Offshore diversification more than a currency bet – Deutsche

South African investors putting money offshore are not just nervous about the rand’s prospects. They are also positive about the recovery prospects of some international jurisdictions and wish to diversify accordingly.

The perspective comes from Deutsche Securities, the Sandton-based exchange traded funds company that offers a rand denominated route to international investment diversification through a suite of locally regulated funds which mirror the performance of some of the world’s biggest equity markets.

Wehmeyer Ferreira at Deutsche Securities says “tactical betting against the rand” is not the major driver of the current upsurge in investor commitments to offshore markets.

“A basket of factors is at work,” he says. “Prudence is a big driver. Many investors, including the professionals, are recalibrating allocations into international markets as previous offshore commitments were probably too low.”

Factors include:

• Eagerness to buy into a global economic recovery
• Improved investor education on issues like portfolio diversification
• Interest in developed markets that show signs of growth after climbing out of recession; specifically the USA and Europe
• Growing awareness that South Africa is seen internationally as an emerging market and diversification out of other emerging markets into mature jurisdictions is prudent
• Concern about high price-earnings ratios on the JSE and a possible correction – P/Es are around 18 times versus a long-term JSE mean closer to 14

Deutsche Bank’s range of db x-trackers is aligned with indices in the UK, USA, Europe and Japan as well as the MSCI World Index. This allows the exchange traded funds marketer to monitor the relative popularity of various developed markets among South African investors while gauging currency factors.

Ferreira points out that its US-linked fund has delivered 23.86%% return over the last year ending May 2014. Only 4.76% of this was attributable to rand weakness against the US dollar. Further, Deutsche’s EU-based product has delivered a one-year return of 28.72%, with currency movements accounting for 9.88%.

The strength of pro-offshore sentiment is demonstrated by substantial inflows into the firm’s US db x-tracker fund. Assets under management in this fund rose 327.55% to R1.33 billion during the course of 2013 and a further 26.82% in 2014 as at the end of May, seeing the fund reach R 1.69 billion under management.

“The trend to offshore investment is pronounced and has been evident for at least a year,” notes Ferreira. “Admittedly, the rand has been a big loser among emerging market currencies versus stronger currencies like the pound, dollar, euro and yen. But it is too simplistic to ascribe offshore diversification to a knee-jerk reaction by the investing public to prolonged rand weakness.

“Inflows into our range not only come from self-directed investors – individuals who develop a portfolio without professional advice. We also see big commitments from private client companies, wealth managers and stockbrokers, highly sophisticated investors who manage the money of some extremely astute clients.

“We see the trend continuing – not out of rand fear, but out of investor prudence.”