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Current economic conditions have challenged the business environment in South Africa. The entry of Walmart into the market has intensified competition, placing added pressure on already thin average profit margins. Increased competition translates into more power and choice for consumers and with social media at a peak, consumers are becoming more vocal as they compare products, prices and customer experiences online in real time. Nowadays, more and more consumers are asking questions about the...  Full story

Seed Weekly - Targeting Returns

In this third article on targeting returns I am going to focus on a very topical subject, not only now but one that has been on the agenda for the entire 25 years I have been in the investment industry.

There are many views, themes, strategies and methodologies for evaluating the topic and I am not going to try and pitch one over the other but rather focus on a few big picture ideas.

The question has been and is, should a South African (asset resident) long term investor invest internationally to get better returns from their portfolio? If the answer is yes the second question is if you were unrestricted what percentage of your investable assets should or would you invest outside of South Africa?

For most South African citizens their biggest assets are all in South Africa namely, their businesses, pension funds and homes. Apart from pension funds that can have up 25% offshore pretty much everything is in South Africa.

Below is a chart that illustrates the various sizes of the listed equity markets. You will note that Africa makes up about 1.5% and of this South Africa less than 1%.

Source: The Money Project 2 August 2016

It does seem quite obvious that South African investment managers would ideally like the opportunity to invest in the other 99% of the global listed equity economy.

I have read for many years that it is much better to have a decent portion of your investment offshore and remember the early days of exchange control when R250k once off was officially allowed offshore, this slowly crept up and up until recently when it was announced that an individual can take up to R10/11m p.a. offshore. This effectively now removes all exchange control for 99% of the population.

Without making the ever present political call, let’s investigate the historical facts based on an investment made in Rands. I have chosen several well-known indexes to represent various equity investment options to illustrate the point. The ALSI for the SA market, the S&P 500 for the broader US market, the FTSE 100 for the UK, the MSCI All World for the broad global market and MSCI Emerging Markets Index. I have also used rolling five year returns to reduce the volatility and to illustrate a more strategic allocation by an investor. Just a reminder the returns p.a. are in Rands.

Source: ZephyrStyleAdvisor 3 August 2016

So with perfect hindsight history shows us that choosing to go offshore was not straightforward and in fact you would have been a net loser until about seven to five years ago. Also the out performance of the local market was extreme for the better part of this reporting period.
If you got your timing right to switch offshore immediately after great financial recession of 2008/9 then you have done very well over rolling 5 year periods since by overweighting to the S&P 500, MSCI AW and the FTSE 100 vs. the ALSI.
Granted I have only used one asset class to explore the question but the same is largely true of most other asset classes. What is very apparent to me is that you need to tactically time your diversification to benefit fully from diversification.
What is encouraging is that at Seed we have analysed our past performances and have consistently added value through our tactical asset allocation decisions.

Kind regards,

Robert Foster

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Thu, 04 Aug 2016

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