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Emerging market funds look eas... SCMB alliance gives bank best of both wo... SA shares become immune to US shiver... Making the most of relaxed control... Safety means lending an ear... Isle of Man opens for SA busines... Up-front fees ditched in favour of perfo... Free flow needed for investment abroa... |
Index funds reduce the riskSOUTH Africans would have been better off investing in the JSE all-share index than the Dow Jones index over the past 20 years, notwithstanding the sharp depreciation in the rand over the same period. However, an investment in the Japanese Topix index would have left them 28% better off, and 12% better off if they had invested in the US Financial Times 30 index. A sum of R100 invested in the JSE all-share index in 1976 would have multiplied to R3 525 in 1996, while 100 yen invested in the Topix index would have risen to about R4 505 and R100 invested in the Dow Jones would have grown to R3 477. "The difference in the international indices is surprisingly small and therefore underlines the argument that investing internationally will not necessarily lead to higher returns," says Herman Steyn, chief investment officer at Investec Quantitative Management. "But what it will do is reduce the volatility or risk of the portfolio without necessarily sacrificing performance." Investing in foreign markets reduces risk by providing the investor with portfolio diversification through exposure to foreign markets, which are driven by forces different to the SA market. One of the preferred methods of gaining off-shore exposure is through index funds, which replicate indices such as the Dow Jones. Index funds were created when investment managers woke up to the fact that the random nature of markets made it difficult for fund managers to consistently outperform the index. Unlike actively managed funds, the composition of an index fund is changed in line with changes in the index, and not in response to changing market perceptions of various shares. Investing in index funds further reduce investment risk because international markets are highly liquid and therefore efficient. The Investec International Index Unit Trusts allow the investor to achieve targeted portfolio exposure and passive index management for Japan, Europe and the US - without the cost structure or complexity of share selection and asset allocation normally associated with international investment. Investors can obtain exposure to a variety of international indices through the Investec Global Select Funds, which comprise the MSCI (Morgan Stanley Capital International) Japan index, the MSCI Europe Index and the S&P 500 index for the US. The six Investec Global Select Funds are tax-free investment vehicles based in Ireland and are targeted at institutional investors seeking off-shore exposure. Steyn says these funds, launched in January, have so far attracted investments totalling R55-million, all of it through Reserve Bank-approved asset swaps. Private clients with a minimum investment of R500 000 have direct access to a range of international unit trusts, while smaller investors can participate through the Investec Worldwide Fund, which is quoted in the daily financial press. The Investec Global Bond Fund, invested in a spread of global bonds, is managed by Investec, with SBC Brinson acting as adviser. The Investec Global Money Fund is split between Bankers Trust and Investec. "By splitting the management of this fund, we compete with each other for the highest returns," says Steyn. Steyn says the relaxation of exchange controls has stimulated a higher level of interest in global investments. Once controls are completely abolished, there are four possibilities for local investors seeking international exposure, says Steyn: ý Via a locally listed international unit trust, such as the Investec Worldwide Fund); ý Via local asset managers with international structures in place (such as Investec and Old Mutual); ý Investing directly in off-shore funds via international groups with local representation, such as Templeton; although Templeton is well known in South Africa, others may not be, which creates an element of risk, says Steyn. ý Via local institutions offering a feeder service to an international asset management group (such as Standard, which is allied to Fidelity). Some feeder services could be more expensive than other forms of overseas investment.
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