Go off­shore, se­ri­ously

Most of the value is sit­ting in Asian mar­kets

Finweek English Edition - - Creation and preservation of wealth - COPY: Brent Melville AD­VER­TIS­ING: Joey van Dyk

JAN VAN NIEK­ERK, chief in­vest­ment of­fi­cer of private wealth man­age­ment com­pany Ci­tadel, is not much of a bet­ting man. He can’t af­ford to be. With R12bn un­der man­age­ment, on be­half of Ci­tadel’s 2 500 high net worth fam­i­lies (each with a min­i­mum R2,5m in as­sets), he has a high­pres­sure job, so he doesn’t take too many chances, in­vest­ing the bulk of funds into pru­dent, long-term port­fo­lios.

While each client has dif­fer­ent fi­nan­cial needs, Van Niek­erk’s long-term in­vest­ment approach is gen­er­ally di­vided 25% into lo­cal stocks, 15% into SA al­ter­na­tives, in­clud­ing private eq­uity and hedge funds, 20% into global hedge funds, and the bulk, about 40%, into off­shore and global shares. It’s a high off­shore weight­ing, but Ci­tadel has man­aged to gen­er­ate re­turns over the last 10 years of be­tween 7% and 8% ahead of in­fla­tion for its clients.

While much of Ci­tadel’s off­shore in­vest­ments are in­vested with Al­lan Gray’s off­shore in­vest­ment ve­hi­cle OR­BIS, Van Niek­erk is also plac­ing money into in­ter­na­tional in­dex funds, recog­nis­ing the in­her­ent value in global multi­na­tion­als. It’s a struc­tured approach, pred­i­cated on a long-term approach to build­ing a truly di­ver­si­fied port­fo­lio.

Nev­er­the­less it must have been dif­fi­cult to steer money away from the ter­rific re­turns gar­nered by the lo­cal eq­uity mar­ket dur­ing the past four years.

“We deal with peo­ple who are re­spon­si­ble about their fi­nances. And it would be fair to say that when some­one hands you the ma­jor­ity of their life sav­ings, then you have a slightly more con­ser­va­tive bias. We ac­cept that we are tak­ing on the fi­nan­cial well be­ing of the fam­i­lies we serve,” he

says. Peter Lu­cas, global in­vest­ment strate­gist at in­ter­na­tional in­vest­ment man­age­ment firm Ash­bur­ton, says a strong off­shore com­po­nent is nec­es­sary within a truly di­ver­si­fied in­vest­ment port­fo­lio, nor should in­vestors be lulled into a false sense of se­cu­rity pro­vided by the pos­i­tive eco­nomic and po­lit­i­cal con­di­tions pre­vail­ing in South Africa at the mo­ment. “Lo­cal re­turns have been good and may po­ten­tially out­per­form most other mar­kets over the short to medium term, but in­vestors need to con­sider the risks of hav­ing all their eggs in one bas­ket.”

In­vestors in all coun­tries should look at off­shore in­vest­ing as an in­sur­ance pol­icy against coun­try or mar­ket spe­cific crises. “The main rea­son for in­vest­ing off­shore is di­ver­si­fi­ca­tion of one's in­vest­ment as­set base, with a view to man­ag­ing and re­duc­ing over­all in­vest­ment risk.”

“The JSE con­sti­tutes less than 1% of world eq­uity mar­kets and, in the eyes of global fund man­agers, South Africa is still re­garded as an emerg­ing mar­ket. This tends to make the South African stock mar­ket more volatile than those of first world coun­tries, in­creas­ing the risk of lo­cal in­vest­ment.”

He says di­ver­si­fy­ing a port­fo­lio across sev­eral coun­tries is also a way of smooth­ing out re­turns, com­bin­ing in­vest­ments from economies ex­pe­ri­enc­ing rapid growth with those that are grow­ing more slowly. “No sin­gle coun­try will be home to all the best in­vest­ments in the world and hence a port­fo­lio with an in­ter­na­tional flavour will have greater po­ten­tial to grow over the long term.”

Lu­cas sug­gests that cur­rency risk should also be an im­por­tant con­sid­er­a­tion for in­vestors aiming to lower the risk of their port­fo­lios. “Al­though the rand has been rel­a­tively stable in re­cent years, it would sim­ply be poor risk man­age­ment to ig­nore the pos­si­bil­ity of a slide in its value. A good ex­am­ple is the 20% weak­en­ing of the rand over the last 12 months against a bas­ket of ma­jor cur­ren­cies. Some for­eign cur­rency ex­po­sure would have en­sured some pro­tec­tion for lo­cal in­vestors.”

He says that many in­vestors sim­ply look­ing for off­shore ex­po­sure of­ten opt for the MSCI World In­dex – which in­cludes a se­lec­tion of stocks of all the de­vel­oped mar­kets in the world, as de­fined by MSCI – but that there are sig­nif­i­cant risks to this approach at present.

A port­fo­lio with an in­ter­na­tional flavour will have

greater po­ten­tial to grow over the long term.

“The MSCI is still heav­ily bi­ased to­wards the West and we are tak­ing a longer-term view that with prop­erty val­u­a­tions, debt and in­come in­equal­ity at ex­tremely high lev­els, th­ese mar­kets con­tain a lot of risk.”

He be­lieves that from an eq­uity per­spec­tive, most of the value is sit­ting in Asian mar­kets, most of which will lever­age off the China and In­dia story. “From a val­u­a­tion per­spec­tive, while th­ese mar­kets may not ap­pear that at­trac­tive over the short term, they of­fer sub­stan­tial long-term prospects.”

In­vest­ing into pru­dent, long-term port­fo­lios. Jan van Niek­erk

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