A number of asset managers are currently recommending that you consider their worldwide multi-asset unit trust funds, which can invest in either local or offshore markets across the asset classes, for your discretionary investments.
Funds in the worldwide multi-asset flexible sub-category in which have mushroomed recently, with almost 30 new funds launched over the past two years. There are now more than 50 funds from which to choose if you want an asset manager to decide for you whether locally or internationally markets are the more attractive.
A new entrant in the worldwide multi-asset fund sub-category is Investec Asset Management.
Investec’s sales manager, Paul Hutchinson, says that the current 25 percent limit on allocations to offshore markets in retirement funds is well below what is an optimal allocation over a long time.
Twenty-five percent is what you are allowed to invest offshore if you are using a retirement annuity fund (RA) or an employer-sponsored pension or provident fund.
Financial advisers will tell you that the amount you should invest offshore depends on your circumstances. Will you, for example, need the money for a retirement income in South Africa or for holidays abroad, and how much have you already saved offshore?
But Hutchinson says research clearly shows that a well-diversified portfolio including a larger allocation to offshore opportunities, can not only improve your return but substantially decrease the volatility of these returns over time.
Hutchinson says that your exposure to offshore markets should at all times be informed by a number of factors including the return prospects of South African asset classes, the likelihood that these returns may materialise, the value of the rand, and the size and breadth of global investments.
In a study conducted by asset manager Cadiz a few years ago, Professor David Bradfield, Brian Munro and Dieter Hendricks calculated that in almost all portfolios with a three-year investment horizon, and even over longer terms, the optimal offshore allocation should be anything from 29 to 46 percent in order to achieve the investment goals of either matching inflation (as measured by the Consumer Price Index) or beating inflation by five percentage points.
Recently, Yashin Gopi at BNPP Securities also generated research clearly showing that optimal offshore allocations are higher than 25 percent, Hutchinson says.
He says investing offshore comes with its own set of risks and it is thus important to allocate to funds and investment teams that are both skilled and adequately resourced to invest outside of their home market. Many unit trust funds that comply with regulation 28 of the Pension Funds Act – making them suitable for use in RAs – are in the South African multi-asset high equity unit trust sub-category.
Hutchinson says the international mutual fund data provider Morningstar has shown that the average returns of the worldwide multi-asset flexible funds have outperformed the average South African multi-asset high equity funds by almost three percentage points a year over 10 years to the end of January this year, albeit it at a slightly higher risk – as measured in terms of standard deviation or the variance of returns.
William Fraser, a portfolio manager at Foord, says Foord’s worldwide Flexible Fund of Funds has outperformed the Foord Balanced Fund (a regulation 28 multi-asset high equity fund) by three percentage points a year since the worldwide fund launched years ago.
The Foord Flexible Fund of Funds returned, on average, 19.5 percent a year over the seven years to the end of March, according to Profile Data. The Foord Balanced Fund returned 15.75 percent a year over the same period.
Fraser says Foord’s worldwide fund is likely to continue to outperform its balanced fund, although it is not possible to say whether it will be to the same extent.
Marriott’s Worldwide Flexible Fund of Funds returned 16.5 percent a year, on average, over seven years to the end of March, while the Marriott Balanced Fund (its regulation 28 fund in the multi-asset high equity sub-category) returned 12.99 percent a year over the same seven years.
Lourens Coetzee, an investment professional at Marriott, says the depreciation of the rand against other major currencies has played a large role in the worldwide fund outperforming its local multi-asset Balanced Fund. The currency can work for you or against you, depending on whether the rand appreciates or depreciates, he says.
A key role the manager of a worldwide fund can play is to choose shares that have better valuations (price relative to expected earnings), he says. So if, for example, offshore equity markets offer better value than local equity markets, the fund’s equity allocation can be tilted towards these shares.
There is an argument that you get offshore exposure from local shares that are also listed on other stock exchanges and whose earnings are largely from offshore, but Coetzee says many of these shares are currently considered expensive.
Asset managers recommend worldwide funds for tax-free savings accounts, and they say these provide a good vehicle for discretionary savings if you plan to invest for a reasonably long period.
Tax-free savings accounts are better-suited to long-term investments because you can only contribute R30 000 a year to a maximum of R500 000 over your lifetime, and if you withdraw money from the account, the withdrawal will not offset your contributions to the limit.
Investments in these accounts are free of dividends tax, income tax and capital gains tax.
If you have most of your retirement savings in a retirement fund, however, you may want your discretionary investments to be more concentrated in offshore markets, rather than in a worldwide fund that also has exposure to local shares, to ensure that, across all your investments, you have an offshore allocation that is greater than 25 percent.
A financial adviser may also recommend you use a fund that invests only or predominantly in international markets and not in South African markets (a foreign fund), rather than a worldwide one, which invests in both, in order to manage your local to offshore exposure more effectively. In a worldwide fund it may be harder to know what the exposure to offshore versus local is at any time.
You may also want to diversify against the risk of the rand depreciating and/or the political risks in South Africa, by investing in an offshore fund denominated in a foreign currency. If you do this, however, you must expect the fund to earn good returns in its denominated currency rather than good returns when converted to rands.
Fraser says the Foord Flexible Fund of Fund’s mandate is to outperform inflation as measured by the Consumer Price Index by five percentage points, while the Foord Balanced fund has a mandate to beat the average of its peers. He says the worldwide fund is therefore well suited to the South African investor who wants to achieve a local inflation-related goal.
A foreign or offshore fund, however, will have a benchmark that is related to international indices, which may not be a good match for what you need to achieve to reach your investment goals.
But if you want a rand-denominated investment in which a manager chooses assets that are expected to perform well from both local or and global markets, then a worldwide multi-asset fund is a good solution.
LOCAL AND OFFSHORE: HOW ACTIVE IS THE ALLOCATION?
Just how actively will the manager of a worldwide fund manage asset allocation between local and offshore markets?
It is not impossible, but unlikely that a fund will go 100 percent into South Africa or offshore but an 80/20 split is possible.
Currently, the Foord Flexible Fund of Funds and the Marriott Worldwide Fund of Funds each have 80 percent of the fund in offshore markets.
Foord’s William Fraser says that over a full market cycle, from a market high to a market low and back to a new high, you could see a big change in the allocations.
The Foord Flexible fund launched in 2008 with less than 20 percent in offshore markets. Today it has only 33 percent in the local market.
Fraser says that at the moment there are more shares in offshore markets than there are in local ones that are well priced given their potential to produce good earnings over the next three to five years.
Marriott’s Lourens Coetzee says that at one stage in its 14-year history, the Marriott Worldwide Fund of Funds had an offshore equity exposure of less than five percent and total offshore exposure (equities, property and cash) of as little as 30 percent. Its local exposure is currently at its lowest, of just over 20 percent, and its local equity exposure is just over 15 percent.
Investec’s Paul Hutchinson says the Investec fund has started with a global asset allocation of 65 percent offshore and 35 percent local.
IS IT A BAD TIME TO GO OFFSHORE?
Investment wisdom is that you should invest offshore when the rand is strong rather than when it is weak. Given that many worldwide funds currently have high offshore allocations, it may not be the best time to invest in one.
However, Foord’s William Fraser says while investing now could incur you some short-term losses, it is unlikely that the rand will appreciate much over the longer term, and with a five to 10-year horizon you are unlikely to be affected too much.
Marriott’s Lourens Coetzee says offshore equities are attractively priced and if one invests over a 10-year period, the impact of currency fluctuations becomes less of a concern. Consider an investment of GBP100 000 (R2.1 million) in offshore first world equities today, at R21 to the pound, for 10 years. In line with Marriott’s expectations, you expect a return of nine percent a year. If the rand stays at R21 to the pound, your investment will be worth about R5 million in 10 years time, but if it strengthens to R17 to the pound, your investment will be worth about R4 million (a return of 6.7 percent a year). The outcome with a 20 percent strengthening of the currency still results in your capital almost doubling over a 10-year period.