The ex­tra ef­fort of in­vest­ing off­shore di­rectly can pay off for you

A WORD OF CAU­TION Higher re­turns, lower risks

Weekend Argus (Saturday Edition) - - FRONT PAGE -

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.

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