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Smart investors score by taking money overseas
The JSE's paltry performance last year relative to bourses in the US and UK means that those who can, should go to offshore funds, writes CIARAN RYAN
Investors who took the plunge and put their money into global equity funds can be pleased with their returns. But those who opted for the Asian funds may well wish they'd stayed at home (although these funds have shown strong recovery over the past few weeks). The JSE all-share index dropped about 6% in 1997 (that's 8% in US dollar terms). Compare this with a gain of 37% for the US's S&P 500 index and 20% for the UK's FT 100 index.
With a further liberalisation of exchange controls expected in Trevor Manuel's Budget speech next month, fund managers are hoping for a more enthusiastic demand for offshore investment than that which followed last year's R200 000 allowance. The response by individual investors so far has been derisory. The outflow averages R100-million a month - well short of expectations. But offshore fund managers are now reporting a steady demand. There is a belief that the R200 000 offshore allowance is too small to effect a meaningful diversification in an individual's portfolio. And many investors are reluctant to seek the necessary tax clearance and so draw attention to themselves.
A model by Standard Corporate and Merchant Bank's (SCMB) asset management division suggests that over the past five years, investors should have split their assets 50-50 between SA and foreign to strike a healthy balance between risk and return. Currently, says SCMB, the ideal offshore split in the absence of exchange controls should be at least 25%. "Given that South Africans are limited to a R200 000 foreign investment allowance, it may not be feasible for many people to achieve this kind of diversification," says John Pollen, head of international strategy at SCMB, which has an association with Boston-based Fidelity, the largest independent fund manager in the world. Clinton Braude of Syfrets International recommends investing about 30% of one's portfolio overseas. Individual appetite determines how much of this 30% should go into money market funds, equities or bonds. Syfrets International, with an estimated 15% share of the retail off-shore investment market, says most offshore clients opt for a balanced fund, which is 60% invested in equities, 35% in bonds and the rest in cash. The consensus opinion - from companies marketing offshore products - is a 20% to 30% foreign weighting. An asset allocation model by Société Générale Frankel Pollak recommends investing 10% abroad, 80% of which should be in equities. The reason, it says, is that the SA economy appears to be following a different phase of the business cycle to much of the rest of the world and now offers good value relative to other markets. Most SA investors appear more confused than enlightened at the plethora of funds from which to choose. Until recently, the choice was between about 150 local unit trusts or, for those investing directly on the JSE, between 650 listed equities. Globally, there are about 34 000 unit trusts, and thousands more investment trusts and endowment products (which are similar to unit trusts in several respects). Some tips for offshore investors: Most of these names are represented in SA through the major investment institutions or independent brokers, and each will have a variety of offshore funds from which to choose.
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On the other end of the scale, Asian markets took a pounding: there was a decline of 78% in Thailand, 73% in Indonesia and 72% in Malaysia (all in US$).
For investors who can see the benefits of geographical diversification that foreign assets bring, expert opinion varies on what percentage of your portfolio should be invested abroad.