MENU
 
 Registered users can save articles to their personal articles list. Login here or sign up here

What you should know before investing offshore

What should your starting point be? And where do you find the data to support your decision and ensure that you are getting your desired exposure?

Projected GDP growth figures of different countries released by the World Bank in January this year show that South Africa is expected to grow no more than 1.8% in both 2018 and 2019. On the other hand ‘Emerging and Developing Countries’, on average, are expected to grow at 4.6% and 4.8% respectively.

As South Africa represents less than one percent of the world’s GDP, it is prudent to consider diversifying geographically and introducing a spread of currencies and other asset classes into an investment portfolio to ensure that you are not over exposed to South Africa specific risk factors. An additional factor to consider is that the rand has recovered to below R13/$ and investing offshore right now is relatively favourable compared to a year ago.

It would therefore be entirely logical for South African investors to start the process of exploring offshore investment opportunities. We would of course caution our clients that they should have a good understanding of their existing investments and what exposures they are looking to add to their portfolios before making this decision. Adopting the “get it offshore at any cost” mentality seldom bears fruit.

But how do you go about this? What should your starting point be? And where do you find the data to support your decision and ensure that you are getting your desired exposure?

As a South African, you are faced with a choice. You can either invest in a rand-denominated fund, (whereby you invest in rands and ultimately get paid out in rands) or you can take your money offshore and invest in assets after converting your rands into a foreign currency.

To invest in a foreign currency denominated fund you have be an individual (as opposed to a trust), over the age of 18 and in good standing with SARS. There are limits on the amount of money you can invest offshore; present caps are set at an annual limit of R10 million unless you do a special application.

Further, you are required to place the transaction through an authorised dealer. Most SA banks are authorised dealers and specialist financial advisers are able to assist with the investment process.

Let us go through a practical example. I have decided to use investing in India as an example as it is an option that we at Rosebank Wealth Group are actively exploring at the moment.

The first thing to realise is that technically, South African investors may invest in any offshore funds that they choose but are limited to FSB registered offshore funds when dealing with a South African financial advisor.

You could brief your financial adviser to find you the best solution for gaining exposure to India, as measured by both return, risk and correlation benefits when added to the rest of your portfolio. You should also specify that your new investment should take tax and estate duty efficiencies into account.

This request would mandate your financial adviser to do a search of all eligible funds and then present you with a list of possibilities. The choices would include the following:

  • Foreign currency denominated funds registered with the Financial Services Board
  • Rand denominated foreign funds. This option would obviously not be advised if the assets to be invested were already offshore.

Foreign currency denominated funds registered with the Financial Services Board: There are about 450 funds that have been approved by the FSB that may be ‘marketed and promoted’ in South Africa in terms of Section 65 of the Collective Investment Funds Act. Factors considered by the FSB when deliberating on which funds should be permitted to be promoted include the investment grade of underlying assets, the liquidity of assets and the availability of the funds in their home jurisdictions, to name a few.

As of March 2017 there are eight foreign denominated funds with a special focus on India. This list of funds include those that are mandated to invest in only equities as well as those that invest in interest bearing investments. The total list of funds approved for marketing by the FSB can be found on www.fsb.co.za.

Rand denominated foreign funds: These funds are classified by the Association of Savings and Investments South Africa (ASISA) as either global funds, (those funds mandated to invest across many countries, as opportunities present themselves) or regional funds (those funds that are mandated to invest in specific country or region). The global and regional funds are further classified according to whether the fund managers concerned are mandated to invest in equities, interest bearing assets, property or across different types of assets. Some rand denominated funds are labelled ‘feeder funds’ and invest only into a ‘parent’ foreign currency fund.

The only rand denominated unit trust fund with a specific Indian focus is the Sanlam India Opportunities Feeder Fund, launched in 2000 with assets of R 210 million. The Sanlam India Opportunities Feeder Fund invests in the SIIP India Opportunities Fund, which is domiciled in Ireland and which is benchmarked against the Bombay Stock Exchange 500 Index.

Other rand denominated funds that may or may not invest in India, depending on the conviction of the fund manager include the Sanlam Asia Pacific Fund of Funds, launched in 2000 and with assets of R 119 million, the Coronation Global Emerging Markets Fund, a fund where the managers have the discretion to invest in a wide range of emerging markets, including India or the Stanlib Global Emerging Markets Fund.

  • One of the first problems to be grappled with is that foreign currency denominated foreign funds are not obliged to publish their prices in the public domain. It is therefore very difficult to track relative performances. Financial advisers typically pay data providers for this information on a subscription basis. Without this data, you would have to rely in the fund fact sheets of the funds concerned, but you would not easily be able to compare the funds’ performance or risk statistics with other funds with the same or similar mandates over different time periods.
  • The second problem is that there are no FSB-determined classifications for offshore funds. The funds that are mandated to invest 100% in India, for example, could be classified in a range of different categories by different data providers. There are two investment data companies in South Africa, Profile Media and Morningstar. These companies decide on their own offshore sectors using their own protocols and usually after collaborating with the management company concerned. In the case of Profile Media, the classification of the funds is determined after analysing the underlying assets and looking at the region and investment universe.
  • In the case of some funds, the classification could reflection either historic classification conventions or the past management style of the fund. The Ashburton India Equity Opportunity Fund is an example; this fund was classified by Profile Media (with the consent of Ashburton, the fund’s management company) as a ‘Global Equity General Fund’ as when it was first made available in South Africa the fund managers invested in companies that derived profits from Indian companies, irrespective of where they were listed. More recently, this fund has developed a policy of investing in companies listed in India only. However, the fund would lose its performance history if it were to be reclassified.
  • Other challenges include the fact that there could be significant delays between the FSB registration of a fund and the time that the data firms get around to listing the fund details on their information sites.

The table below shows all the funds with an Indian orientation listed as a foreign fund on the FSB website. Column 2 shows the Morningstar and the Profile Media classification of the funds concerned. Note the different classifications of the funds concerned.

1

2

3

Fund

Classification (Morningstar / Profile Media)

Mandate (as per fund fact sheet)

SIIP India Opportunities Fund

(Registered with the FSB in February 2011)

India Equity/ SA Offshore Far East Equity General

The fund managers are mandated to invest in the stock markets of India and aim to outperform the Bombay Stock Exchange 500 index over a 3 year period.

Franklin India Fund

(Registered with the FSB in Nov 2007)

India Equity/ SA Offshore Far East Equity Varied Specialist

The fund managers of this fund invest in Indian-based equity and equity-related securities and to a lesser extent in money market securities. The benchmark of the fund is the MSCI India Index.

Ashburton Chindia Equity Fund

(Registered with the FSB in February 2011)

Other Asia Pacific Equity/ SA Offshore Far East Equity General

The fund managers are mandated to invest in the stock markets of China and India. They aim to outperform a composite index made up of 50% MSCI India and 50% MSCI China.

Ashburton India Equity Opportunities Fund

(Registered with the FSB in Sept 2014)

India Equity/ SA Offshore Global Equity General

The fund managers are mandated to invest predominantly in the stock markets of India. They aim to outperform the MSCI India.

Ashburton India Fixed Income Opportunities Fund

(Registered with the FSB in Sept 2014)

Other Bond/ Unlisted

To achieve long-term capital growth and income through investment in fixed and floating rate instruments traded in India.

Rubrics India Fixed Income UCITS Fund

(Registered with the FSB in Oct 2014)

Other Bond/ Unlisted

This fund aims to generate income and capital gains by investing in fixed income securities issued by the Central Government of India (Sovereign debt) and the companies of Indian origin in which the government holds a majority stake known as public sector undertakings or ‘PSUs'(PSU corporate debt).

Q – ACPI India Equity UCITS Fund

(Registered with the FSB in Oct 2016)

Unlisted by both data providers as of February 2017

This fund aims to achieve capital appreciation via a diversified portfolio of listed Indian equities. The fund is managed from Mumbai, India by Quantum Advisers.

Q-ACPI India Balanced UCITS Fund

(Registered with the FSB in Oct 2016)

Unlisted by both data providers as of February 2017

The Q-ACPI India Balanced UCITS Fund invests in Indian equities and bonds over a market cycle via collective investment schemes.

 

It follows that investment advisers and / or members of the public choosing their own investments have to understand the logic (or lack of it) that determines the classification of funds and need to interrogate the underlying holdings in the fund and not just the label.

In case you are thinking that fund classification is neither here nor there, bear in mind that award ceremonies such as the Raging Bull Awards and the Morningstar awards base their award nominations decisions on i) their classification protocols and ii) the limited pool that are FSB registered and the classification of the funds concerned.

It is one of our pet gripes that in the marketing hubris following award ceremonies, the winning funds get away with advertising their success by boasting that they won the ‘Best performing European/ Indian/ Technology Fund’, just to name a few categories. The adverts fail to mention that the only competitors might have been a very small group of other FSB-registered funds and their leading competitors might be excluded because of a historical classification issue.

It is therefore crucial that both you and your financial adviser should resist the temptation to take the easy route and select award-ceremony winning funds without a good understanding of which funds are not on the list and why, and how the funds that are on the list have been classified.

To avoid this mistake, all you have to do is ask your adviser to conduct a thorough analysis of the funds concerned so that you can ensure you are in fact getting the underlying exposure you are looking for.

ADVISOR PROFILE

Peter Nurcombe-Thorne

Rosebank Wealth Group (Pty) Ltd

COMMENTS   0

To comment, you must be registered and logged in.

LOGIN HERE

Don't have an account?
Sign up for FREE

LATEST CURRENCIES  

ZAR / USD
ZAR / GBP
ZAR / Euro

Graduating? First job? Tips on how to allocate your first salary

If you're about to earn your first salary, how should you go about dividing your income between life insurance, disability and income protection insurance, investments and retirement savings?

Heading towards too much time, with too little money

About 94% of individuals are unable to retire independently and maintain their living standard straight after retirement.

Should I interrogate my financial advisor? Absolutely

Take your time and do your due diligence to ensure you're getting the value you deserve from your advisor.

Stretching your pension investments

If you're 65 and retired your priority is to make your money last for at least the rest of your life. If possible, the capital should grow at a rate higher than inflation, without taking undue risk.

To kill a bond or not?

If you can get an investment return higher than the interest rate on your bond, then you should allocate any additional cash you have to investments.

Over 40 and nothing saved for your retirement?

Here's what to do...
GO TO SHOP CART

Follow us:

Search Articles:Advanced Search
Click a Company:
server: 172.17.0.2