Excon relaxation – extra homework now necessary

Trevor Manuel’s budget has finally given South African investors, via the investment industry, a realistic chance of offshore diversification. From a prudency perspective, investors the world over are expected to invest a portion of their portfolio in countries outside of the one in which they live. By relaxing the grip of foreign exchange controls on pension funds and unit trusts to 20% and 30% respectively, South African fund managers and therefore investors now have the opportunity to properly pursue global diversification.

Whilst from the investor’s perspective this is both exciting and adds additional security to long-term savings, it also comes with particular risks that need to be examined. South African investors have been notoriously bad with regards to the timing of their offshore diversification, tending generally to make these decisions based on emotion rather than fundamental reason. Once again, with current sentiment less confident than a year ago, the temptation may be there for investors to rush overseas.

While most fund managers will probably work their way towards the new limits, it is important that offshore investment coincides with opportunity rather than merely leaving the country en masse. And this is where it gets critical for investors. South Africans are quick to forget that while we have problems of our own, developed markets economically are in many cases suffering worse. They will have to rely on the astute judgement of those managing their money to choose the most appropriate time and the most appropriate investment.

Which is where it gets interesting. Most South African fund managers have some form of access to an offshore manager. Some have taken time to build their own operations offshore and have been very successful in this regard. Others less so. It is vital that South African investors ask the hard questions and do proper due diligence on their offshore fund manager. A significant offshore brand name does not necessarily equate to decent investment performance.

When it was only 15% of your money being managed offshore, it was less relevant who the manager was. Now, it will become a significant portion of your portfolio and you cannot afford to be uninformed.

The South African financial authorities recently went through a process whereby local financial institutions were forced to get to know their clients better in order to guard against dirty money and the laundering thereof (referred to as KYC, Know your client). Investors now need to go through a similar exercise to get to know their fund manager in order to ensure that their retirement savings are protected.

Questions investors should ask include:

• Where is the international fund manager based?
• What is the size of their asset management operation? Is it purely a South African operation or a proper offshore business?
• How compelling are the performance track records of the products that they are offering you?
• Are they relying purely on flows from South African investors or do they compete effectively with global competitors?
• How well do they understand the South African investor and their requirements for offshore investment?

Although more homework is involved, the potential upside and diversification benefits are an enormous opportunity, which has for far too long been denied South African investors.

Thank you Trevor!