Over the last 18 years, South African funds invested offshore have increased tenfold. Of these funds, about 30% is invested via Allan Gray’s Orbis Global (which includes Orbis SICAV, Orbis Optimal SA, and Allan Gray Australia).
Stanlib, Investec and Nedbank hold another 31% of the market, with the balance held by a combination of local and international fund managers, according to data from the Association for Savings and Investment South Africa (Asisa) that was compiled and presented at the Morningstar Investment Conference in Cape Town.
South Africans have had a fascination with offshore investing for decades, and this is likely to continue as investors become more comfortable investing offshore. Since 2001 the amount invested offshore has increased from R56 billion to R518 billion.
While political uncertainty has played a role in accelerating the flow of funds out of South Africa, the relaxation of exchange controls and the amnesty has had a material impact, says Victoria Reuvers, a senior portfolio manager with Morningstar Investment Management.
Investors, too, are simply broadening their investment horizons.
In keeping with this trend, the number of managers actively investing South African funds offshore on behalf of clients has increased from 46 to 68, with just 36% of those local fund managers.
Offshore investors will have learned, some the hard way, that precisely when you take your funds offshore can have a material impact on the returns generated over time. For instance, if you took funds offshore in 2001 it would have taken 14 years to break even on a currency basis, she notes.
The importance of timing
While individual (retail) investors have developed a growing appetite for offshore investing over the last two years, fund flows are still dominated by institutions looking to diversify their exposure. This trend was accelerated after March this year when the then finance minister, Malusi Gigaba, announced that the offshore investment allowance for institutional investors, under Regulation 28, would be increased from 25% to 30%.
Institutional investors are diversifying offshore
When it comes to asset allocation what is notable is that of the funds invested offshore, 75% is into global equity funds, 20% into multi-asset funds and 5% into fixed income funds, says Reuvers. This is in contrast to local investment preferences which favour balanced funds. Over the past six years, equities were clearly the place to be – specifically in the US. US equities have been the best performing global asset class in six of the last seven years. Some investors may have believed that simply investing in US dollars was a good bet. It was not, says Reuvers. An investment in the US fixed income market generated a return of less than 1% over five years to September 2018.
An interesting observation in a world that is increasingly aware of the impact of investment fees on returns is that SA investors are not price-sensitive when investing offshore. When it comes to global equity funds, South African investors are prepared to pay annual fees of as much as 2.21%. Perhaps they are prepared to pay up for the certainty of investing with a big name?
The average fee across global equity funds is 1.46%, while on the lower end fees fall to 0.69%.
In terms of global investment trends to watch, Reuvers notes that value investing has suffered a death – as it has locally. “‘Momentum’ has outperformed ‘value’ in six of the last seven years,” says Reuvers. Investors’ love affair with passive funds continued, although it slowed somewhat in 2018. At one point Vanguard, the worlds biggest passive investor, was attracting inflows of $1.5 billion a day. “At the height of this trend – in 2015/16 – Vanguard was attracting more funds than the rest of the US asset management industry combined,” she says. “However, after two years of fund outflows, the fund industry is now back in positive territory.”
The strength of the passive industry has forced fees lower: fees on the average global equity fund are now 1.46%, while those on passive world equity funds are about 0.8%.
So what does this mean for SA investors wanting to go global?
In a world of Trump economics, rising interest rates, trade wars, Brexit and rising populism, volatility is inevitable. “Focus on what you can control, not on what is out of your control,” says Reuvers. “This means focusing on company fundamentals. There are opportunities available – economic growth is still positive and inflation is manageable.”
On the other hand, valuations in the US are at all-time highs. In fact valuations on US companies are now higher than they were prior to the global financial crisis.
“There is a lot of optimism priced into the US market right now,” she adds, pointing out that there are other opportunities. “Regions marred by uncertainty – Japan, emerging markets, the UK – are less crowded and thus more attractive at the moment. The trick is not to follow the herd.”