Catch the offshore boatThe global investment business got off to a slow start after the relaxation of currency controls last July, but a better educated public is now beginning to make more assertive steps towards portfolio diversification, writes CIARAN RYAN
TRY as it may, the offshore investment industry has been unable to whip up much enthusiasm among private investors since foreign exchange controls were relaxed last July. Some R100-million flows out every month in terms of the R200 000 foreign investment allowance - well below expectations.
There are several reasons for the limp response: the obligation to seek tax clearance first, an embarrassment of advice which confused rather than enlightened investors, a fear that world stock markets were too highly priced and a R200 000 limit considered too small to effect a meaningful portfolio diversification for high net worth individuals.
One of the main obstacles, however, appears to be the obligation to seek tax clearance. It was recently disclosed that more than 800 of the 4 815 people who had applied for offshore investment failed to get tax clearance,
"Once you take up your R200 000 offshore allowance, you leave a paper trail for the inland revenue authorities, and many people appear unwilling to take this risk," says one offshore investment adviser. "There is a fear that this may lead to questions being asked about other offshore funds which were taken out illegally."
According to some estimates, up to R100-billion was spirited out of the country during the apartheid years. There is still a vibrant black market for those seeking to avoid detection by the authorities.
"If someone wanted to move R10-million offshore it could be done overnight at a 5% premium to the official exchange rate," says the adviser. "For bigger sums, the premium drops to 4.5%."
Huge amounts are reportedly moved this way. Some foreign companies accustomed to operating in countries with no exchange controls appear willing to bypass the banking system by selling their hard currencies on the black market. There are also reports that some local banks have been able to transfer funds abroad on the back of structured finance deals, and a number of companies are selling offshore investment products by means of credit card debits - effectively avoiding exchange controls, unless Reserve Bank permission is granted.
Companies appear to have made fairly brisk use of their R30-million offshore allowance - R50-million if the destination is Africa. About R2.1-billion was invested offshore by companies since exchange controls were relaxed in July 1997, while the value of assets swaps totalled R42.1-billion. The total retirement and insurance market in SA is valued at about R800-billion, 10% of which could be moved offshore in terms of the asset swap allowances. This suggests only half of the potential funds have been moved abroad.
The reluctance of pension funds to invest abroad is an indication for more education on global investments, according to John Pollen, head of international strategy at Standard Corporate and Merchant Bank's (SCMB) asset management division. "We lack actuarial data on cost and performance comparisons between international managers and this is one of the reasons for the slow pick-up by pension funds. But this information will soon be available.
"There is a huge amount of administration involved in an asset swap for a pension fund. The board of trustees for each pension fund involved in the swap must be consulted, and there could be 50 of them. Then it's a question deciding how much of the portfolio should be invested abroad, and where to invest."
Despite this, SCMB transacted asset swaps of more than R6-billion in 1997 on behalf of pension funds, insurers and its own clients. The asset swap market dried up temporarily after the Asian financial collapse last year as local investors shifted to bonds and foreigners baled out of SA. Interest picked up again once it became clear that SA was a relative haven of stability.
With total gold and foreign reserves of R36.6-billion at the end of December 1997 - substantially higher than a year ago - finance minister Trevor Manuel is expected to announce a further relaxation of exchange controls in this week's Budget.
The total value of blocked rands held in SA by non-residents is estimated at R15- billion. Given the high propensity to shift most, if not all of this, into hard currency, the government will be loathe to relax controls on these funds.
Those selling offshore products report that the strongest demand has been for unit trusts, particularly global funds invested in a spread of sectors and regions. Those who opted for Asian funds on the basis of historical performance got horribly burnt. The IFC Asia index was down 43% in 1997, while Japan's Nikkei index dropped by 30% against a 10% drop in the JSE all-share index. But the more developed Western and Latin American markets held up surprisingly well. The US's S&P500 index appreciated 31% in 1997 against 30% for the UK's FT100 index and 29% for the IFC Latin American index.
Opinions vary as to where to invest in 1998, although staying at home might not be a bad idea. Lower inflation and an improving economy augur well for the JSE. SA bonds have outperformed equities by 17% over the past three years and should continue to fare well in a disinflationary environment, according to Mike Brown, head of strategy at Société Généralé Frankel Pollak (SGFP). But, after three sluggish years, the JSE should outperform bonds over the next two years.
SA equities offer good value relative to other emerging and more developed stock markets, adds Brown. The average price-earnings (PE) ratio of the JSE is 14.5 versus 27 for the S&P400. With corporate earnings growth of 15% expected in SA against some 5% in the US, there are strong arguments for keeping the bulk of one's portfolio invested locally.
SGFP's recommended asset allocation to the year 2000 is 50% in SA equities, 30% in bonds, 5% in cash, 5% in property and 10% in foreign assets. Institutions are allowed to invest up to 10% of their assets and a portion of their cash flows abroad through asset swaps, although the actual figure is closer to 6%. Brown recommends that this be increased to the allowable 10% over the next two years.
For private investors the consensus opinion is that 25% to 30% of one's portfolio should be invested abroad. The volatility of the JSE in recent years highlights the need for geographical diversification. Over-exposure to any one region is hazardous, as shown by events in Asia last year and most advisers recommend a global portfolio, where risk is spread across several regions and asset classes.