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Johannesburg - If you bought the recent hype that offshore investing delivers superior performance, you should also be cautious about the motives and methods of those promoting this strategy.
According to Rudolf Schmidt, who heads up the South African business of multi-manager SEI Investments, there is a very good reason why certain South African asset managers have been promoting the merits of offshore investments.
"It has everything to do with the margins they can make off international products, compared to local ones," Schmidt said.
Schmidt said that in some cases investors are being sold "off-shore diversification" only to have their funds reinvested in South Africa. He urged investors to spend time with their product brokers and managers, to find out where the funds have actually been invested.
He said, for instance, that one of the country's largest asset managers sold retail clients offshore products - aimed at offering them emerging market exposure - only to have more than 60% of those funds reinvested in South African equities by the offshore manager.
Asked why it costs less for institutional clients to invest offshore than locally, Schmidt said that international markets are "more efficient" than their local counterpart, and that there is more competition around pricing and costs.
In many cases, the management fees of institutional mandates are on average 0.5% cheaper in the international market compared to SA - a saving not necessarily passed on to clients, either through the manager or the product broker.
Retail investors who are uncertain about costs should check out the "total expense ratio" (TER) figure attached to the fund fact sheet, particularly if their manager recommends a change from domestic to offshore.
Investors can also use a number of online tools to find out what shares make up their portfolio, and question their product manager or broker if South African shares comprise a big portion of the portfolio.
In terms of fees from a number of major asset management houses, the Old Mutual Industrial Fund has an annual management fee of 1.43%. In comparison, the Old Mutual Global Equity fund has a 2% management fee. The Coronation Industrial fund has an annual management fee of 1.14%, while the Coronation Global Emerging Markets Flexible Fund charges 1.5%.
Schmidt said South African investors should diversify their portfolios, but investors need to know why their assets are being allocated the way they are.
- Fin24.com