Go offshore, seriously
Most of the value is sitting in Asian markets
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