SA investors doing the right thing for wrong reasons – db X-trackers
Wehmeyer Ferreira, head of db X-trackers in South Africa.
South African investors committing to offshore diversification are doing the right thing, but sometimes for the wrong reasons, according to db X-trackers, an increasingly popular method of securing exposure to international equity markets.
The rand’s persistent weakness against the US dollar, the euro, yen and British pounds prompts many local saver-investors to move a portion of their portfolio offshore, but diversification is much more than a simplistic currency play, says Wehmeyer Ferreira, head of db X-trackers in South Africa.
He explains: “An offshore strategy should not be a knee-jerk reaction to rand weakness. Admittedly, when the rand weakens the offshore investor usually achieves enhanced returns once the gains have been translated back into rands, but the benefits are more wide-ranging than that.
“No matter what’s happening in currency markets, all serious-minded South African investors should have some international exposure. South Africa is a relatively small market. We are also classed as an Emerging Market – which means we are exposed to high levels of volatility while remaining vulnerable to shifts in the commodity cycle.
“For all these reasons, it is prudent to spread risk by achieving better portfolio balance through sensible allocations into developed markets.”
Ferreira says a growing number of South Africans – especially those guided by qualified advisers – appreciate the benefits of portfolio diversification. However, many are still motivated by the quest for short-term gains on the back of rand vulnerability.
He notes: “Those making a short-term currency play might be doing the right thing for the wrong reasons … but only if they maintain a certain portion of their holdings offshore, even when the rand strengthens.
“Unfortunately, there is a danger they will exit offshore markets on a rand uptick, turning their backs on the strategic benefits of international diversification.
“Accurate market timing is almost impossible to achieve so those making a short-term switch run the risk of securing sub-optimal gains while compounding costs.”
The db X-trackers range of exchange traded funds (ETFs) covers developed markets in the USA, Europe, Japan and Britain with the option of further diversification via an ETF that mirrors global equity market performance.
ETFs deliver market-related returns and do so at db X-trackers for management fees of less than 1%. ETFs also remove performance risk as the investor ‘buys the market’ rather than buying into the expectation that a particular active fund manager can achieve better than average returns.
Says Ferreira: “There are many good reasons for selecting an ETF like db X-trackers as the preferred route to offshore equity markets. But while they’re at it, local investors should ask their advisers for a thorough briefing on the value of offshore diversification.
“Once they understand this type of strategy they should stick with it. That way the benefits are locked in for the long term.”
