Offshore remains best return target while local risks should be managed

Investors should look for returns in offshore markets despite heightened risks there, and let fund managers position the investments they need to hold in local markets to withstand any scenario that may unfold, asset managers told the Meet the Managers conference held in Cape Town and Johannesburg recently.

If you invested in a diversified portfolio of global equities like that represented by the MSCI All Countries World Index, you would have earned 14.7 percent a year on average over the past 10 years in rands, Sumesh Chetty, portfolio manager in the quality team at Ninety One, told the conference.  

Investing in a range of local shares like that represented by the JSE All Share index would have delivered only 6.5 percent a year on average over the same period, he said.

Chetty said six percentage points of your rand return from the MSCI ACWI would have been from the rand depreciating against other major currencies.

The South African equity return was made of dividends – accounting for three to four percentage points and only two percentage points was a return on capital, Chetty said.

The JSE All Share index has shown little growth in dollars since 1995 and has been absolutely flat in dollars since 2011. This means we are becoming poorer in dollar terms and it makes it more difficult for you to travel overseas or buy things in currencies other than rands, Chetty said.

Even more concerning is the fact that local companies are making profits of around 14 percent by cutting jobs – this is not sustainable, he said.

Look broader

As South Africans we have to keep about 55 percent of our retirement savings in rands, but beyond this we should remember that 99% of investment opportunities are outside of the country, Chetty said. The market capitalisation of shares on the JSE represents just one percent of global market capitalisation, he said.

Anchor Capital is of the view that once your income requirements in local currency are met, you should have 70 to 80 percent of your investments offshore, Peter Armitage, the chief executive of Anchor Capital, said.

Anchor’s five-year forecast is for a 10% a year return on local equities, while global equities are expected to return seven to eight percent a year, Armitage says.

Ninety One also expects to earn the best returns from the global equities in its flagship multi-asset fund, the Ninety One Opportunity Fund – not necessarily global equities represented in global indices like the MSCI All World Country Index as there are many risks in global financial markets.

Ninety One expects to earn between nine and 15 percent a year from its selected global equities over the next five years, Chetty said.

Managing local assets

Global companies that are listed on the JSE are expected to deliver between seven and 14 percent a year over the next five years, Chetty said.

The Ninety One Opportunity Fund has 24 percent of the fund in South African equities and almost two-thirds of this is in global companies listed on the JSE. These companies act as a hedge against a falling rand because their earnings are in other currencies.

Rezco Asset Management’s popular multi-asset high equity fund,  the Rezco Value Trend Fund, has an even more extreme position with 23 percent of its 26 percent allocation to South African equities in global companies listed on the JSE.

Rob Spanjaard, the chief executive of Rezco Asset Management, told the conference that even in funds that are obliged to invest assets in South African markets in these times of uncertainty, it is possible to do research, plan scenarios and position your portfolio to make the best of a range of uncertain outcomes.

You should not be panicking and falling for fake news because that is when you can make bad decisions such as moving all your investments offshore, or into cash or Bitcoin, Spanjaard said.

Referring to the uncertainty around the ANC’s negotiations to form a government of national unity, Spanjaard said assets managers are not Smart Alecs who know what will happen.

Instead, managers have to sit down calmly and analyse the facts and past experience to consider which investments would fare best under different possible outcomes, he said.

Hedging your bets

Spanjaard said Rezco has chosen to position the Value Trend Fund for the best returns under any outcome and as the facts emerge it will use its tactical asset allocation skills to change its position to take advantage of the situation, he said.

Some fund managers and investors expected the shares of companies exposed to the South African economy to benefit from a pro-business coalition between the ANC and the Democratic Alliance.

Spanjaard said investors who did this chose to ignore what was predicted in the polls.

Armitage said given how low South African share prices are relative to earnings (valuations), a benign election outcome with an ANC-Democratic Alliance coalition could have unlocked some nice opportunities leading to a potential 18 percent return.

However, this alliance looks unlikely to happen and instead President Cyril Ramaphosa’s decision to include people from a number of parties in a government of national unity, is likely to lead to constant political uncertainty going forward, Armitage said.

This is not the outcome we were looking for but not the worst, he said.

Armitage said South African bonds are offering a 10 to 11 percent a year return, but there are risks. For every R100 South Africa collects in revenue, it is paying R21 away in interest on debt before any capital repayments, Armitage said.

It will be important to watch for changes in government that could result in fiscal discipline slipping and the interest payments going over R25 in every R100, he said. This would expose investors to the risk of the government being unable to collect sufficient revenue and it defaulting on its debt, he said.