Offshore opportunity

Despite the fact that South African retail investors withdrew R3-billion from offshore funds in the last quarter, fund managers believe that offshore markets offer excellent value and recommend that South Africans use this opportunity to take money out of the country.

The latest figures from the Association of Collective Investments (ACI) show that although retail investors were withdrawing money, institutional offshore funds experienced a R1,1-billion inflow. Retail investors tend to buy at the top and sell at the bottom.
This massive outflow from offshore funds, against the advice of fund managers, suggests that the savvy investor should start investing money offshore.

Di Turpin, chief executive of ACI, says most analysts recommend an offshore allocation of about 30% to 40%, yet the latest ACI figures covering foreign currency-denominated funds show that offshore fund total assets are just less than R112-billion, compared with the R656-billion invested in local funds.

Turpin says that even local rand-denominated offshore funds, which can be bought over the counter without any foreign investment allowance, are not attracting big money because of relatively poor returns. Local markets have performed far better than offshore markets, with the All Share Index up 10,15% compared with the FTSE100, which is down 2,64% this year in rand terms. But the relatively strong performance of the JSE has made offshore markets more attractive.

Trevor Garvin, head of multi management at the Bank of England’s (BoE) Private Clients, says that on a relative valuation offshore developed markets are now looking more attractive than South African markets.

Although the South African market has fallen by more than 10% in the past month, it is coming off a strong four-year bull run, substantially outperforming overseas markets. Garvin says with the rand at about R7,50 to the United States dollar, now is a good time to invest offshore. “We are not rand bears but we believe R7,80 to R8 to the dollar is likely to be the level later in the year.” Turpin says the Bureau for Economic Research (BER) forecasts that the rand is likely to weaken against the dollar but strengthen somewhat against the softer Euro.

BER expects the currency to average R8,45/$ during the fourth quarter of 2008 and R8,75/$ in the final quarter of 2009. Garvin says that although the currency offers a good opportunity to invest, diversification is an important building block of any investment portfolio. “We are an emerging market and by having exposure to developed markets one can access a variety of different businesses and asset classes,” says Garvin, who adds that this also provides investors with exposure to asset classes not readily available in the South African market, such as hedge funds, private equity funds, life settlement funds and asset-based lending funds. “Many of these are strategies that are not related to equities and can deliver when markets are falling.”

US the place to invest
According to Lehman Brothers’ research, large US companies are showing exceptional value with some of the largest banks in the world cheaper than our own beleaguered banks.

Lehman Brothers says earnings expectations for the second quarter in the US were the lowest ever, if the market is viewed as a whole. But second-quarter results do not appear to be as bad as anticipated.

While net income was down almost 22% year-on-year, this has largely been concentrated in the financial and consumer sectors. The rest of the market, excluding financials, appears to have held up relatively well, with net income increasing by 8% year-on-year.

The report says strong earnings from the energy sector offset the results from financials this quarter, but that this may not continue, given the outlook for lower oil prices. A falling oil price might underpin other sectors. Lehman Brothers says the US is favoured over Continental Europe, the United Kingdom and emerging markets as earnings revisions and valuations move in favour of the US, particularly in financials, technology and consumer cyclicals.

Garvin says BoE’s offshore strategy is to be in mega- and large-cap companies in the US. “These are historically cheap with strong cash flows and high dividend yields.” The US market has officially entered a bear market, with a fall of 20% in two months, and is trading at levels below that of 2000.

Garvin says that, given the economic environment and write-downs in the banking sector, it is prudent to be in large business with strong management and safer stocks. But the funds are underweight in the UK, where there is rising inflation, rising unemployment and weak government.

MSCI USA Index top 10
Exxon Mobil
General Electric
Procter & Gamble

Sector weightings:
22% consumer non-cyclical
16% energy
14% financial
11% communications
11% technology
11% industrial
15% other

Hassle-free offshore investing
There are many ways to invest offshore, including using your R2-million offshore allowance. There are also rand-denominated offshore funds that provide exposure without having to comply with Reserve Bank requirements. But a third alternative - locally listed foreign exchange traded funds - offers an inexpensive and hassle-free way to invest in blue chip shares.

Deutsche Bank’s db x-trackers track some of the key global world indices, including the MSCI USA Index, FTSE 100, MSCI Japan, FTSE 100, MSCI World Index and DJ EuroStoxx 50 Index. Db x-trackers track an index that delivers the return of that index in its base currency. So although investors might be investing with rands, they still have exposure to the foreign currency and benefits from any rand depreciation.

The Deutsche Bank-sponsored ETFs offer the same trading opportunities as single stocks on the JSE Limited and are quoted continuously during exchange trading hours. You can buy either through your stockbroker or directly from dx-trackers.

Over and above your brokerage fees a 1% annual fee is charged for the product. This is well below the 2% to 3% annual fees charged by offshore unit trusts, although one has to take into account any fees from the broker.

The upfront fee can be significantly lower, depending on brokerage costs. Providing exposure to all the major developed markets, individuals are able to invest, depending on which region they believe will offer potentially better returns, and create their own passive index tracking offshore investment.

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