Do you need an offshore manager to manage your offshore investments?
Many South Africans are considering investing offshore, or topping up their offshore investments, mainly because the political risks to the economy, financial markets and the rand are high. Although these may not be the best reasons for investing offshore (see below), many investors have too little exposure to offshore markets and need to diversify their portfolios.
If you are contemplating investing offshore, you may be wondering whether you need to find a foreign manager, or whether a familiar home-grown one will do.
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When it comes to performance, South African fund managers do well relative to their foreign competitors, although there are sound arguments for using an offshore manager, such as lower costs and more experience (see Extra effort of investing offshore directly can pay off).
If you are just beginning to venture into offshore markets, a rand-denominated global equity or global multi-asset fund is a good place to start. You can invest in these funds without converting your rands into a foreign currency, accessing your offshore investment allowance (up to R10 million each year) and obtaining tax clearance.
You can also take comfort from the fact that local managers are proving their worth relative to their foreign counterparts. For example, the top five rand-denominated funds in the foreign equity general sub-category over the past 10 years have delivered returns pretty much in line with the returns (in rands) produced by offshore global equity funds (between about 10 and 12 percent a year).
Offshore funds are registered in a country outside South Africa, and to invest in them you must use your offshore allowance and convert your rands into a foreign currency. Some are managed by local fund managers, while others are managed by managers based abroad.
Although you are free to invest in any fund anywhere in the world, offshore funds that are registered with the Financial Services Board (FSB) are regarded as suitable for South Africans, because they are domiciled in countries with regulations similar to ours and have a representative in South Africa whom you can contact.
Over the past 10 years, the average annual return (9.25 percent) of global equity funds based in South Africa was slightly above the average annual return of offshore global equity funds (9.02 percent).
In the PlexCrown survey of offshore asset managers that have FSB-registered funds denominated in a foreign currency, the leading manager at the end of September was London-based ACPI, which has four fixed-income funds and a global multi-asset fund domiciled in Jersey in the Channel Islands.
However, the next four places in the rankings were filled by local managers with offshore funds: Marriott (second place), Nedgroup Investments (third), Oasis (fourth) and Investec (fifth).
A look at the returns in United States dollars (according to ProfileData) of FSB-registered offshore funds shows that local manager Foord’s International Trust Fund was the top-performing global asset-allocation flexible fund over 10 years, with an average annual return of 11.48 percent.
Global asset-allocation flexible funds have no restrictions on how much they can allocate to the different asset classes of equities, bonds, cash and listed property.
Looking beyond the small pool of FSB-registered offshore funds to all offshore funds, Daryll Welsh, the head of product at Investec Investment Management Services, says foreign funds in the more popular sectors (global multi-asset and global equity) run by South African managers have fared well over the past year.
He says South African offshore funds, such as those managed by Foord, Investec, Coronation and Nedgroup, are in the top half of international ratings agency Morningstar’s performance table over one year in the categories for global and European funds. These funds invest in the largest shares on exchanges around the world or in Europe, as well as in two multi-asset sub-categories, for funds with a high or moderate exposure to equities.
Welsh says some of these sectors have a large number of funds, so it is no mean achievement for a fund managed from South Africa to achieve above-average performance.
The competition for your rand-denominated investments in offshore markets is increasing.
Over the past two years, almost 40 rand-denominated funds that invest in foreign markets have been launched and almost 30 rand-denominated worldwide funds have been launched. Worldwide funds invest in foreign and local financial markets in line with the managers’ expectations of how these markets will perform.
Offshore expertise
Of the FSB-registered offshore global equity funds, the leading fund over the 10 years to the end of September was the Orbis Global Equity Fund, with an annual average return of 12.92 percent.
The top rand-denominated global equity fund over the same period was the Allan Gray-Orbis Global Equity Feeder Fund, which invests in the Orbis Global Equity Fund. Orbis is a sister company of Allan Gray and its funds are domiciled in Bermuda and managed by a team in London and elsewhere in the world.
Many local managers have set up their own offshore funds and offer South Africans the option of investing in these in either a foreign currency or in rands by way of what is known as a feeder fund.
Some South African managers have teams that acquaint themselves with the global markets from within this country, while others use teams in other parts of the world, typically London.
Other managers have partnerships with managers based in other countries, for example:
• Prudential Portfolio Managers uses M&G Investments, the United Kingdom and European manager in the South African manager’s parent group, Prudential plc.
• Stanlib uses three offshore managers, Fidelity Worldwide Investments, Columbia Threadneedle Investments and Brandwine Global Investments, to manage its foreign and offshore cash, equity and asset allocation and bond portfolios respectively.
• Last year, Absa Active Asset Management partnered with UK-based investment heavyweight Schroders International to manage its Global Core Equity Fund and Global Recovery Fund. The global equity fund is also available as a rand-denominated feeder fund.
• South African manager Nedgroup Investments won the Raging Bull Award for the top offshore manager of 2015. Its offshore funds and rand-denominated feeder funds are run by offshore managers that it selects. For example, its foreign-currency-denominated Global Flexible Fund is managed by First Pacific Advisors in the US.
If you invest in a feeder fund that invests in an offshore fund, you can compare the performance of the underlying offshore fund to that of other FSB-registered offshore funds.
Growing passive market
After many years of a limited range of low-cost rand-denominated funds that track global indices (passively managed index-tracking funds), there will soon be two additions.
Deutsche Bank has a range of five exchange traded funds (ETFs): three track broad global indices and two track leading indices in the US and Japan respectively. Old Mutual and Satrix each has a fund that tracks the broad global market.
The db x-tracker MSCI USA Index ETF was the top-performing rand-denominated collective scheme over the 10 years to the end of September, with an annual return of 27.85 percent.
Recently, Coreshares announced that it will list an ETF that tracks a major global index, the S&P500, on the JSE in early November. The S&P500 tracks the 500 largest shares (measured by the value of the shares listed) on equity markets around the world. The cost of the ETF will be 0.45 percent a year.
Coreshares will also launch a global property ETF that will track the S&P Global Property 40 Index, which tracks the 40 largest listed property stocks globally.
FUNDS WITH FOREIGN EXPOSURE DO BETTER
The average returns from unit trust funds in the rand-denominated global equity general and multi-asset sub-categories tended to be higher than the average returns of funds that invest in equivalent South African sub-categories over the five-, three- and one-year periods to the end of September, with only one exception over the one-year period.
The MSCI World Index returned 22.2 percent a year in rands over the past five years, while the FTSE/JSE All Share Index returned 15.29 percent a year over the same period. Over this period, the rand depreciated against the United States dollar by an average of 10.5 percent a year, boosting returns.