Question:
Is there an index tracker (like Satrix) for buying overseas shares?

I'd like to get exposure to overseas markets. I'm a very small investor (I'm planning to invest R500 per month, maybe more) so I can ignore the maximum overseas allowance by SARS.

Answer:
Investing money overseas is a very important part of one’s overall investment strategy. But before we look at the various investments and asset classes, it is important to take a step back and carefully consider the reasons for wanting to invest offshore. It is also important to have a clear understanding of the role that offshore investment plays in our broader investment strategy.

Offshore investment has always been a hotly-debated and emotional issue. The high levels of emotion around the volatility of the rand and the impact of the global credit crunch has given the offshore investment debate new life.

There are generally three main reasons why we choose to invest offshore. The first is to have a hedge against the depreciating currency. Let’s consider this more closely.

From April 1994 to March 2009, the average depreciation of the rand against the US dollar was 6.5 percent per year (the euro came in at 7.2 percent). This becomes more interesting when we consider that the level of risk (volatility) offshore investors endured for this return was about 15 percent per year (the euro came in at 14.3 percent). To contextualise this, this return is roughly equal to the after-tax return you would have enjoyed if you left your money in the local money market over the same period.

So if we purely wish to benefit from the depreciation of the rand, we need to decide if it is really worth living with this high level of risk and uncertainty for a return that we could just as easily get in cash at a much reduced level of risk.

The second reason is economic diversification. The rationale is that investors can favourably diversify risk if they invest in economies that behave differently to ours. This argument is correct as South Africa makes up about one percent of the global economy.

Investors should, however, ensure that they get appropriate market exposure based on the return they require to meet their financial objectives. They should also make sure that this exposure is actively managed. Diversification should happen across different economies, asset classes and currencies in order to be successful. Many investors that make the effort to take their money offshore often end up leaving it in cash or in a highly-specialised and localised strategy like UK property or Asian emerging companies. Without a sound reason for doing so, this leaves them in a position where they not only often suffer returns that fall short of their requirements, but also suffer a significant amount of volatility (risk) for no good reason.

It is also vital for investors to understand that other economies do not necessarily perform better than our own. From a return perspective, the grass is not always greener on the other side. In real (after-inflation) terms, the best performing global economies between 1900 and 2008 were Sweden, Australia and South Africa. The US and UK were fourth and sixth respectively. The main reason for this is that although resource-based economies like our own tend to have greater levels of volatility, patient investors are rewarded with superior returns over the long term.

The last popular argument for offshore investment is political risk. What if South Africa becomes the next Zimbabwe? Is this possible? Maybe. Is it likely? Well, that’s a different question altogether. When the rand fell to R13.72 to the US dollar in 2001, many investors (and investment managers) fled overseas to protect themselves from 'the devastation our economy was in for' at the time. But the rand’s subsequent return to more realistic levels left many retirees in a position where they needed to start working again. Therefore, those wanting to invest offshore due to political uncertainty should first ask themselves a very important question: Can I afford to be wrong?

The above by no means implies that offshore investments have no place in a well-balanced portfolio. Instead, the point is that before deciding to go offshore we should be certain that we are doing so for the right reasons and that our offshore portfolios are managed effectively to complement our local portfolios. This should be done in the context of what we are trying to achieve over the long term.

So now that we understand the arguments, how can we invest offshore? The following are our basic options:

1. Direct offshore investment. Adult South Africans (18 years or older) can invest up to R2-million directly overseas. Clearance by the South African Revenue Services and the Reserve Bank is required for this. Once your money is overseas, you can invest in whatever you want. You will, however, also pay individual currency conversion costs which tend to be significant. We should also be careful of the 'offshore product pushers' as this can often end up being a very risky and expensive way to go. Make sure that the institution has been registered with the Financial Services Board and try to avoid the 'exotic' stuff. Going with an established name with local offices should be a good start to making you sleep easier in this regard.

2. We can make use of the offshore investment capacity of South African investment companies. Most such companies (like investment houses and insurers) are allowed to invest a certain percentage of their clients’ assets offshore. Offshore unit trusts are an example of this. There are also one or two institutions out there that are using this capacity to allow you to build a direct offshore share portfolio, so buying an index could be possible. These options are often most convenient from a recurring investment perspective (as you are considering). With this class of investments anybody can invest, but you will always need to access your money in South Africa in rand terms if you should choose to withdraw it. Check out the costs first, though, as sometimes the price is tough to justify.

If we consider your specific question in light of the above, the most time and admin effective solution for the amount and nature of your investment would probably be the second option.

Although it is very difficult and certainly inappropriate for me to recommend specific indices to track, most South African global unit trusts tend to track the Morgan Stanley Capital International (MSCI) World Index as a benchmark for their returns. This is a stock market index of 1500 'world' stocks, which includes securities from 23 countries but excludes stocks from emerging economies — like South Africa. Unit trusts that closely reflect the composition of this index should give you a pretty balanced global equity exposure.

It will still not give you exposure to other global asset classes aside from shares, so it would remain responsible to rather look at a portfolio that would give you exposure to the blend of asset classes that best reflects your overall investment strategy.

As a parting thought, if you do take money offshore, make sure that you stick to your investment strategy, especially during periods of short-term emotional spikes. By managing our emotions and expectations in this way, keeping our eyes on the prize — our personal financial security — should hopefully be easier.

acsis Limited is an authorised financial services provider. The response to the question covers some of the issues in a general and factual manner and does not constitute advice. It is important to consult with a financial planner who, after an analysis of the individuals’ personal needs, goals and circumstances, will be able to provide comprehensive and appropriate advice.

If you would like acsis to put you in touch with an independent financial planner, click here!

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