/ 7 March 2011

Managers set sights offshore

Managers Set Sights Offshore

The best time to move funds offshore is when the local currency is strong. That’s why South Africa’s fund managers have been eying developed offshore equity markets such as the US, UK and Japan with more than casual interest since the middle of last year.

Peter Brooke, head of the Macro Strategy Investments boutique at Old Mutual Investment Group SA (OMIGSA) says there are three key reasons for retail investors to increase offshore exposure right now: The benefit of diversification, attractive relative valuations offshore versus home, and the likelihood that the rand will continue to depreciate gradually over the medium-term.

OMIGSA says the 10-year bear market in global equities — particularly developed markets — is not likely to be repeated in the next decade. Asset allocation and diversification strategies are among the most important roles a fund manager performs

By taking some of the available capital offshore these managers can expose investors to fast-growing industries such as computer chip manufacturers and major emerging markets (including Brazil, Russia, India and China).

“Our analysis shows that an efficient SA portfolio would ideally have more than 30% invested offshore,” says Brooke. His views are echoed by John Biccard, manager of the highly successful Investec Value Fund. Biccard’s “value” strategies rewarded investors in the fund with 30% per annum compound over the past decade, turning R100 000 into R1.4 million!

“We expect low nominal rand returns and believe that the rand is overvalued at current levels, making it an opportune time to buy offshore equities,” says Biccard. His team started accumulating offshore equities toward the end of last year — for the first time in 10 years. At 31 January 2011 the fund was almost 20% invested offshore in top companies in Japan, the US, Europe and Israel.

This pro-offshore sentiment repeats across the fund manager environment. Chris du Toit, an analyst at Allan Gray says the triple hit of capital flows into emerging markets, rising commodity prices and the strong rand cannot last forever. “Now may be the right time to diversify your portfolio offshore to protect yourself against these trends reversing,” he says.

By increasing the offshore component of their portfolios, local investors “buy” protection from local currency weakness. He urged investors not to swap “expensive” local assets (equities) for similarly “expensive” opportunities offshore. It pays to have an astute fund manager to tackle these decisions for you.

Local investors can take one of three paths offshore. They can purchase rand-denominated international funds, invest directly in foreign currency-denominated offshore funds or purchase local asset allocation unit trusts that provide offshore exposure according to the expertise of the fund manager.

“The thousands of offshore unit trusts available to retail investors in the second option make it difficult for individuals to choose,” says Brooke. A simpler solution is to select asset allocation funds, such as balanced funds, where the fund manager has a mandate to select the most appropriate allocation to offshore assets, including countries and industries.

What can investors expect offshore over the next decade? “We expect the SA equity market to return around 6.0% per year in real terms over the next five years, says Brooke. “Offshore equities are likely to return slightly more, around 6.5% per annum in real terms, over the same period.”

The investment boutique’s fund managers will also be looking to take advantage of short-term trading opportunities in markets such as Japan, where company valuations are cheap and sentiment improving. “Our asset allocation funds, such as the Old Mutual Balanced Fund, are currently overweight Japan and we are looking for higher risk/higher return opportunities in Africa,” he says.