Financial Mail - Investors Monthly
LOOK OFFSHORE
Investors have become accustomed to above-average returns
When investing in a passive fund, it is important to understand the underlying composition
It was a particularly hard year for equity investors in 2018. The global economic slowdown, trade wars, the Brexit fallout and monetary policy fuelled a market rout that left few sectors and markets unaffected.
“Measured in local currencies, global equity markets experienced an average decline of 7.2% in 2018, with few countries reporting gains,” says Samantha Steyn, chief investment officer at Cannon Asset Managers.
Radhesen Naidoo, business analyst at Allan Gray, offers additional perspective, saying that the MSCI world index was down about 9%, with the S&P 500 at -4% and the MSCI EM index at -15%.
“It has been a while since investors saw negative returns in a calendar year, but it’s worth remembering that global markets have experienced a bull market since 2009. Over the past decade, investors have also become accustomed to achieving above-average returns in a low-volatility environment.”
While certain threats and market risks persist, it would be a mistake to avoid global equities after 2018’s slide, says Galileo Capital’s Warren Ingram. “Any equity investor needs to prepare for a potential 30% loss in a year, which can happen every three or four years. These periodic losses are natural in equity markets and present opportunities for investors with access to cash to derive better value.”
Steyn concurs. “The sell-off in equities has resulted in particularly attractive valuations at the market level. The world equity market trades on a forward price-earnings multiple of 13.5 times, a price-book multiple of 2.8 times and offers a dividend yield of 2.1%. Some hard-hit markets look especially compelling. The German market, for instance, is trading on a multiple of 10.9 times 2019 earnings with a dividend yield of 3.5%.”
In addition to cheaper valuations, Kyle Hulett, head of asset allocation at Sygnia Asset Management, believes the signals emerging in 2019 are pos- itive for global equities. “China is increasing its stimulus, and the Fed is nearing its neutral rate. All of these suggest that equities should perform better in 2019 compared to last year.”
Investors have various options to gain access to these global opportunities, but picking the most appropriate investment will ultimately determine returns. However, any effective investment strategy must begin with managing risk before considering returns, especially in the prevailing global economic environment, says Steyn.
“Locally listed offshore ETFs and rand-denominated funds provide investors with an easier way to gain offshore exposure,” adds Hulett. “These products are also efficient because the investment and payout are in rands, so investors don’t need Sars clearance to invest offshore as the mandated fund manager takes care of these requirements. These funds also broaden inclusivity, offering retail investors a chance to invest offshore without the onerous minimums associated with direct investments.”
Passive offshore funds are another option, but Bryn Hatty, chief investment officer at Stonehage Fleming Investment Management in SA, says these investments are not as simple as they may appear. “Investors should be certain that they know what they are doing, or seek professional advice on how best to navigate issues such as concentration risk.”
Says Steyn: “When investing in a passive fund, it is important to understand the underlying composition, as passive managers construct the funds based on established indices or predetermined baskets.”
While concentration risk is less prevalent within developed markets as they are highly fragmented and have lower single-stock concentration risk, investors must consider their exposures when investing in sector-specific funds.
“Industry allocations would, in turn, need to be strategically managed on the back of shifting industrial patterns and valuations. Another way to mitigate this risk is to blend passive funds that have different underlying characteristics, including factors such as size, style in terms of growth, value or momentum, or other fundamental attributes such as dividend yields.”
Mike Wood, wealth director at Apio Group, says passive ETFs that are heavily weighted in a small number of shares can also increase an investor’s concentration risk exposure.
“To mitigate this risk, passive investors should not focus offshore investment in a single passive ETF. Rather diversify through multiple funds that hold stocks in numerous sectors, markets and economies to spread the risk.”