heavily on the quality of the offshore shares. He therefore has a preference for companies reporting high levels of profit with strong balance sheets that can ride out storms more effectively.
“If you look at the returns we’ve managed to deliver in our Global Franchise Fund, it’s still in the mid- to high single digits over 10 years, including the global financial crisis.”
The cautionary tale for investors is that returns of this magnitude are not simply by virtue of being invested offshore. As Koekemoer points out, the rand strength or weakness has a direct impact on the level of returns investors can expect. And as Forsyth has emphasised, the quality and resilience of the companies invested in are crucial factors that determine the outcome.
The true test of investors’ strength of character will come by year end, when at least some political clarity will emerge. That test will show whether yet another knee-jerk reaction will lead to a flight of capital, or whether investors will stick to a disciplined approach to the offshore component of their portfolios.