How is your fund manager investing offshore?

Those who regularly follow their unit trust fund’s portfolio holdings would have noticed the significant exposure to offshore assets in many South African funds. This has been especially evident in Regulation 28 compliant asset allocation funds where many

In the domestic general equity category we found that many fund managers have chosen to limit their funds to domestic equities only. Following a screening process on active single-manager funds with assets over R300 million we identified 10 that had some foreign exposure. Examples of these include PSG, Stanlib and Prudential. The Nedgroup Rainmaker, Coronation Equity and Foord Equity are examples of funds that do not utilise offshore. They are SA specialist funds and will invest in companies listed in South Africa only including dual listed companies such as British American Tobacco and BHP Billiton. A key way in which funds with these strategies obtain some form of foreign exposure is through large multi-nationals who are listed on the JSE and through South African companies which obtain much of their revenue abroad. These companies are commonly referred to as Rand-hedged stocks as a large portion of their revenue is received in foreign currencies, limiting the company’s risk to fluctuations in exchange rates. These companies are also not as influenced by local economic trends due to their global reach.

Fund managers who have chosen to invest offshore do so in different ways. This ranges from investing directly in shares listed on foreign stock exchanges, investing a portion into foreign unit trusts or simply obtaining exposure to a market via exchange traded funds (ETFs). The exchanges invested in currently tend to be in developed markets as they have reduced levels of risk due to greater transparency. In addition, companies listed on the major exchanges are typically well researched giving managers access to broker research and an understanding of the companies in question. While strategies tend to differ between the types of shares selected a key criterion when including it into the fund is that the investment managers have a complete understanding of the company being held.

Although we have noticed that some local general equity funds have increased their foreign exposure, the largest shift has been observed in asset allocation funds. Reasons for this include favourable valuations on foreign assets, limited opportunities in local equities and the diversification benefits of the foreign holding and currency. Another possible reason for the larger foreign allocation to asset allocation funds relative to domestic equity funds is their respective fund benchmarks. Asset allocation funds have various types of benchmarks. Some utilise a composite of (local and foreign or only local) equity, bonds and cash indices, some use a peer group average, while others – especially in the Target and Absolute Real Return category – are benchmarked relative to inflation. Domestic equity funds however are usually benchmarked to the All Share index, SWIX index or the peer group average.

So down to the real question, how is your fund manager investing offshore? The most popular method for most South African asset managers is to invest in existing foreign unit trust funds which are either managed in-house or by an offshore asset manager with a very similar investment approach to their own.

A few examples include the following:

Allan Gray has utilised the full foreign component in their Stable and Balanced funds and have done so in a similar way. The foreign component of these funds is managed by Allan Gray’s offshore arm, Orbis. They are based in Bermuda but have teams in many other regions worldwide. Allan Gray allocates the foreign component to one of the existing Orbis funds depending on the fund mandate and type of exposure required. The foreign funds the Balanced and Stable would use include the Orbis Global Equity and Orbis Optimal funds. The way in which Orbis manages money is almost identical to Allan Gray so investors who favour the Allan Gray investing style have the comfort in knowing that there is consistency in the way the offshore portion is managed.

Investec’s Opportunity fund also uses its own offshore manager to obtain foreign exposure. This fund invests directly into the Investec Global Opportunity fund which is also managed by the local manager – Clyde Rossouw. In this way the manager has a simple way of gaining foreign exposure and direct control over liquidity. He also has in-depth knowledge of the underlying foreign holdings and hence is able to clearly understand the risk inherent in the foreign unit trust at counter level. This approach is similar for the Foord Balanced and Coronation Balanced Plus funds. The Foord fund feeds directly into their Foord International Trust fund while the Coronation Balanced Plus fund feeds into the Coronation Emerging Markets and Global Opportunities Equity funds. Both are managed by the respective in-house asset management teams.

PSG is one of the few asset managers who invest directly in offshore shares within their asset allocation funds and equity fund. They evaluate these shares in the same way as local shares. In addition to these they – as well as most other funds – include local companies with a global reach.

Lastly, SIM’s Balanced fund utilises a combination of these strategies by utilising foreign unit trusts, direct holdings and ETFs. The unit trusts selected are typically the SIM Global Best Ideas fund – managed by Kokkie Kooyman – and a range of unit trusts managed by Sanlam International Investment Partners (SIIP). Direct shares are selected on the manager having a full understanding of the company while ETFs are included when they want exposure to a particular foreign asset class.

Foreign exposure can be viewed as another asset class that can add significant diversification benefits. It can however introduce additional risk to a unit trust portfolio. It is therefore imperative that you understand the way in which your manager chooses to invest offshore and the degree to which this is done. Due to the size of many of these exposures (up to 25% in some cases) investors need to determine whether they are comfortable with the way foreign investment is done as this will surely impact the performance profile of their fund going forward.