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Good morning

05 November 2004 Angelo Coppola

This revival of interest – the first hint of the reversal of a two-year trend – has been identified by STANLIB.

It is well placed to judge institutional and retail investment sentiment after organizing an international conference on offshore opportunities which toured all major centres.

Paul Hansen, Director, Retail Investing at STANLIB, revealed this week (early October) that early indications are “coming through that increased allocations are being earmarked for international markets”.

However, there are key differences from the rush into offshore markets of the late ‘90s when US was the targeted market, the US dollar the favoured currency and Dow Jones-listed equities the preferred asset class.

According to Hansen, a much more deliberate approach is now evident. The preference this time around is for...

* Selected opportunities and prudent diversification, either through direct offshore exposure or via asset-swap vehicles. Over-commitment to equities is studiously avoided, whether in the USA or other offshore destinations.

* Some exposure to Japan and South East Asia, while going underweight on the USA.

* Euro and sterling as the cash options because of their high yields; though recent resilience by the US dollar suggests it could be unwise to totally ignore the greenback.

Hansen believes various factors are prompting a review of offshore possibilities.

Institutional investors, for instance, are sensitive to ‘best practice’ among their international peers.

Hansen explains: “Many SA retirement funds fail to make full use of the official dispensation enabling them to place up to 15% of total assets offshore. However, the UK retirement fund average is a 50% placement offshore.

“Britain is a much bigger market than SA. If their institutions think 50% is not excessive, then perhaps some local funds could usefully review their strategy. At least one fund manager at the conference immediately signaled his eagerness to increase offshore allocations.”

Among retail investors a reappraisal seems to have been prompted by the likelihood of low local interest rates for some time yet.

“The August cut in repro and prime rates was totally unexpected,” notes Hansen. “It came as a reminder just how quickly the investment landscape can change in a small market and a developing economy.

In a little over a week after the cut, the Rand had weakened against the dollar by about 10%.

“This spotlighted our status as a small market and perhaps gave a hint that bigger exposure to bigger markets can’t be a bad idea. After all, SA accounts for only ½% of global capital markets.”

In addition, some offshore timing factors appear broadly favourable.

International markets have tended downwards for the last eight months, but the fall has been limited to about 5%. Current investor concerns include the danger of terror attacks on the run-in to the US presidential elections, continuing Mid-East tension and high oil prices.

However, these factors appear to be priced into the markets, which could be a little under-valued at present – suggesting a buying opportunity at current levels.

Hansen points out: “Local interest is again stirring in offshore opportunities, but the days when an SA investor would ‘stick it all on the Dow’ are long gone.

“The focus is on selected opportunities and strategic diversification rather than one big bet.”

Stanlib’s recommended asset allocation for a conservative investor is currently 20% in equities, 20% in bonds, 10% in alternatives and the balance of 50% in money markets (with, say, one third in each of sterling, the euro and the dollar).

A balanced investor would have 45% in equities and 25% in money markets.

Health warning: Each investor has his or her own circumstances. This article shouldn't be construed as advice.

Quick Polls

QUESTION

As National Treasury mulls a two-bucket retirement system, mandatory contributions and preservation, regulation 28 is being amended to allow up to 40% of retirement fund assets to be invested in SA-based infrastructure… Which of the following retirement fund ‘tweaks’ would you consider most beneficial to your clients?

ANSWER

Give fund members emergency access to retirement savings
Let fund members invest 40% in infrastructure
Let fund members invest 40% offshore
Mandatory preservation when resigning from a fund
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