Analysis by Allan Gray suggests that South African investors should hold 30% to 50% of their portfolio offshore. This is the optimal level of diversification.
However, those who save exclusively through retirement products are restricted to the 30% allowed by Regulation 28. This means that most South Africans are probably under-exposed to international markets, since the majority of savers have all of their long-term money in retirement funds.
The reason investors need to be aware of this isn’t just because they have to consider the risks of having a very high proportion of their assets linked to the fortunes of a single country and a single currency, but also because they might be missing opportunities available elsewhere. The South African listed market makes up only around 1% of the world’s market capitalisation, and there are only around 400 companies on the JSE.
This compares to the over 43 000 companies listed on exchanges around the world according to the World Bank. This indicates how the opportunity set outside of our borders is far greater than can be found domestically.
Everyone should therefore consider whether they need to increase their offshore exposure beyond that which they have in their retirement funds. As Allan Gray notes: “Offshore diversification is core to a successful long-term investment plan.”
There are a number of options, but the simplest is through locally-registered unit trusts that give international exposure. These generally don’t require big investment amounts and are as easy to access as any other local fund.
According to the latest statistics from the Association for Savings and Investment South Africa (ASISA), most of the money going into these global funds is placed in equity portfolios. This is not surprising since the yields on cash and fixed income assets in South Africa has been much higher than can be found internationally. Investors have therefore been looking for growth in offshore stocks.
Over the past decade, they have also been rewarded for doing so. In the 10 years since the start of June 2008, the MSCI World Index has returned 10.85% in rand terms, while the FTSE/JSE All Share Index has delivered only 9.01%.
Consider also that over this time the rand has moved from around R8 to the dollar, to its current levels of over R13. South Africans with some of their money invested internationally have therefore also protected their global purchasing power.
It is interesting to note how individual funds have performed over this time. The table below lists the top global equity funds over the past 10 years.
|Global equity fund performance to May 31, 2018|
|Fund||10 year annualised return|
|Allan Gray Orbis Global Equity FF||12.52%|
|Old Mutual Global Equity Fund A||12.23%|
|Coronation Global Opportunity Equity [ZAR] FF A||11.11%|
|Alexander Forbes Investments Global Equity FF||10.18%|
|Investec Global Franchise FF A||9.31%|
|Nedgroup Investments Global Equity FF A||8.98%|
|Discovery Global Equity FF||8.92%|
|Stanlib Global Equity FF A||8.59%|
|Investec Worldwide Equity FF A||8.52%|
|Prudential Global Value FoF A||8.30%|
|MSCI World Index||10.85%|
|FTSE/JSE All Share Index||9.01%|
It is significant that the top three funds on this list have all out-performed the MSCI World Index. This is not a simple task, and it suggests how well managed these funds are.
It should be noted that they don’t always show this out-performance. There are times when even their long term numbers have fallen below the index returns, but this period has been a constructive one for these managers.
Investors should also take note that these three funds are all very different, and should therefore be aware of how they are positioned.
The Allan Gray Orbis portfolio is a value fund that sometimes takes quite contrarian positions, such as its high exposure to Russian stocks in recent years. Its performance can therefore sometimes be quite ‘lumpy’ and volatile over short periods.
Old Mutual has a far more diversified approach, using a range of factors for selecting stocks. Its portfolio is therefore extremely broad. It’s largest holding is Apple, which is just 1.4% of the fund. In comparison, all of the top 10 holdings in the Allan Gray Orbis portfolio carry at least double that weighting.
The Coronation fund is a multi-manager offering, giving investors exposure to five different global asset managers. It also tends to have a higher exposure to emerging markets than its peers.
Looking over the shorter-term, the table below shows the top performing funds in this category over the past five years.
|Global equity fund performance to May 31, 2018|
|Fund||5 year annualised return|
|Old Mutual Global Equity Fund A||16.50%|
|Discovery Global Equity FF||14.04%|
|Allan Gray Orbis Global Equity FF||14.02%|
|Alexander Forbes Investments Global Equity FF||13.26%|
|Stanlib Global Equity FF A||12.80%|
|Coronation Global Opportunity Equity [ZAR] FF A||12.68%|
|Prudential Global Value FoF A||12.45%|
|Nedgroup Investments Global Equity FF A||12.42%|
|PSG Wealth Global Creator FF A||12.30%|
|Element Global Equity SCI Fund A||12.23%|
|MSCI World Index||14.56%|
|FTSE/JSE All Share Index||9.16%|
Over this period, only the Old Mutual portfolio has produced a higher return than the MSCI World Index. This proves what a difficult hurdle it is to beat.
It is however notable that the average fund in this category has produced significantly better returns than the FTSE/JSE All Share Index. This highlights how having some international exposure would have benefited local investors.