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SA investors’ growing love affair with offshore

But pay attention to fees.

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

Source: Asisa & Morningstar

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%.

Source: Morningstar

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.

Source: Morningstar

“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.”

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So perhaps another 14 years to break even on a currency basis for those who invested 2 yrs ago in 2016?

Interestingly no. I took a lot of money out after the Nene debacle (the 1st one!) at about R15.30/US$. When the Rand came back to hit that rate again a few months ago my portfolio was up 25%. The growth had nothing to do with the exchange rate, it was purely the growth in the constituent equities. Of course it seemed disastrous when the rate went down to R12.50 but the wheel turns. When (not if) the rate hits R60/$ I will have the growth + currency gain which seems wonderful until one realises that whatever we “gain” from currency weakness is also a devaluation of all our assets, homes, businesses and the cost of travelling overseas etc. Would I have been better off waiting for the rate to get down to (say) 12.50? Well, #1 I did not know that it would reach that rate and #2 I would have lost growth opportunity by waiting. What I do know is that I am already far better off having as much money as possible out of the country. Follow the trend – we are travelling down Zimbabwe road at an ever increasing pace but somehow many people think we will not end up like Zim. Is that insanity or what?

With my investments I convert their value to GBP on a daily basis and use that as a judge of their performance. My international investments have accrued 4.6% in pound terms, but because of the onerous cost of using an investment platform for international money transactions, the actual accrual is about 2% in GBP terms. My JSE investments have lost 1/4 of their value in GBP terms.
I would like to know what a good reference currency or standard would be (perhaps gold, or perhaps the Swiss Franc (CHF)).
I am wondering if holding some sort of derivative contract linked to an index, but hedged from the Rand, would be a cheaper option than using an investment platform like CREDO, and if it is possible.

Hi Foshan, yes but I did say on a CURRENCY basis, not EQUITY basis and the former (currency loss) can very easily negate the latter (foreign equity gain). Your 25% is only 25% due to the rand weakening back to the amount u initially invested at. Per the article, had u invested in 2001, your 25% return would have been realised only after FOURTEEN years (the period it took for the rand to devalue back to 2001 levels). Could it be another 14 years for those who invested in 2016 at R17/$ ? Of course one should have money offshore, its called diversification but the pendulum swings both ways

R60/$ you say, good luck with that.

@mojojojoe I like to get a feel for a few hard currencies (direct conversion) to USD/EUR/GBP and CNY. Also, I’ve looked at the composition of SDR from the IMF and use those weightings to get a feel if overall wealthier or not – although USD weighting is still huge.

Volatile it is… you may be up 25% in ZAR, flat in USD, and 10% in GBP.

Difficult to absolutely say from year to year whether you’re doing well or not, but in reality in all of the currencies I’m up and to the right of all major currencies after their respective inflation rates over the past 10 years so that’s good I guess…

I believe people are mis-reading matters around being off shore with their funds. The only party that has funds offshore are the investment managers per their 30% allowance. Should you sell units then these funds are placed to your SA account and not creditied to an account in a foreign country of your choice. If you truly wish to externalize funds you need a foreign entity to accept Rand equivalents in that particular foreign currency – these funds would be truly externalized and if you wished you could repatriate these funds back to SA when the exchange rate favours you, there is a further negative you are compelled to list all foreign assets to SARS annually

Foreign assets are not required to be listed annually on one’s tax return. One gives a total value of foreign assets.

I can’t over-emphasize the importance of selecting assets, not currencies!

If you had gone GBP but invested in Glencore IPO you made a bad investment

If you had stayed ZAR at that time but invested in SAB you would have made a great investment. Actually the SAB investment probably tracked above foreign currencies over 5, 10, 20, 40 years.

For costs, most foreign banks have a securities arm so your only costs should be an annual banking fee plus the normal brokerage fees per transaction.

The tax side can get hairy dealing with withholding taxes in dividends, CGT is surprisingly simple (the gain in the underlying converted at the rate when realized)

Just tread carefully, US indices are VERY expensive after a massive run since March 2009. Several individual stocks are up 30% per year over the period.

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