The extra effort of investing offshore directly can pay off for you
A WORD OF CAUTION Higher returns, lower risks
Investing directly offshore in an investment denominated in a foreign currency, rather than a rand-denominated one, may be more difficult for you as a South African, but there are a number of obvious benefits as well as some less well publicised ones to do with costs and manager experience.
The obvious benefits are having an investment in another country and some protection against the depreciation of the rand, which has, according ProfileData, depreciated against the United States dollar by more than 10 percent a year over the past five years.
But investment managers who advise local financial advisers on how to set up portfolios for their clients are looking beyond the rand-denominated and offshore offerings that can be marketed to South African investors, as they are of the view that other international managers charge less and have more experience.
Rory Maguire, the managing director of Fundhouse, which rates funds and provides what are known as discretionary investment management services to financial advisers, says there are some world-class managers that have their origins in South Africa, including Orbis, Contrarius, Old Mutual and Investec.
Brandon Zeitsman, the chief executive at Portfoliometrix, also a discretionary investment manager, agrees that South African managers run some excellent global funds and there are also great global managers who have registered offshore funds with the South African regulator, the Financial Services Board, as funds suitable for South African investors. However, this isn’t enough.
Both Fundhouse and Portfoliometrix look beyond funds registered with the FSB for a variety of reasons including: The choice of offshore funds is vast and unless you are familiar with the regulation in the country in which the fund is registered and the track record of the manager, or you are being advised by someone who is, you are probably better off using a randdenomined global fund or an FSB-registered offshore fund.
If you invest in an offshore fund, FSB-registered or not, you need to have foreign currency in a foreign-currency bank account. You can invest up to R1 million a year into an offshore foreign-currency fund without getting tax clearance, but if you want to invest more, you will need a certificate from the South African Revenue Service stating that your tax affairs are in order.
If you invest in a fund domiciled outside of South Africa, you will have an offshore estate and may require an offshore will and executor for this estate. If you invest in an offshore endowment through a local company’s offshore branch, you can avoid some of these problems, but these products add an additional layer of costs.
The offshore managers have far longer track records of managing funds and “history matters”, Maguire says. Some local managers, such as Orbis and Investec, do have long track records, but there are offshore managers with histories of more than 20 years in selecting global equities, and their teams are established and stable, he says.
Good long-term performance track records are lacking in many local managers, Maguire says. Not many navigated the 2001 tech bubble, or even the 2008 global financial crisis with the same processes and teams in place as they have today, he says.
Most South African managers that offer a global equity fund have much larger teams researching South African equities than teams researching global equities, despite the fact that there are many more global shares than local shares and experience in researching this broader market is all the more important, Maguire says.
It is very hard to find a South African manager with a global bond fund that has anything near the resources needed to adequately keep pace with the issue of global bonds and credit instruments in general, Maguire says. He says even medium-sized offshore managers have double or triple the capacity of South African bond fund managers to cover the global credit market.
Zeitsman says that the breadth of global funds and the choice of mandates available from South African managers is too limited. Portfoliometrix has highly specialised approaches to constructing global portfolios. For example, it will select a fund that focuses exclusively on emerging Europe excluding Russia and another for developed Europe.
Offshore funds cost less. Outside of South Africa, global funds charge fees of 0.75 percent or less. In South Africa, the fees for funds investing globally are lot higher and the quality of the fund is not always clear, Maguire says.
Zeitsman agrees. He says local funds are very expensive: the weighted Diversifying offshore can increase your returns and lower your risk, Duggan Matthews, an investment professional at Marriott, says.
In terms of market capitalisation, the JSE represents less than one percent of all the world’s stock markets, he says, so investing in global markets exposes you to many more opportunities.
Matthews says many companies in developed countries have bigger balance sheets, longer track records, more customers and stronger brands. Consequently, the operational risks in these businesses are a lot lower than the South African alternatives. He says that besides lower risks, returns should be better, as the emerging middle class continues to grow.
Short-term movements in the rand exchange rate can create volatility in returns when investing offshore, but over the long term the primary driver of returns are re-invested dividends and capital growth, Matthews says. The more time you give your offshore investments, the less you have to worry about currency fluctuations, he says. average management fee for global equity managers is about 0.6 percent – much less than what most funds available locally charge.
South African advisers and investors make less use of cheaper passive funds, Maguire says. He says Fundhouse’s indications are that, globally, 25 to 30 percent of investments are passively managed, while in South Africa it is estimated that less than 10 percent of investments are passively managed.
The FSB’s registration of offshore funds has constrained the offshore market, Maguire says. Those managers who have struggled through the FSB registration process gain a quick march on their competitors, he says, but some of them struggle to get strong ratings from Fundhouse. Maguire says this indicates that a fund’s success in registering with the FSB has less to do with the quality of the fund and more to do with their ability and willingness to bend to the FSB rules.
Ian Jones, Fundhouse’s managing director in South Africa, says even for less sophisticated investors, lower fees and better track records could be good reasons for them to look further than familiar local managers with rand-denominated global funds or FSB-registered offshore funds. However, you may need some advice.
The good news is that the number of FSB-registered offshore funds has grown significantly over the past two years. About 65 new offshore funds have registered with the FSB over that period.
There has been a huge boost for offshore index- tracking funds with the entry of the world’s largest fund manager BlackRock into the South African market. BlackRock has registered 10 offshore index tracking funds and 25 offshore exchange traded funds (ETFs) (under the iShares brand) with the FSB.
Both ETFs and index funds track an index, but ETFs are listed on a stock exchange and may or may not also be registered as unit trust funds.