Is it too late to invest offshore?

2012-11-17 09:58

Over the last two years, fund managers warned people to diversify their investments to include offshore exposure as the price paid for shares in local companies became more expensive relative to offshore companies.

Wayne Sorour of Old Mutual International says despite the advice by fund managers to invest offshore, it has been difficult to convince South Africans to do so as local markets have performed well over the last decade.

“In most cases, offshore investments delivered a zero return, while South African equities gave a 400% return,” says Sorour.

It’s all about timing. In 2000, when there was a mad rush to take money offshore, the rand had plummeted to R12 to the dollar and offshore equity markets were at all-time highs.

Investors believed this trend would continue and, as a result, South Africans paid too much for global companies while the rand strengthened substantially in the decade that followed.

By comparison, in the last two years, offshore equities have offered excellent value and the rand held steady.

Sorour says institutional money, funds managed by asset managers and invested offshore two years ago, has done well on the back of a stronger global market and a weaker rand.

The opportunity now is not as good as it was two years ago as the global markets have risen and the rand has weakened; but based on sound investment principles there is still an argument for offshore investing, particularly for diversification.

“The easy money has been made so this is not about a quick buck, it is about good portfolio management,” says Sorour.
South Africa makes up only 1% of the world’s economy.

If you were investing in shares on the Johannesburg Stock Exchange you would not invest everything into a company that makes up just 1% of the market as it would be too risky.

One needs to have a more holistic approach and look at diversifying investments.

South Africa is an emerging economy with its own risks, as the recent events at Marikana and the ongoing mining-labour unrest are testament to.

While the opportunity is not as great as it was two years ago, asset managers still believe there is good value, especially
in global blue-chip shares that generate most of their profits from emerging markets.

In fact, the country where a company is actually listed has very little to do with where its earnings come from.

Take Coca-Cola for example. A stalwart of the New York Stock Exchange, it makes 50% of its earnings from outside the US and is geared to the emerging market.

Other companies such as Microsoft, Apple and even YUM Brands, which owns KFC, make most of their profits from emerging economies.

So, buying into a US-listed company does not mean you are tied to the US economy.

Michael Power, a strategist at Investec Asset Management, says their Global Franchise Fund simply invests in high-quality global companies irrespective of where they are listed.

“We choose the best companies wherever we find them. It just happens that 20% of the best companies are listed in the US,” says Power.

Duggan Matthews, an investment professional at Marriott Asset Management, says offshore investors should opt for equities in defensive industries, for example those supplying household necessities with solid brands.

Whatever happens to the world’s economy, people still need to eat and they get sick. Matthews says examples of global firms that have shown steady dividend growth over time through all conditions include Procter & Gamble, British American Tobacco, Kellogg’s, Nestle, Unilever and Johnson & Johnson.

But Craig Chambers, the managing director of Dibanisa Fund Managers, has warned that a price bubble appears to be developing in the global IT sector, which is led by Apple.

“Apple’s market capitalisation has skyrocketed far beyond the company’s actual economic impact. At R5.2 trillion, its market cap is larger than the GDP (gross domestic product) of Switzerland,” warns Chambers, who adds that financial, oil and gas, and telecoms companies in developed markets are attractively priced from a historical perspective.

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