South Africans con­cerned about the lo­cal econ­omy may think in­vest­ing off­shore is the so­lu­tion. But it should form part of big­ger-pic­ture port­fo­lio plan­ning, writes Jo­hann Barnard

Financial Mail - Investors Monthly - - Contents -

In­vest­ing off­shore should form part of big­ger-pic­ture port­fo­lio plan­ning for South African in­vestors

SA in­vestors’ ap­petite for di­ver­si­fy­ing their port­fo­lios be­yond our bor­ders is con­tin­u­ing apace. With the econ­omy all but stalled, rat­ings agen­cies still pes­simistic about an im­prove­ment and po­lit­i­cal un­cer­tainty fu­elling fears, it’s not sur­pris­ing that off­shore op­tions are look­ing at­trac­tive.

One mea­sure of this in­ter­est is the R5.5bn net in­flows into lo­cally reg­is­tered for­eign col­lec­tive in­vest­ment port­fo­lios there have been in the first quar­ter of this year. Ac­cord­ing to the As­so­ci­a­tion for Sav­ings and In­vest­ment SA this pushed as­sets un­der man­age­ment in these funds by end-March to R383bn, from R363bn at the end of De­cem­ber last year.

These fig­ures ex­clude rand­de­nom­i­nated col­lec­tive in­vest­ment schemes of­fer­ing ac­cess to or track­ing in­ter­na­tional mar­kets.

The in­ter­est in global as­sets as a way to de-risk ex­po­sure to the lo­cal econ­omy makes sense on many lev­els, but is no guar­an­tee of a risk-free in­vest­ment strat­egy.

The ex­act im­pact of the UK’s with­drawal from the Euro­pean Union, for in­stance, is still un­clear, and may re­main so for many more months. On the op­po­site side of the At­lantic, the US eq­uity bull market is forg­ing ahead de­spite fears of an im­pend­ing correction.

The dilemma for in­vestors is made all the more puz­zling by the con­tin­ued strength of the rand in spite of lo­cal head­winds. The con­vic­tion that peo- ple’s for­tunes are best served by in­vest­ing off­shore is be­ing tested to the full as the ex­pected gains from a weak­en­ing cur­rency are be­ing nul­li­fied.

How­ever, the wis­dom of di­ver­si­fy­ing off­shore still holds true — though as part of a wellde­vised in­vest­ment strat­egy rather than in pan­icked re­ac­tion to lo­cal eco­nomic and po­lit­i­cal tur­moil. Main­tain­ing such dis­ci­pline is far eas­ier said than done for in­vestors who have been rocked by a se­ries of gut-wrench­ing events that would shake the con­fi­dence of the most ac­com­plished in­vest­ment manager.

“We tell clients they should rather de­cide how much they want to go off­shore in the long term and not be in­flu­enced by how neg­a­tive or pos­i­tive they feel about the lo­cal market or the rand, [oth­er­wise] they run the risk of mak­ing de­ci­sions for the wrong rea­sons,” ad­vises Tam­ryn Lamb, who looks af­ter client ser­vic­ing for Or­bis, Al­lan Gray’s off­shore in­vest­ment part­ner.

“When I speak to clients about in­vest­ing off­shore, I en­cour­age them to view it as a struc­tural, core part of their long-term plan to di­ver­sify their port­fo­lio. In­vest­ing off­shore has two main ben­e­fits; di­ver­si­fi­ca­tion and pro­tect­ing your lo­cal pur­chas­ing power. SA is a very small part of a very big in­vest­ment op­por­tu­nity set — we are less than 1% of the global in­vestable uni­verse. Ac­cess to a wider set of in­vest­ment op­por­tu­ni­ties should en­able you to in­crease your re­turns, and lower your risk over the long term.”

While the even­tual pro­por­tion will dif­fer from in­vestor to in­vestor, Lamb con­sid­ers a 25% off­shore al­lo­ca­tion as a min­i­mum. This is what you achieve by in­vest­ing in a lo­cal mul­ti­as­set class fund. Reg­u­la­tion 28 caps overseas in­vest­ment to that per­cent­age, though an­other 5% can go to the rest of Africa.

The ques­tions that in­vestors need to ask them­selves once they’ve de­cided to look abroad is where the best op­por­tu­ni­ties lie and which as­set class is best suited to their needs.

The bad news is that there is nei­ther a sim­ple nor a sin­gle an­swer to these ques­tions.

US mar­kets, for in­stance, have run very hard for nearly a decade now, push­ing pop­u­lar stocks to ex­treme val­u­a­tions that ap­pear to defy logic. Lamb says that while Or­bis re­search an­a­lysts see some op­por­tu­ni­ties in the US, they have in­creas­ingly been find­ing in­di­vid­ual stocks in emerg­ing mar­kets such as China, South Korea, Rus­sia and Brazil that could of­fer long-term value.

SA’s com­par­a­tively high in­fla­tion rate is an im­por­tant fac­tor to con­sider if in­vestors are look­ing to grow their money, es­pe­cially if that money will be used to fund a lo­cal life­style.

For that rea­son, eq­ui­ties are favoured over low-yield al­ter­na­tives such as gov­ern­ment bonds and cash or money market op­tions.

Pi­eter Koeke­moer, head of per­sonal in­vest­ments at Coro­na­tion Fund Man­agers, gives some con­text to the com­plex­ity of the de­ci­sions that need to be con­sid­ered.

He ex­plains that the lo­cal eq­uity market has de­liv­ered medi­ocre re­turns of around 5% a year over the past three years, which is sig­nif­i­cantly be­low the roughly 13% in the

MSCI All Coun­try World In­dex (ACWI) over the same pe­riod. In the past year, lo­cal re­turns have been at about the same level, while ACWI re­turns have fallen to 7%.

“That 7% in rand terms would be a lit­tle on the light side,” Koeke­moer says.

“The ex­pected rand re­turn that an in­vestor would want from eq­ui­ties in the long run would be some­where around 11%-12% a year.

“The rand strength has sur­prised peo­ple given how much the lo­cal fun­da­men­tals have de­te­ri­o­rated over the past year and a half. If you had asked pun­dits at the time of the mid­night cabi­net reshuf­fle in March, not many would have fore­cast a rand at around R13/US$.”

The point about the im­pact of a strong cur­rency and how this fac­tor can hurt SA in­vestors is that the ACWI re­turned 19% in dol­lar terms over the past year.

Koeke­moer be­lieves sig­nif­i­cant risks still ex­ist in the rand, which he says does not at present fully re­flect the eco­nomic and po­lit­i­cal threats to the coun­try’s im­me­di­ate fu­ture.

“From an SA in­vestor point of view, we think you still want to be over­weight global as­sets, be­cause the po­ten­tial down­side in the case of a poor po­lit­i­cal and eco­nomic out­come is not fully priced into the rand ex­change rate. But we think that in that off­shore al­lo­ca­tion you prob­a­bly want to be more cir­cum­spect than nor­mal about eq­uity and bond hold­ings and prob­a­bly want to be over­weight cash.”

This cau­tious ap­proach is in re­sponse to the nine-year bull market, par­tic­u­larly in the US, that has pushed val­u­a­tions to his­tor­i­cal highs.

Michael Sas­soon, Sas­fin’s head of wealth, says the value of as­sets un­der man­age­ment in the firm’s pri­vate client off­shore funds has grown 20 times over the past sev­eral years to about R8bn.

“A lot of those clients have moved their money from lo­cal to off­shore port­fo­lios,” he says. “Our global po­si­tion­ing is based on of­fer­ing ac­cess to off­shore mar­kets as it is im­por­tant to view one’s wealth in global terms. In [re­cent] months quite a few of our clients have adopted an off­shore ap­proach be­cause of their con­cerns about the coun­try.

“We met with some very high-net worth in­di­vid­u­als af­ter the cabi­net reshuf­fle who men­tioned that they wanted to move ev­ery cent they could out of the coun­try. So there is no doubt that there is a fear fac­tor driv­ing cer­tain clients, even though we still see op­por­tu­ni­ties in SA.”

Sas­fin wealth has been quick to re­spond to client needs, though, build­ing a set of prod­ucts to cater for the de­mand for off­shore op­tions. At the core of the Sas­fin wealth of­fer­ing is man­aged global share port­fo­lios that of­fer in­vestors tai­lored so­lu­tions. This of­fer­ing has now been com­ple­mented with a global eq­uity fund to­gether with cap­i­tal-guar­an­teed struc­tured notes, which are suit­able op­tions for cer­tain in­vestors.

The op­por­tu­nity for fund man­agers to de­velop be­spoke port­fo­lios or funds that cater for the off­shore ap­petite is there­fore great. It is a source of ex­per­tise in­vestors would be well ad­vised to tap into.

“The global market is huge, so it de­pends quite a bit on the clients them­selves. If they lack ex­per­tise in in­vest­ing and they’re look­ing to build their in­vest­ment port­fo­lio we ob­vi­ously en­cour­age them to en­gage with a port­fo­lio manager. If they’re just start­ing out and don’t have that much money to in­vest, they should prob­a­bly fo­cus on buy­ing into a fund or po­ten­tially an ex­change traded fund,” Sas­soon sug­gests.

In ei­ther event, it is dan­ger­ous to con­sider any and all off­shore ex­po­sure as the sil­ver bul­let to pro­tect against threats to the lo­cal econ­omy.

This is a point high­lighted by Rob Forsyth, head of qual­ity re­search at In­vestec.

“It’s not a sim­ple strat­egy of tak­ing money off­shore, but a mat­ter of be­ing able to put that money to work in a con­sis­tent fash­ion where it makes sense. In terms of a multi-as­set port­fo­lio, we like SA gov­ern­ment bonds plus off­shore high-qual­ity eq­ui­ties that give you bet­ter risk-ad­justed re­turn.

“It’s im­por­tant for any per­son that we can ac­cess these high-qual­ity coun­ters at twothirds of the dol­lar-based volatil­ity of global mar­kets and much lower cor­re­la­tion, so it’s a good risk di­ver­si­fi­ca­tion strat­egy for SA in­vestors.”

Forsyth adds that risk mit­i­ga­tion also de­pends heav­ily on the qual­ity of the off­shore shares. He there­fore has a pref­er­ence for com­pa­nies re­port­ing high lev­els of profit with strong bal­ance sheets that can ride out storms more ef­fec­tively.

“If you look at the re­turns we’ve man­aged to de­liver in our Global Fran­chise Fund, it’s still in the mid- to high sin­gle dig­its over 10 years, in­clud­ing the global fi­nan­cial cri­sis.”

The cau­tion­ary tale for in­vestors is that re­turns of this mag­ni­tude are not sim­ply by virtue of be­ing in­vested off­shore. As Koeke­moer points out, the rand strength or weak­ness has a di­rect im­pact on the level of re­turns in­vestors can ex­pect. And as Forsyth has em­pha­sised, the qual­ity and re­silience of the com­pa­nies in­vested in are cru­cial fac­tors that de­ter­mine the out­come.

The true test of in­vestors’ strength of char­ac­ter will come by year end, when at least some po­lit­i­cal clar­ity will emerge. That test will show whether yet an­other knee-jerk re­ac­tion will lead to a flight of cap­i­tal, or whether in­vestors will stick to a dis­ci­plined ap­proach to the off­shore com­po­nent of their port­fo­lios.

Tam­ryn Lamb … in­di­vid­ual needs dif­fer

Pic­ture: iSTOCK

Michael Sas­soon … op­por­tu­ni­ties in SA

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