Investing off-shore: is it too late?

Maybe not, but tread with caution ?



CAPE TOWN - In one of my last columns of 2013 I suggested the idea of buying gifts of unit trusts or ETFs for your children, grand-children or god-children instead of ‘wêreld-se-goed’ which are probably discarded in a corner by now. I must confess my children were not all that impressed with the idea, but one day they will see the light. Celma, one of our Moneyweb readers wondered whether it wouldn’t be a good idea to invest in an offshore unit trust or ETF, of which there are several. On the face of it, this suggestion makes eminent sense.

As reported elsewhere on Moneyweb by Patrick Cairns, eight of the top ten performing unit trusts in 2013 were off-shore focused. And the returns were nothing short of astonishing, as this article shows. But as we well know, past performance is no indication of future performance and there are many factors that investors need to bear in mind before they venture off-shore. The most obvious of these says Terence Craig, CIO at Element Investment Managers, is the double whammy gained from the surge in global equity markets coupled with the rand’s loss in value.

Global markets rose by 30% while the rand fell 22% in a year, enhancing the returns, as is evidenced by the charts below.


USD ZAR
MSCI NA 30.38% 61.80%
MSCI World 27.48% 58.19%
MSCI Europe 26.08% 56.47%
MSCI Japan 26.84% 56.20%
MSCI Asia x J 3.15% 28.00%
Source: Sanlam International Investments

01-Jan-13 01-Jan-14 Rand depreciation
Rand dollar 8.47 10.35 22.2%
Rand pound 13.73 17.38 26.6%
Rand euro 11.15 14.43 29.4%
Rand yen 0.0974 0.0997 2.4% S
ource: Sanlam International Investments


Only those who believe in the Easter Bunny will expect a repeat of these returns this year. But does this mean that those who have not invested offshore have missed the boat?


To make an assessment of whether now is still a good time to invest offshore one has to consider the fundamentals of the SA currency, global equity fundamentals and global economic fundamentals, says Thomas Schlebusch, CIO at Sanlam International Investments.

Although the rand is now undervalued, further weakening will depend on both internal and external factors. Internally much depends on how Finance Minister Pravin Gordhan addresses SA’s twin deficits and economic weakness. Politics will also influence volatility. South Africa is one of the five emerging market countries that Deutsche Bank says “could be a political landmine.” Thus the rand could be affected by volatility and populist rhetoric ahead of the coming election.

He adds that externally, further recovery in developed markets as well as tapering and concerns around growth and governance issues in emerging markets, could see emerging market currencies weaken further, albeit at a slower pace.

Global equity markets are just seven weeks away from the fifth anniversary of the bull market, a fact that is making investors cautious. Bull markets don’t usually last more than four years, says Paul Hansen who runs the Stanlib Global Equity Feeder Fund. But the conditions that often precede a bear market - excess demand, booming house prices and rising inflation triggering successive interest rate hikes – are also not in place, he says.

In fact, despite the surge in global equity markets, valuation multiples in developed markets are still below their long term averages. On a PE basis some regions are starting to look a bit stretched, says Schlebusch. This could be justified should higher earnings growth and dividends come through – particularly in the US. Europe could still see some positive surprise on the back of credit growth, while “Abenomics” could fuel further growth in Japan, he says.

Of course South Africa is not the only country where elections and short term politics feed into market volatility. So watch out for the US fiscal debt ceiling in February as well as mid-term elections. In Europe the reform momentum could be limited by parliamentary elections in May that could strengthen the position of populist fringe parties. In Scotland the independence election could create some volatility, while in the UK manoeuvring is likely to begin in advance of the 2015 general election.

To go offshore or not?

If you are cautious and have a three- to five-year investment horizon then it’s not too late to invest. Current market fundamentals suggest that equities will continue to outperform bonds and cash, while developed markets are favoured over emerging markets, says Schlebusch.

Also sounding a cautionary note was Element Investments’ Craig, who says that if you do invest offshore don’t switch out of another unit trust investment to do so. Investors who chop and change generally lose.

In this environment of rand weakness Hansen advises making monthly investments over a lump sum investment. If there is a sharp recovery in the rand or a pull back in offshore markets, then add to the investment.

As for which fund to choose, well that’s up to you. Old Mutual’s Global FTSE All World Index Feeder Fund is a good low cost option. Another is Satrix’s MSCI World Equity Feeder Fund – though that doesn’t have a track record yet. Deutche Bank’s offshore ETFs allow you to target specific parts of the world, if you prefer.

On the other hand with some areas of the market looking more expensive than others, the actively managed unit trusts are able to be more selective in their search for value. For instance Allan Gray’s Global Equity Fund has investments in Korea and in companies that will fall outside the radar of the big index trackers.


REF : Money Web - Author: Sasha Planting