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Offshore investing gains ground

May 25 2012 07:28
Mzwandile Jacks

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 capabilities.

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.

 - Fin24

investing  |  offshore investment



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