Getting into Google and Microsoft

You can only get access to global leaders such as Microsoft and companies involved in exciting, cutting-edge biotechnology developments through investing offshore.

Yet South Africans, by and large, have been reluctant to invest offshore while the South African markets have been relatively strong and the rand staged an amazing recovery, making it one of the strongest currencies in the world over the past three years.

Recent rand weakness will have tempted some investors to look offshore again, but investing offshore is not just about hedging your rand bets. According to Richard Timberlake, chairperson of Investment Manager Selection, who spoke at the recent Stanlib International Investment Conference, investing offshore gives you an opportunity to tap into companies and opportunities not available locally, such as the very successful listing of Google.

While most investors understand the importance of diversification to reduce risk, most people believe that lower risk means lower returns. Timberlake argues that with such exciting opportunities offshore, diversification out of South Africa will enhance your returns while lowering your risk.

According to Timberlake, when investing offshore your country selection is one of the least important influences on performance. This is interesting in light of the fact that most fund managers highlight their geographical spread when reporting on their funds. The reality is that whether you are invested in the United States, Japan or Europe, it will have less than a 10% impact on your return.

It is rather the sectors and companies you select that will have the greatest impact on your performance. This is because the world has become globalised, companies are global and sell their goods and services across all continents, which means the world equity markets tend to move in tandem. Timberlake says, for example, in 2000 the MSCI world index fell by 11%. No country was spared with all indices falling, some worse than others — the US fell 14% while Europe only 4%. One would have thought there was no place to hide with technology stocks globally falling 40%. Yet, at the same time, the pharmaceutical sector rose 25% and financial sector gained 13%. If you were out of tech shares and in these more defensive stocks, you would have made money in 2000 irrespective of which country you were invested in.

Whether an international fund manager has a growth or value bias is also one of the major drivers of performance. If you held growth shares in a value play market, no matter how good your fund manager was, he would under-perform the market. For example, from 1997 to 2000 the growth stocks dominated the performance charts and you just had to be a fund manager with a growth bias to pull in the big bonuses. However, that changed dramatically in 2000 and for nearly two years the value players outperformed. The growth stocks came back into fashion momentarily in 2002, but there has already been a return to value performers. So where should one be investing next? Timberlake believes it is time for growth stocks to return to the centre stage and is switching portfolio emphasis in his multi-manager funds.

Until recently most of the market performance over the last two years has come from the small to mid-cap stocks, but Timberlake sees large caps coming back.

However, with the very best professionals only getting it right 65% of the time, Timberlake believes the best option is to diversify across management styles. This can be done either through a multi manager or by constructing a portfolio that gives exposure to both growth and value shares.

According to Paul Hansen, head of Retail Investment Marketing at Stanlib, a balanced portfolio would have 20% in a benchmark tracking fund as a core base. Forty percent would be invested in growth shares and 40% in value. If one chooses a multi- manager fund to make these selections for you, it should be earning its fees by adjusting its bias towards growth and value depending on where it sees the market moving.

How much should you send offshore?

Long-term studies show that the optimal balance for risk and return is a 50% offshore exposure. In the past 35 years, by investing 50% of your assets offshore and 50% locally, you would have reduced your risk and improved your investment performance, says Paul Hansen of Stanlib.

However, this is not necessarily the correct level for everyone. For example, the more heavily you rely on income from your investments, as in retirement, the greater the rand risk becomes should the rand appreciate as it has done over the past three years.

Are your liabilities such as your mortgages paid off?

If you have rand debt, you need to make sure you can service that debt without taking on currency risk. Even at current low interest rates, it still makes sense to channel more money into paying off your liabilities.

Do you have time and patience?

According to Hansen, you should invest offshore with a minimum seven-year view.

The double impact of weaker global markets combined with a stronger rand left many South Africans reeling. Although it is unlikely that we will see such a protracted bear market in the near future or such a rampant currency, you need to be realistic about your time period.

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Maya Fisher French
Guest Author

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