Amidst a tide of reports of doom and gloom for the local economy supported recently by confirmation that South Africa is officially now in a “technical recession” due to two successive negative quarters of economic growth, investors and financial planners are faced with the dilemma of what to do with their and their clients’ long term investments. An area that certainly deserves attention and could well-serve investors is to diversify their portfolios into global markets. However, according to Trevor Garvin, Head of Multi-management at Nedgroup Investments, many South African investors are hesitant to approach offshore investing and consider it an intimidating process.
“There is a lot of noise around offshore investing and the benefits of going offshore at the moment. While there is definitely a good case for diversifying offshore, it is crucial in times like these of heightened uncertainty, both domestically and abroad, to stick to the basic principles of investing and remember to keep a long-term view and investment time horizon,” he says.
Garvin provides the following advice for local investors looking to diversify offshore:
Choose investments that are appropriate to your risk profile
“Before making any decisions, take time out to do your research. Be realistic about your current financial position, your risk profile and your investment objectives, and then find and compare the offshore funds that are available to you. Consulting with a financial advisor can be very helpful,” says Garvin.
A quick visit to the website of any investment company will expose an investor to a wealth of information and data about specific funds – including performance, fees and monthly commentary – as well as fund commentaries and other news articles. There may also be educational articles to help investors learn more about the investment environment.
One of the most important things an investor can do is take the time to do proper fund research (ideally with the aid of a financial advisor) and then match their investment requirements and investment time horizon with an appropriate fund. It is then imperative to stay invested in that fund for as long as is required and to ride out any shorter periods of capital drawdowns or underperformance – as opposed to switch between funds and try and time the market. This inevitably leads to value destruction – it is way better to do your detailed research and then stay fully invested with that fund through long term investment cycles in order for them to deliver on their investment potential.
Choose a credible investment partner
“When investing offshore, you are investing in a market or markets that may be unfamiliar to you. It’s crucial therefore to make sure, firstly that you are investing in the appropriate fund and also that your investment will be managed by a fund manager that has a credible and proven track record for managing offshore funds,” advises Garvin.
Garvin warns investors not to focus solely on recent performance. “Awards based on solid short and medium term performance are a good indication that a fund has been performing well. However, past-performance is not necessarily an indication of future performance and one should rather focus on consistency in performance over the longer term and have comfort that you believe that the fund manager has a sound investment process, stable research team and the ability to generate new investment ideas or themes on a consistent basis. Although difficult, one needs to try and distinguish between “luck” and “skill” in terms of performance. Normally a skilful manager is one who has a robust investment process that is repeatable and consistent over time with an emphasis on protecting capital in falling markets by following a strict valuation type approach to buying assets ” he explains.
Other indicators that investors should look at when choosing an investment management company are: the company’s access to industry expertise, their investment stewardship principles and do they put clients first in terms of their decision making, commitment to individual funds’ mandates and importantly transparency of communication. Another factor to be aware of is whether the fund has been “approved” by the South African Financial Sector Conduct Authority” (FSCA). The FSCA has certain criteria that it looks at when assessing offshore funds – if the fund has been given approval by the FSCA it does provide an added layer of comfort and protection.
One of the best ways to protect large capital losses and reduce ones volatility is to ensure that you have a well-diversified portfolio. There are three main asset classes – cash (money market), bonds (government and corporate fixed income instruments) and equities (large, medium and small cap equities as well as developed versus emerging market equities). One can get exposure to these asset classes via South African domiciled assets as well as offshore domiciled funds or listed instruments.
One ideally wants exposure to both domestic and global assets across all the various asset classes. What the exact mix of these assets should be is dependent on your age, risk profile, income requirements, investment time horizon and aversion to risk. Speak with a financial advisor on how to come up with the optimal mix in order to provide the best diversified portfolio possible. Different asset classes perform differently under changing economic cycles – hence the benefits that this brings in reducing the volatility of ones investments.
Avoid making emotional decisions
In the current market, it is near impossible to be able to forecast with any degree of certainty what the future holds in terms of investment returns. Therefore, Garvin urges investors to take a measured approach to investing and to avoid over-reacting to negative public sentiment and allowing one’s emotions to drive your investment behaviour. Spend time on doing the correct research and wealth planning, but once you have made your investment decisions try and stick with them for the longer term.
“Pessimists have been predicting the collapse of the South African economy for decades and we should remind ourselves that the Johannesburg Stock Exchange was one of the best performing stock markets in the world measured in both South African rands and US dollar terms for the past twelve years,” he says. Another good example is the Rand – notwithstanding all the current political dramas in South Africa at the moment – with Guptagate, investment downgrades and declining economic growth – we have actually seen the Rand strengthen 5% against the USD year to date – when most people were predicting its collapse.
Remember that valuation drives long-term return
When markets are erratic or in a downturn, Garvin says it is easy to forget that valuation drives investment returns over the long term. This is why investment managers look for pockets of value to drive consistent performance over time. Your entry price is one of the biggest drivers of future returns.
“There will always be several excellently run businesses with fantastic growth prospects and management who allocate capital efficiently both domestically and internationally. These businesses, when identified, will provide one with investment opportunities,” he says.
It is often at times of the greatest level of uncomfortableness or pessimism that one should actually be investing, as this is when valuations are stretched and providing the best probability of sound returns in the future.
Don’t base your decision on currency alone
Garvin understands investors’ concern when it comes to the Rand but urges investors not to base their financial and investment decisions on currency fluctuations in isolation.
“Rand movements can have a material effect on one’s rand investment returns. However, predicting currency movements is also extremely difficult, and certainly getting it right on a consistent basis is even more so. The current exchange rate of the rand should be just one of the factors that investors take into consideration, along with valuation, diversification and personal circumstances,” says Garvin.
Garvin urges investors to speak to their financial planners to ensure that they have a well-diversified portfolio with both domestic and offshore exposure. Investors can gain offshore exposure by investing in Rands via rand-denominated feeder funds or alternatively by using their foreign allowance money to invest in a foreign currency fund - such as the Nedgroup Investments Irish-domiciled US dollar or British pound range.