South Africa may offer access to well-run, world-class companies, but there are several reasons why local retail investors may also want to diversify offshore.
JOHANNESBURG – South Africa may offer access to well-run, world-class companies, but there are several reasons why local retail investors may also want to diversify offshore.
Andrew Steyn, head of consulting relations at Sygnia, says as an emerging market, international monetary policy has a significant impact on South Africa and its currency – as was evident by two recent external shocks.
Steyn says that the US Federal Reserve triggered outflows of about $1 trillion from emerging markets with a May 2013 announcement that it would taper its quantitative easing program.
Similarly, emerging markets took another hit when economic data indicated in September last year that the US recovery was well underway and that interest rates would likely be hiked earlier than anticipated. Currencies depreciated relative to the US dollar and it created upward inflationary pressure.
But for those investors with offshore exposure, currency depreciation may provide a welcome windfall.
In the year through May 2015, the MSCI World Index (a proxy for international equities) delivered a return of 6.5% in dollars and 21.5% in rand, illustrating the impact of rand weakness over the period.
Steyn says many South African investors believe the rand will continue to depreciate over time. With quantitative easing and the resultant carry-trade (investors borrowing money in countries with low interest rates and investing in countries with higher interest rates) still a reality in many parts of the world, money will continue flowing in and out of South Africa’s markets.
Investing offshore is a way for investors to diversify risk and to counter the impact of currency depreciation, higher inflation and lower economic growth, he says.
However, there are two hurdles investors may need to overcome when investing offshore – complexity and costs.
The average retail investor usually has limited access to information and therefore decisions about offshore investing can be daunting.
Steyn says the investor would typically face a barrage of offshore fund managers and investment options, with different asset allocations, currency exposures and geographic focus.
Apart from the complexity, it can also be very expensive to invest offshore. Management fees well in excess of 2.0% per annum are not uncommon in this environment Steyn says.
Against this background, the probability of making the right decision is fairly low, he argues.
“You could end up paying top dollar and have made the wrong decision because of absence of access to information.”
The best way to deal with the complexity is for the retail investor to use index-tracking funds, which generally offer a much more cost effective exposure to market-related returns and simplify choice, Steyn argues.
Steyn says the multinational investment group BlackRock offers a wide range of passive equity unit trusts tracking different market indices. The funds are accessible through most of the major local investment platforms such as Investec, Glacier International, Momentum Wealth International and Old Mutual’s international platform.
Management fees generally range from 20 to 50 basis points, excluding the LISP platform administration fees, he says.
Another big obstacle for the small retail investor is the minimum investment required, which could be as high as $3 000. However, some platforms pool investor funds and waive the requirement, he says.
At the moment Sygnia has a fairly limited offering in this part of the market as it is well-covered by international managers such as BlackRock, but it has applied to the Financial Services Board (FSB) to launch an index-tracker International Balanced Fund, which it hopes to bring to market within two months.