Analysts have coined the phrase ‘new normal’ to warn investors of lower-than-expected equity returns through 2011/12.
Gone are the ‘boom times’ of 2002 to 2007 when the JSE All Share index averaged 26.1% per annum. And the post-recession recovery of 2009/10 is the stuff of dreams. In these turbulent economic times analysts are advising that you should sacrifice some of your domestic equity exposure in favour of better value opportunities offshore. The easiest way to gauge the investment community’s expectation for offshore equities is to consider the offshore weighting of various managed funds.
As Q2 2011 draws to a close it is clear the majority of unit trust fund managers are buying as much offshore exposure as their respective fund mandates allow. Absa Multi Management (AMM), a ‘manager of asset managers’ that scrutinises investment fund behaviour at major investment houses and nimble investment boutiques, reckons trend-spotting investors — the guys who go where the smart money goes — are heading in just one direction. They’re going offshore.
“Some investors seek profit by rapidly latching on to trends, especially trends involving ‘smart money’ placed by major institutions,” notes AMM analyst Miranda van Rensburg. “The latest trend relates to prompt action by some pension funds looking to take advantage of changes to prudential investment guidelines”. The offshore allocation for retirement fund assets was recently increased from 20% to 25% of total assets. Of course, legislated changes don’t always benefit investors at the individual level.
Marius Fenwick, COO of Mazars Financial Services, the investment arm of audit, tax and advisory firm Mazars, notes that the 25% ‘cap’ can be seen as restrictive: “While this is an increase over the previous limit, many investors have had to reduce their offshore exposure to bring it in line with the new limit. This is because previously, asset class limits were set at the fund level by administrators and not at the level of individual members.” With offshore equities offering better value than local equities at present, the timing couldn’t be worse.
“The serious investor needs to look at ways to continually grow their portfolios — and right now the smart money is going offshore,” he says. “A number of asset managers have increased the offshore exposure in their portfolios to the maximum, partly due to a strong rand, which is bound to depreciate at some stage,” says Van Rensburg.
An assessment of domestic versus global equity valuations suggests private investors should adapt their offshore investment strategies too. The JSE has delivered solid returns over the past two years thanks to the All Share index recovering from its March 2009 ‘low’ of around 18 000 points. But this stellar recovery has stretched local company valuations, making selected offshore equities more attractive.
How can private investors adjust their strategies to take advantage of the new age of offshore equity returns? A popular option is — with assistance from your financial adviser — to consider the range of locally available ‘offshore’ unit trusts funds— And new opportunities crop up everyday.
A recent entrant to this ‘space’ is the Discovery Best Ideas Fund, which is “free to exploit global equity (or equity-type) opportunities with a total return bias, without being constrained by the restrictions imposed on a regulated fund.” The fund, which we should stress is not a unit trust, is managed for Discovery Invest by Investec Asset Management’s Sam Houlie. He believes there are numerous opportunities among ‘bombed out’ developed world stocks, particularly in Japan.
Those looking at individual shares will find that the Dow Jones ‘Global Titans’ — multi-national companies offering strong brands worldwide — are inexpensive, higher quality and offer better free cash flows than South African equities. However, if the losses on equities abroad exceed the extent to which the currency weakens you could still end up with fewer rand in your pocket,” says Chris Du Toit, an analyst at Allan Gray, which invests offshore through its global asset management partner Orbis.
He says there are many opportunities for investors to go offshore: “Shares are an obvious place to start for those with a long time horizon, but it’s also important to consider other options when looking abroad too.” But he warns against placing too much stock in the promised offshore equity returns given the correlation between global share prices and emerging market currencies.
The days of utilising developed world equities as a hedge against the local currency are over. “The correlation, between share prices globally and the value of emerging market currencies can work against you if you are investing in offshore equities in order to benefit from potential rand weakness,” says Du Toit.
The question is how to benefit from the obvious correlation between rand and developed market equities. Allan Gray uses its Orbis Optimal SA fund which invests in uncorrelated assets offshore, typically alternatives to cash and bonds.
“Benefiting from currency weakness is always an objective for investors heading offshore. If correlations between the rand exchange rate and global markets remain as high as they have been recently, an uncorrelated offshore asset, such as one of the Orbis Optimal SA funds, may prove to be a useful addition to a portfolio,” Du Toit concludes.