IFA expertise crucial for those going offshore – db x-trackers

Wehmeyer Ferreira, head of db X-trackers in South Africa.

There is not one simple answer to all the questions surrounding offshore investment, which makes input from independent financial advisers crucial to the development of a sound diversification strategy for retail investors.

The view comes from Wehmeyer Ferreira, head of db X-trackers in South Africa, a range of exchange traded funds (ETFs) offering exposure to several developed markets and an increasingly popular avenue for international diversification.

Says Ferreira: “Offshore allocation is an area in which professional advisors can add significant value as individual needs, investment objectives and horizons shape the decision.

“Qualified professionals who are close to the client are best placed to design appropriate solutions.”

Periods of rand weakness admittedly prompt growing retail investor interest in offshore markets, but currency factors alone should not determine portfolio composition, according to the db X-trackers team.

“We do not attempt to time the currency markets and advocate that any time is a good time for offshore diversification,” says Ferreira, “because it is exceptionally difficult and risky to call currency markets or the direction of the rand. Portfolio balance and prudent diversification across geographies and asset classes should be the principal motivator.

“Tying up all assets in a market like South Africa creates an unacceptably high concentration of risk. Better portfolio balance and improved risk-adjusted returns can be achieved through an element of offshore diversification.”

Risk management is not the only issue. Exposure to a wider opportunity set can also add significant return potential to a portfolio, especially when the investment destination is a developed market.

Ferreira explains: “Several sectors are either under represented or not represented at all on the JSE – for instance, biotech, pharma, energy and technology counters.”

The 25% offshore limit for institutions has little relevance for most retail investors as they can commit 100% of their savings to international destinations, if they wish. However, the 25% figure can be seen as official recognition that a significant portion of a portfolio can prudently go offshore.

One possible obstacle to offshore investing is the perceived complexity of these markets and mind-numbing choice. However, JSE-listed securities like db X-trackers offer a ready-made solution to both retail investors and their advisors.

“Investor concerns are understandable,” says Ferreira.

“Performance risk is ever-present. The client also has to choose between asset classes, equity sectors, countries and currencies. This can be daunting. Selecting offshore asset managers can also prove to be challenging as there are more factors to consider than simply past performance.”

This explains the growing focus on uncomplicated, transparent solutions.

Ferreira points out: “db X-trackers are listed locally and denominated in rand. Performance risk is eradicated as an ETF tracks an index like the FTSE 100 or the MSCI USA Index, as opposed to active management and the use of stock picking, which may lead to underperformance.

“Transparency, liquidity and rand-denomination also assist advisors in keeping a close handle on their client’s investments.”

With the db X-tracker ETF range, there is no need for an offshore bank account, though some investors, subject to certain minimums, have the choice to elect to receive distributions in local currencies into offshore accounts.

A key attraction of this ETF range is its focus on developed markets such as the USA, UK, Europe and Japan.

Ferreira notes: “South Africa is an Emerging Market, subject to changing sentiment around EM risk, while the rand is regarded as a volatile commodity currency.

“Developed markets are therefore a sensible diversification option. But the final decision rests with the client … hopefully in consultation with an financial advisor.”