Expected rand depreciation means SA investors should diversify now into offshore equity markets

With the currently strong Rand expected to depreciate, South African investors should seriously revisit offshore diversification of their portfolios says Kari van Rensburg, – Director at Deutsche Securities.

“Many products, such as certain JSE-listed Exchange Traded Funds (ETFs), offer local investors diversification to international markets - and they offer protection against Rand depreciation. Weakening of the Rand against the base currencies of the indices that these ETFs track will enhance investment returns. Deutsche’s current house view is that the Rand will depreciate to a level of 8.50 by December 2011 against the US Dollar, adding to the investment case of looking to invest in or increase offshore investments.”

Van Rensburg also highlights the advantages that locally listed ETFs with offshore exposure give to the South African investor. “Those wanting to diversify directly into individual offshore listed shares would have to make use of the R4 million offshore investment allowance. They would also come up against the high costs of currency spreads, offshore brokers and custodians. The process can be an administrative challenge and may carry offshore tax consequences.”

To avoid these difficulties, Van Rensburg points out that local investors could buy JSE single stock futures on several foreign shares. “However, one must be completely knowledgeable on the complex derivatives market before doing this.”

Van Rensburg recommends that a more convenient alternative to direct offshore investing is to make use of Rand-denominated products which give the investor offshore equity exposure. “A convenient method is through JSE-listed Rand–denominated ETFs). These passively managed index tracking funds give market performance returns and permit an investor to cost-effectively purchase exposure to world class shares in a single transaction. They do not require Exchange Control approval.”

Van Rensburg also cites core ETF advantages that apply to all these funds, whether they offer local or offshore exposures. “A single investor would struggle to pick a basket of individual shares that would outperform the index. Very few professional active fund managers can do this on a consistent basis. Standard and Poor’s Indices Versus active Funds (SPIVA) Scorecard as at 30 Dec 09 indicates that only 10.45% of actively managed funds in the Emerging Market category outperformed the comparative index over 5 years (16% over 3 years). The Global Funds category looked a little better, with 40% of actively managed funds out-performing the comparative index (46% over 3 years). These long term performance numbers make a strong case for ETFs. In South Africa, the SATRIX 40 ETF outperformed 89% of the active managers in the same unit trust sector over a 5 year term to 31 December 2009.”

She cautions investors that the costs of the Rand-denominated ETFs that give offshore exposure would be higher than those which give mainly domestic market exposure. “Costs like custody, index sponsor costs and other administration fees are incurred in offshore currency making it more expensive than the domestic tracking equivalents. However, the Rand-denominated ETFs that give foreign exposure are clearly more cost effective than the unlisted unit trusts that give similar offshore investing opportunities.”