HAVE you been worried sick about your offshore investments
over the past decade, given that they have failed to return anything while
continuing to incur severe losses?
Investment analysts believe your worries should subside as
confidence in offshore investments re-emerges, after these assets in recent
months provided great returns.
Analysts say a greater portion of onshore funds are bound to
be invested offshore on the back of this outperformance.
Marize van der Merwe, a senior investment analyst at
Glacier, a subsidiary of SA's second-biggest life insurer Sanlam, says the
theme of offshore investments has featured strongly on the agenda of numerous
SA investment managers.
In the past, even the most convincing argument for offshore
investing might have left many investors unconvinced because of a lack of
returns from offshore investments.
"In essence, it is what offshore equities - especially
developed markets – failed to deliver over the past decade compared to the
double-digit returns that investors received from SA equities" that
brought about this situation, explains Van der Merwe.
But this has changed. "Compelling arguments have been
made for offshore investing with the most significant from a valuation
perspective," Van der Merwe says.
Offshore investing is now a strategic focus for several
South African asset managers, with most of them reinforcing their offshore
Van der Merwe believes that some asset managers have
expanded their offshore teams, while others have chosen to partner with an
offshore-based fund manager instead.
"The relaxation of foreign exchange limitations from
15% to 25% in recent years has also contributed considerably to this trend (the
move to offshore investing)," says Van der Merwe.
"In essence, a fund manager now has the ability to
invest up to 25% of pre-retirement money in offshore assets as permitted by
Regulation 28 of the Pension Funds Act."
Fund managers have been requesting investors to vote for the
inclusion of offshore in the mandate of funds that did not previously make
provision for offshore.
"It is therefore critical that investors understand the
drivers of return of the offshore component, given the pronounced impact it can
have on the performance of an onshore portfolio," Van der Merwe says,
adding that there are typically two drivers of the return.
Firstly, the driving force could be the performance of the
underlying asset class, ie offshore equities. Secondly, it may be the movement
of the rand, which often confuses investors.
"A simplistic example will be used to illustrate this
concept. If a South African investor were invested in the MSCI AC World index
(USD) during 2011, the underlying asset class (offshore equities) would have
returned a loss of 10% (ex-dividends) for the year," she says.
"The rand, on the other hand, depreciated significantly
(between 18-22%) against major currencies in 2011, which would have contributed
positively to performance.
"The effect is a 10% positive return in the pocket of
an SA investor as the extreme weakness of the rand negated the poor performance
from offshore equities."
She says if one considers the performance drivers in 2011,
offshore equities and bonds would have contributed significantly to the
performance of a balanced onshore portfolio.
The outperformance relative to local asset classes can
mainly be attributed to the extreme weakness of the rand as risk aversion
returned to global markets in the latter part of 2011.
The converse is however also true where a particularly
strong rand, as in 2010, will detract from the performance of the underlying
offshore asset class.
"While the arguments for offshore investing are
compelling and the benefits are considerable, in practice it's often found that
investors are not benefiting from this trend.
"The flexibility of choice combined with a
misconception of the drivers of performance within a fund unfortunately often
lead to poor decisions that destroy value.
"Investors essentially chase performance by switching
out of underperforming funds and into the top performing ones without reasons
to substantiate their decisions."
Even though offshore has been a strong driver of performance
in 2011, this was not the case in 2010 or 2009.
Investor behaviour shows that in 2010 several investors
unknowingly switched out of funds with a large exposure to offshore assets -
due to underperformance relative to peers - and into better performing funds
which contained limited offshore assets.
In essence, they destroyed value based on poor decisions.