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Insights
By: Reyneke Van Wyk
Invest offshore for the right reasons and don’t be surprised if emerging markets outperform in the medium term
Informed investors who have followed a phased approach of investing surplus capital offshore have enjoyed significant additional growth to their investment portfolios and overall wealth.
However, not all investors who invested offshore during this time have had the same experience. In light of the severe current pessimism in South Africa, it is prudent to remind investors of some of the key pitfalls of offshore investing.
South African (SA) equities and the Rand (ZAR) have outperformed global markets and currencies for long periods in the past 20 years. Indeed, there have been lengthy periods where the local equity market significantly outperformed the S&P 500 in dollars on a rolling 10-year basis. While the historic differences are volatile for sure, this is also true when investing more broadly in emerging markets. For that assumed risk, at one point in time, you could have been compensated with a differential in excess of 360%. Further, there were times when a 10-year investment in the S&P 500 yielded a negative return, while having held the JSE All Share Index (ALSI) was markedly positive. In particular, the period following the technology bubble in 1999 and 2000 resulted in negative returns for S&P500 over the following 10-year period.¹ There was a similar picture for the MSCI World Index (ACWI) compared to the South African equity market in US dollars.
The expected global economic recovery, China (and most of Asia) coming through Covid relatively well, very low interest rates, expected US Dollar ($) weakness and stronger commodity prices may be tailwinds for Emerging Markets (EM). Within EM equities, the TOP 40 index in SA is at its cheapest level in 10 years relative to Emerging Market peers after foreign investors have sold $4.5 billion of SA stocks year to date.² However, the South African market is cheap for reasons familiar to all of us. The intention of this article is not to make a strong investment case for South African assets relative to offshore assets, but rather to highlight that emotionally externalising assets can potentially be detrimental to investors.
Predicting future returns is very hard, and at Stonehage Fleming, we prefer to spend more time on factors we can control, such as basic risk diversification principles and understanding what we invest in, to minimise any permanent loss of capital.
When investing offshore, investors need to remember the most important principles - be careful of following the herd, stay away from investing capital that might be required in the short to medium term and watch out for investing for the wrong reasons.
When investing offshore, it is essential to do so with capital that is surplus to sustaining your desired standard of living (and likely business interests) in the medium term – say 5-7 years (being cognisant of the investor’s unique circumstances). It can be very painful to externalise assets for the wrong reason and when everyone is panicking, only to return the assets once the markets have calmed and the Rand has strengthened again. It is also important to invest offshore for the right reasons. The primary reasons to invest offshore have received much airtime, but are worth revisiting: i) diversification of risk; to improve risk adjusted returns in the long term via accessing different types of assets, and ii) a broader and improved opportunity set. The Rand is a structurally weak currency
and should continue to weaken in the long term. However, this should only be an ancillary benefit from offshore investing, as the Rand can (also) strengthen and remain strong for long periods.
A practical example: an investor who invested one lump sum offshore in 2001/2 when the Rand was very weak, had to wait about 10 years for the Rand to get to those levels again, all while South African equities performed very well during this honeymoon period of our democracy. If the investment was made with capital required during this period – and/or for the wrong reason, such as to (only) benefit from the weaker Rand trend- then the investment could have resulted in a very unpleasant loss of capital and opportunity. However, if the investment was made with long-term surplus capital, invested for the right reasons and invested following a phased approach rather than investing one lump sum, the same investment turned out very well in the long term.
¹ Source: Morningstar direct
² Source: RMB Morgan Stanley Research. Time period: 01/01/2020 to 19/08/2020
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All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing.
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All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing.
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All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing.
The information and materials in this website and any pages thereof (the "Website") contain information on foreign collective investment schemes managed by Stonehage Fleming Investment Management Limited which have not been approved by the Swiss Financial Market Supervisory Authority (FINMA) for distribution in or from Switzerland to non-qualified investors in accordance with the Federal Act on Collective Investment Schemes of 23 June 2006 ("CISA"). Therefore, the information contained in the following pages is only directed to qualified investors within the meaning of Art. 10 Para. 3, 3bis and 3ter CISA ("Qualified Investors") with domicile/registered seat in Switzerland.
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1. According to Art. 10 Para. 3 of the Swiss Federal Collective Investment Schemes Act (CISA), Qualified investors are considered: a. Regulated financial intermediaries such as banks, securities dealers, fund management companies as well as asset managers of collective investment schemes, b. Regulated insurance companies, c. Public entities and insurance companies with professional treasury departments, d. Companies with professional treasury departments; e. High net worth individuals, f. Investors who have entered into a written asset management agreement with a supervised financial intermediary (such as banks, securities dealers, fund management companies as well asset managers of collective capital investments).
2. According to Art. 6 Para. 2 of the Swiss Federal Collective Investment Schemes Ordinance (CISO), in particular Art. 10 Para. 4 CISA, qualified investors are also considered: Independent asset managers and investors who have entered into a written asset management. agreement with independent asset managers to the extent that: a. The asset manager as a financial intermediary is subject to the Money Laundering Act (MLA) of 10 October 1997 (Art. 2 Para. 3 lit. e MLA); b. The asset manager is subject to a professional code of conduct which is recognized as a minimum standard by the supervisory authority, and c. The asset management contract contains the recognized guidelines of a professional organization.
3. A high net worth individual is someone who can confirm in writing that they directly or indirectly have net financial investments of at least 2 million Swiss francs. * Financial investments are bank assets (demand or time deposits), fiduciary assets, securities (including collective investment schemes and structured products), derivatives, precious metals as well as life insurances with a replacement value. * Direct investments in real estate and claims from social insurances (including claims from the 2. and 3. Pillar), are not considered financial investments. * The confirmation of financial investments has to be submitted no later than the time the collective investment scheme is offered and distributed. * The advertiser or provider of the collective investment scheme must review the existence of the required financial investments if there are doubts as to whether the person qualifies as a high-net-worth individual. * A written confirmation is not necessary if the required financial investments are deposited at the bank or the securities dealer who is also offering or distributing the collective investment scheme. Private investment vehicles which have been set up for private persons can be treated like high-net-worth individuals as long as they hold net investments of over 2 million Swiss francs.
We have appointed 'ARM Swiss Representatives SA' as our Swiss representative for the following funds: Stonehage Fleming ("SF") Global Best Ideas, SF Global Responsible Investment Fund, SF Global Multi Asset Portfolio, and SF Private Capital Fund. The paying agent in Switzerland is Banque Heritage S.A. The Prospectus and the Articles, KIIDs and additional documentation including the annual and semi-annual report can be obtained free of charge from the representative in Switzerland. Full contact details are contained within the fund documentation.
All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing.
I confirm I am accessing the website from the country indicated.
All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing. This information is not directed at any US person or any person in the US and the information does not constitute an offer or solicitation to buy or sell shares or units in any Stonehage Fleming fund to any US person or to any person in the US.
The following pages contain information on collective investment schemes (both local and foreign) that have been approved by the Financial Sector Conduct Authority (FSCA) for distribution in South Africa, in accordance with the Collective Investment Schemes Control Act, No 45 of 2002 (“CISCA”). The information and materials have been prepared for information purposes only and do not constitute a personal recommendation or advice or a solicitation to buy any product or service. They do not take into account the financial circumstances, needs or objectives of the recipient. In addition to the information provided, you may wish to consult an independent professional adviser.
All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing.
I confirm I am accessing the website from the country indicated.
All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing. This information is not directed at any US person or any person in the US and the information does not constitute an offer or solicitation to buy or sell shares or units in any Stonehage Fleming fund to any US person or to any person in the US.
The following pages contain information on collective investment schemes (both local and foreign) that have been approved by the Financial Sector Conduct Authority (FSCA) for distribution in South Africa, in accordance with the Collective Investment Schemes Control Act, No 45 of 2002 (“CISCA”). The information and materials have been prepared for information purposes only and do not constitute a personal recommendation or advice or a solicitation to buy any product or service. They do not take into account the financial circumstances, needs or objectives of the recipient. In addition to the information provided, you may wish to consult an independent professional adviser.
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All investments risk the loss of capital. The value of investments may go down as well as up and, for products designed to return income, the distributions can also go down or up and you may not receive back the full value of your initial investment. No guarantee or representation is made that the funds will achieve their investment objective. The material on this site does not constitute legal, tax, or advice on investments. If you are unsure about whether a fund meets your requirements, then you should seek professional financial advice before investing.
IMPORTANT: This information on this website is only intended for a) Qualified Clients, within the meaning of that term in the Israeli Investment Advice, Investment Marketing and Portfolio Management Law 1995, OR b) Qualified Investors within the meaning of First Addendum to the Israeli Securities Law 1968. It is not intended for any other type of investor. If you are unsure about whether you meet the criteria as a Qualified Client or Qualified Investor, please seek legal advice prior to reviewing this information.
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