Fund managers weigh in on offshore, onshore debate
The percentage of a living annuity portfolio that should be invested offshore has plagued local annuitants and their financial planners for years. It is arguably one of the most important decisions to weigh up as your clients move from a regulation 28 constrained pre-retirement environment, where exposures to asset classes are strictly capped, to a living annuity world where pretty much anything goes.
The global versus local paradigm
The recent 2024 INN8 Invest Summit added fuel to the debate by considering the global versus local paradigm specifically for the equity asset class. The panel discussion, moderated by Andrew Cormack, Head of IFA and Global Distribution at INN8, pitted representatives from two SA Equity focused fund managers against two global equity fund managers. To set the scene, Cormack asked whether long-suffering local investors could finally expect better returns from JSE-listed shares given the recent uptick in economic and political sentiment, and in light of the argument that local equities were attractively priced.
Chantelle Baptiste, Head of Equity Research at Fairtree, warned against a blanket assessment of the local investment market. “We do see opportunity locally; but the South Africa Inc component is just one opportunity set,” she said. She pointed out that the JSE included companies that were heavily influenced by global macro factors alongside a smaller sub-set of firms with significant exposure to the domestic economy. The latter include banks, industrial and property groups, and retailers. According to Baptiste, many of these shares are cheap; but with good reason, most notably the country’s lacklustre GDP growth outlook.
These be stock pickers, not politicians…
“We are not in the business of politics; we focus on bottom up stock picking and from that perspective, local equity valuations are extremely cheap,” said Abdul Davids, Head of Research at Camissa Asset Management. He said there were a number of unloved small- and mid-cap shares trading at single-digit price-to-earnings multiples (PEs). Concerns over liquidity make it difficult for large funds to invest in these shares. “The larger managers, be they global or local, cannot play in that small- and mid-cap area; this allows smaller managers to build long-lasting portfolios, take a long-term view, and wait for earnings and growth to come through,” Davids said.
Even if you position correctly, it is impossible for South Africa only investors to gain exposure to important macro investment themes. Derinia Mathura, a fund manager at Melville Douglas, singled out the innovation side of healthcare and technology to illustrate the point. “The level of innovation that helps drive new revenue streams for [healthcare and technology] companies are just not present in the South African context,” she said. Local only investors can get macro exposure to healthcare through the hospital groups or drug distribution through Aspen; but will miss out the innovation on offer from a Boston Scientific, or dozens of similar global firms.
It makes sense to take a step back and debate offshore versus onshore at a more holistic level. According to Alastair Baker, Portfolio Manager at Sarasin & Partners, global equities are near the top of the returns tables over multiple time frames. Over 15-years, global equities have outperformed domestic equities by around 4% per annum. “You need to do a lot of work in your domestic market to close that gap,” he said. Unfortunately, if you stay local you have no chance of riding the handful of MSCI World companies that drive global equity returns.
Two motivations for going global
Maximising your opportunity set was the first of two motivations the portfolio manager offered for investing offshore; the second was diversification. “Over a 10-15 year time frame you need the diversification and wider opportunity set which global gives you,” Baker said, adding a warning about excess exposure to a single country market such as China, where government decision making heavily influences financial market outcomes. PS, Baker also reminded the audience of mostly independent financial advisers (IFAs) that there was always a need for domestic asset class exposure to achieve asset-liability matching within clients’ portfolios.
The panellists weighed in along similar lines, conceding that the debate was not as simple as saying either or. “We sometimes ask the wrong question; and we frame it in such a binary way as being either 100% local or 100% offshore,” Baptiste said. She said her role was to provide a best of breed local equity product for those investors seeking local exposures. As for IFAs, your role is more complicated. Each of your clients are at different life stages with unique asset and liability bases and financial objectives, and it is your job to optimise their portfolio asset allocations to accommodate this.
How much is enough?
Cormack challenged the panellists on how much of a clients living annuity should be invested offshore, given that the 45% offshore limit enforced by regulation 28 no longer applied. Mathura suggested going ‘all in’ offshore despite arguments that many developed market equities were expensive. “Valuation is one just on component we consider when seeking out quality compounders that can deliver a compound return sustainably over time,” she said. Companies have to offer acceptable risk; attractive growth profiles; economic moats; and reasonable valuations.
Even if you decided to go 100% offshore, countries like China might require a more nuanced approach. “We have decreased our exposure to China; and if we want to access the consumer theme, we prefer to do it through multinationals because that [reduces] some of the regulatory risks,” Mathura said. She argued that the quantum and timing of Chinese regulation was almost impossible to predict, making mention of the severe price movements in Tencent following government decisions to delay video game release dates and limit gaming time, among other interferences.
The South African fund managers were reasonably pragmatic. “China is crucial for the world; you cannot shut it off … and you cannot ignore it,” Baptiste said. Love or hate their policy, the Chinese economy is a USD18 trillion behemoth growing at 4% annually. The panellists contended that China represented the buying opportunity of a lifetime right now. As such, Fairtree has increased its exposure to China via Naspers and Prosus, which give exposure to Tencent. Tencent offers a 10 times forward PE; 4% dividend yield; and is on offer at a steep discount through Naspers. PS, this does not constitute financial advice.
You cannot discount a resource recovery
Davids suggested that concerns over China’s regulatory environment were already baked into valuations. He sees potential to gain exposure to Chinese growth through increased exposure to local resources shares. “The miners are presenting opportunity; China is the biggest consumer of a lot of minerals ... and that demand is continuing,” he said. “This presents an opportunity for emerging markets like South Africa to continue to export minerals”. The caveat, you have to get your timing right before taking big stakes in cyclical resources shares.
Baker took the extreme view that you can invest globally and avoid China. “You cannot avoid China in your analysis; but you can try and avoid it in your exposure,” he said. The portfolio manager also shared some insights into balancing local and offshore exposures, arguing out a portfolio of SA equities would likely be skewed towards a value investing style. In this context, you do not want to go out and buy a global value manager because that would be doubling up. A better approach would be to offset SA value with global growth and / or quality.
The right blend, strategy for your clients
After the concluding remarks, it was left to Cormack to fire the final salvo: “Global versus local is not an either or question; it is a question of how you blend them together and find the right strategies to meet the clients’ demands,” he concluded.
Writer’s thoughts:
Optimism over South Africa’s GNU and ongoing load-shedding reductions is understandable; but so is the draw of the 4% per annum long-term outperformance of global over local equities. Is today’s optimism enough for you to increase living annuity exposures to South Africa? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.
