Offshore-ho, oh sons and daughters

Image courtesy stock.xchnge (PocketAces)

In one of my last columns of 2013 I suggested the idea of buying gifts of unit trusts or ETF’s for your children, grandchildren or godchildren instead of “wêreld-se-goed” which are probably discarded in a corner by now.

I must confess, my children were not all that impressed with the idea, but one day they will see the light.

Celma, a reader, wondered whether it wouldn’t be a good idea to invest in an offshore unit trust or ETF.

It makes sense – eight of the top 10 unit trusts in 2013 were offshore focused. And the returns were nothing short of astonishing.

But there are many factors that investors need to bear in mind before they venture offshore.

The most obvious of these says Terence Craig, CIO at Element Investment Managers, is the double whammy gained from the surge in global equity markets coupled with the rand’s loss in value. Global markets rose by 30% while the rand fell 22% in a year, enhancing the returns.

The MSCI North America index grew 30.38% in dollar terms; in rands it clocked up an eye-watering 61.8% profit. The MSCI World index grew 27.48% in dollars, in rands 58.19%. MSCI Europe saw respective growth of 26.08% and 56.47%; MSCI Japan 26.84% and 56.20%; MSCI Asia (exJapan) 13.15% and 28%.

In all cases, the rand differential more than doubled the return.

Around New Year’s, the rand dropped 22.2% against the dollar, 26.6% against the pound, 29.4% against the euro and just 2.4% against the yen.

Only those who believe in the Easter Bunny will expect a repeat of these returns, but does this mean newcomers have missed

the boat?

To make an assessment of whether now is still a good time to invest offshore one has to consider the fundamentals of the South African currency, global equity fundamentals and global economic fundamentals, says Thomas Schlebusch, CIO at Sanlam International Investments.

Will the rand continue its dive, or could those phenomenal returns be wiped out as it increases in value?

Although the rand is now undervalued, further weakening will depend on both internal and external factors. Internally much depends on how finance minister Pravin Gordhan addresses SA’s twin deficits and economic weakness. Politics will also influence volatility. SA is one of the five emerging market countries that Deutsche Bank says “could be a political landmine”. Thus the rand could be affected by volatility and populist rhetoric ahead of the coming election.

He adds that externally, further recovery in developed markets as well as tapering and concerns around growth and governance issues in emerging markets, could see emerging market currencies weaken further, albeit at a slower pace.

Valuation multiples in developed markets are still below their long-term averages. On a PE basis some regions are starting to look a bit stretched, says Schlebusch. Europe could still see some positive surprise on the back of credit growth, while “Abenomics” could fuel further growth in Japan, he says.

Also, watch out for the US fiscal debt ceiling in February as well as mid-term elections.

To go offshore or not?

If you are cautious and have a three to five year investment horizon then it’s not too late to invest. Craig says if you invest offshore don’t switch out of another unit trust investment to do so. Investors who chop and change generally lose.

Hansen advises making monthly investments over a lump sum investment. If there is a sharp recovery in the Rand or a pull back in offshore markets, then add to the investment.

As for which fund to choose, well that’s up to you.

today in print