Rand-denominated funds the easiest way to invest abroad

The easiest and simplest way to invest offshore is with a rand-denominated unit trust fund that invests in foreign financial markets.

Peter Brooke, the head of Old Mutual Investment Group’s MacroSolutions boutique, says investing in a unit trust fund enables you to diversify across a number of securities, such as shares, that are selected by a professional and experienced fund manager.

A unit trust fund also gives you the ability to liquidate your investments quickly, with funds typically paying out within 48 hours – and the costs are reasonably transparent.

You can invest in a randdenominated fund that, in turn, invests in foreign markets, or you can invest directly in a fund domiciled offshore and denominated in a foreign currency.

However, a rand-denominated fund saves you from complying with exchange control regulations and converting your money into a foreign currency via an offshore bank account.

You can also build your own share portfolio using a stockbroker or the private-client services of a financial institution, and either select the shares yourself or give the stockbroker the discretion to choose shares for you.

However, you should be aware that, in addition to the exchange control requirements, you may incur capital gains tax (CGT) on the sale of each share within the portfolio.

With a unit trust fund – denominated in rands or in a foreign currency – you pay CGT only when you realise your investment in the fund.

When it comes to unit trust funds, your choice includes pure equity funds that invest in financial markets globally and multi-asset funds that invest across asset classes in different countries.

Old Mutual’s rand-denominated Global Equity Fund recently won the Raging Bull Award for the best global equity fund over three years to December last year. Over that period, it produced an annual average return of 40.98 percent in rand terms – well above the MSCI World Index’s 31.6 percent.

The fund invests in the same shares that make up the MSCI World Index, but takes small bets to increase or decrease the weighting of those shares in the portfolio. It is guided by five investment strategies to identify shares that, in the fund manager’s view, are mispriced (the price is not a true reflection of the share’s inherent value).

Old Mutual also has a randdenominated multi-asset fund, the International Growth Fund of Funds, which invests in a number of Old Mutual International’s offshore funds. This fund was the top performer in the global multi-asset flexible sub-category over one, three, five and seven years to the end of December last year. Over five years, it had an average return of 24.78 percent a year.

GETTING THE TIMING RIGHT

Traditionally, investing offshore when the rand is weak, as it is now, has not delivered good returns for investors, Brooke says.

The risk to which your investment is exposed if you go offshore now is much higher than it was a year ago, when the rand was stronger, he says.

Only if the rand weakens further will investments made now deliver good rand returns.

If the government makes policy mistakes, the currency will weaken further, Brooke says. But if the government commits to the National Development Plan and delivers an austere budget with less spending, the rand may strengthen, he adds.

Given these risks, you may want to consider a fund such as the Old Mutual Maximum Return Fund, managed by Brooke, which holds a higher allocation to both international assets and equities than is permitted in terms of regulation 28 of the Pension Funds Act.

However, with these kinds of funds – classified as worldwide funds – the manager decides when will be a good time to have a higher exposure to offshore markets and when it is better to have high weighting to local shares.

You have thousands of funds from which to choose if you want to invest in a fund denominated in a foreign currency and domiciled in a foreign country, but, for peace of mind, you should choose a fund that the Financial Services Board (FSB) has approved for South African investors.

An FSB-approved fund will be domiciled in a country that has unit trust fund regulation similar to that in South Africa. The fund must have an office or person in South Africa who you can contact if you have problems with the administration of your investment.