In light of the falling rand and the uncertainty in the share market, investing abroad is a very good idea, writes Donna Block
What world markets are going to do these days is anyone’s guess. You might as well get out the old crystal ball. One thing that is certain though is the demand for rand denominated international funds will be on the rise and they could be a good bet.
Demand for offshore unit trusts has risen steadily as increasing numbers of South African investors look to diversify their portfolio risk. South Africa’s best performing fund sector last year was global or international unit trusts. Most fund managers suggest a long-term investor earmark 25% to 30% of his portfolios for offshore investments.
There are basic reasons why investing abroad is a good idea. A fundamental reason is that the rand has lost approximately 90% of its international purchasing power over the past 25 years, and may fall further. This makes it important for individuals to have a segment of their portfolios invested abroad.
“If the rand continues its downward trend and an individual has rands invested in foreign currency through a global or international fund, that portfolio will benefit from the declining rand,” said one fund manager.
Another, and possibly the best, strategy decision to go offshore is diversification. In light of the uncertainty in the share market and the extreme volatility being experienced not only on the Johannesburg Stock Exchange (JSE) but in most markets, spreading the risk makes good sense. The assumption is that market risks are reduced by a variety of investments. Therefore, international exposure should reduce risk while, hopefully, at the same time increase returns.
Peter Stroobach, deputy MD of BoE Private Bank, is a firm believer of this. He wrote: “From a risk-reduction perspective, there is no doubt offshore investment makes a great deal of sense. Even a well-diversified South African equity portfolio is not actually diversified at all. Effectively, most of the equity holdings are on one stock exchange and the country-specific risk attached to that portfolio is still present.
“Offshore investments offer risk reduction through geographical and currency spread, as well as portfolio-enhancing returns through potentially greater investment opportunities abroad and a long-term hedge against the rand.”
Craig McKay, head of unit trust marketing and sales for Southern Asset Management, believes there are three compelling reasons to invest offshore. Firstly to alter portfolio risk by spreading the fund’s exposure over more than one economy and currency and over a few dominating sectors, as with South Africa’s mining and financial sectors. Secondly, to hedge against currency risk, and thirdly, global diversification provides some measure of stability in an increasingly volatile marketplace.
Moreover, the benefits of investing in global and international funds have been evident in the returns they produced for investors last year. The average return was 35,9%. The best performer returned 42,4% and the worst took in a mere 11,7%.
But what does the crystal ball predict for this year? No one knows for sure, although Old Mutual Unit Trusts’s Pieter van Niekerk said in a video conference last week that he expects the JSE to outperform world stock markets this year and that the present uptick in commodities prices could also translate into a stronger rand. This means that rand hedges may be a less attractive investment option this year.
However, Van Niekerk added that because the South African market makes up less than 1% of world capital markets, in the long term offshore investments would “increase your chances of doing better at a lower risk – and that’s the bottom line. South Africa is a small basket for all your eggs.”
No doubt South African investors have taken heed. They are now permitted to hold R500 000 per person offshore and competition is rife between sponsors for a piece of the offshore pie.
Because Reserve Bank rules limit the amount of investment in individual offshore unit trusts and because they are becoming “over- subscribed”, sponsors are required to stop taking investments when they reach a certain limit. However, in order to meet the growing public demand, new funds are springing up almost daily.
Nonetheless, there are always caveats to any type of investment. The prospects for international markets depend on many different factors. For the past two years world markets have performed – in some respects – unrealistically and it is not likely they can maintain that kind of pace.
Today global investors are faced with a world in flux: there is growing conflict in Eastern Europe and slow growth in the rest of the Europe, the United States market appears to be unstoppable, Asian markets seem to be making a comeback and Latin America could recover in due course. And, in the run up to the millennium, other “unusual” events may occur, which at the end of the day makes a case for foreign diversification.
As an investor it is always prudent to be as informed as possible. Therefore, when deciding which product or asset manager to choose, the most important consideration is to identify what your particular needs are as a South African investor.
Choosing a particular fund or unit trust, or even someone to manage your investments, is a personal decision and one that should not be taken lightly.
Doug Thomson of Investec Securities suggests that it is important to choose an investment manager with a global reach and local focus and one that is ideally positioned to meet the needs of the South African investor.
Investors should be assured of a portfolio that is tailored to domestic requirements and make sure they will be completely serviced by that investment manager.