Dont let previous mistakes stop you from investing

DESPITE global markets performing at 37% over the last year in rand terms, South African investors are still shying away from investing offshore, says Sunel Veldtman director at BJM Private Client Services.

Veldtman warns that investors who spurn offshore opportunities are increasing their risk profile not only because they have exposure only to an emerging economy, but also by increasing their vulnerability to inflation. "One of the most important reasons to invest offshore is that over time the rand depreciates in line with inflation. By investing in offshore assets, South Africans are able to provide a natural protection against inflation," says Veldtman.

Veldtman says while the more sophisticated investor has maintained offshore exposure as part of a well diversified investment strategy, the majority of investors are still suffering from the shock of the losses incurred at the beginning of the decade. Investors fingers were badly burnt when the rand strengthened and offshore equities entered a bear market. Veldtman says that fear and poor financial advice meant that people did not invest according to their long term strategies. "Investors raced to invest offshore out of fear of the falling rand rather than part of a strategic investment plan".

To compound the problem, there was a general lack of investment alternatives for investors and many of the old products carried high charges which compounded the losses. "Many people were burnt by five year products, some of which were guaranteed in dollars and therefore matured at a loss". Veldtman says that these products were not transparent and carried very high charges. Due to the high demand and low availability of asset swap capacity, institutions were able to charge high fees for foreign investment capability combined with the high charges that go with guaranteed funds. In many cases these investments were linked to a specific index exposing investors to only one asset class and often only one region.

Today however there are far more options when it comes to offshore funds with globally diversified products available which offer investors a more diversified exposure and substantially lower fees.

"A solid global balanced fund is the best option for South African investors, especially if this is their first offshore investment" says Veldtman, who recommends that investors select a fund with a diversified portfolio which includes equities, bonds, property and hedge funds as well as cash. The fund should also be diversified across a range of currencies to minimize currency risk.

"Most South Africans dont have the knowledge to manage on individual fund basis, yet they will take bets on highly specialist funds like China or European small caps. Veldtman is concerned that this approach to investing will result in another set of burnt fingers which will further prevent investors from making prudent offshore investments.

Veldtman says that while it is understandable that investors who were so badly burnt question the rational of investing offshore when our local markets have performed so well, the situation is very different now. Firstly, although the rand has depreciated sharply this year it is off a strong base and is likely to remain in this range. "Considering the pressure on our current account deficit, it is unlikely the rand will strengthen back to the levels we saw last year".

With regards to the local markets the JSE no longer offers a better value proposition than the offshore markets. While BJM expects the global markets to perform in line with the JSE, further rand depreciation will be a sweetener to offshore performance.

Veldtman says however at the end of the day the decision to invest offshore should not be driven by fear but because global diversification is the best way of protecting ones investments against individual market risk and inflation. Research shows that a combination of local and offshore investments provides the best risk and return ratio. "Previous poor investment decisions should not be a reason to ignore investing offshore."