Ignore emotional rollercoaster at home and keep investing abroad
• Many South Africans burn their fingers because they rush offshore only in times of trouble
Aquestion I am sure we will hear more often now that things are turning for the better in SA is: why should I continue to take any of my money offshore when, firstly, things are improving here and, secondly, South Africans (especially corporates) have a dismal track record of investing abroad?
The reason it has been so dismal is that South Africans typically expatriate their money when pessimism about SA is at its peak and repatriate their money when the consensus is overwhelmingly positive.
Who can forget how much money was lost on global investments (in dollar terms) as the rand rose from a low of R12 to the dollar in 2001 to R6 by the end of 2004?
At this point many people bought their rands back to SA and lost a second fortune on their domestic investments (again in dollar terms) as the rand subsequently weakened to R15 by the end of 2015.
Rare is the person who is able to time the market with any success. More rare is one who is able to do this while investing in their spare time. The reality is that it always makes sense to have a portion of your wealth invested globally. Many people forget, or choose to ignore, the benefits of diversification that were drilled into them in Finance 101 at university.
While the expected return of a portfolio will always be lower than the return of the asset with greatest expected return, as the average of 1 and 2 will always be below 2 (what Warren Buffett calls “diworsification”), its purpose is to reduce risk.
This it does remarkably well, especially if the assets out/underperform at different points in the cycle.
In these instances the risk of the portfolio can even be below the weighted average risk of all the assets within the portfolio, so in this case, to use an analogy, the average of 1 and 2 would be below 1.5.
This holds true for the MSCI ACWI and the JSE Alsi indices because since 2008 their rolling annualised five-year returns have exhibited a low correlation with each other. This, however, is not the only reason you should invest globally.
Why would you limit yourself to an investable universe of $1.2-trillion (the market cap of the JSE), much of it concentrated in a single company, Naspers, which accounts for $110bn of that $1.2-trillion, or almost 10%, when you could be investing in an enormous universe of $79trillion in which no single stock accounts for more than 1%?
This includes great companies like Coca-Cola, Google and Microsoft, whose products the average South African uses every day. When last did you drink a soft drink that wasn’t manufactured by Coca-Cola, use a search engine that wasn’t Google or use a spreadsheet that wasn’t Excel?
These businesses have the benefit of being globally diversified, so the degree to which they are affected when one country invades another (think Russia and Ukraine), its neighbours boycott it (think Qatar) or a finance minister is replaced (think SA) is very small indeed.
A potential risk of investing globally is that global markets are currently expensive. This is unquestionably true looking from the top down, but there are many companies that individually offer value.
One example of this is Legal and General, a UK insurer, which trades on a low forward price-earnings multiple of 11 times and a dividend yield of 7%, even though it is growing at high single to low double digits.
Another is Axis Bank, which trades on under two times price to book and should be able to grow its loan book at 20% plus on strong GDP growth in India as well as private banks taking share from their state counterparts. It should also benefit from a margin uplift on top of this as its credit loss ratios recover from elevated levels and it tilts its loan book towards retail (as opposed to corporate) loans.
Even some stocks that look expensive at the moment, like the so-called Fangs (Facebook, Amazon, Netflix and Google), look far cheaper if you adjust for the multi-decade growth opportunities available to them.
A stock that can grow its earnings north of 20% per annum doubles its earnings in more than three years (not in five, due to the benefit of compounding) and one that can grow more than 50% (as Facebook did) doubles its earnings in less than 18 months.
I believe the only sensible investment strategy for the average person is to decide what portion of your monthly savings you wish to invest globally and what portion in SA and to keep this percentage stable, regardless of what happens in SA.
Announced in the budget last week was that the foreign allocation limits for institutional investors are to be increased by 5% across all categories — life insurers, collective investment schemes, investment managers and retirement funds.
This includes the allocation to African exposure, which will rise to 10%. Should you have a windfall, invest this in the same ratio. This is called dollar (rand) cost averaging. If you had done this over the last five years, the average price of each dollar bought would be R12.33, which doesn’t compare unfavourably to the current “strong” levels we see the rand trading at today.
Wales is a portfolio manager at Old Mutual Investment Group’s Titan boutique.
STRATEGY … IS TO DECIDE WHAT PORTION OF YOUR MONTHLY SAVINGS YOU WISH TO INVEST GLOBALLY AND WHAT PORTION IN SA