Does going global still make sense?
The 2018 national budget stipulates that the foreign allocation limits for institutional investors are to be increased by 5% across all categories – life insurers, collective investment schemes, investment managers and retirement funds. A question that is becoming increasingly prevalent among South African investors, however, is whether there is still any benefit to taking money offshore when the local economic environment appears to be on the upturn.
Kyle Wales, Portfolio Manager at Old Mutual Investment Group’s Titan boutique, believes that it always makes sense for investors to have a portion of their wealth invested globally. “South Africans typically expatriate their money when pessimism about South Africa is at its peak and repatriate their money when the consensus regarding South Africa is overwhelmingly positive,” he explains. “However, this leads to significant investment losses as the currency fluctuates.”
Wales adds that many people fail to consider the benefits of diversification that being invested in global equities offers. “The role of an investment portfolio is to reduce risk, which is especially relevant when the assets out- or underperform at different points in the cycle.”
He explains that while the expected return of a portfolio will always be lower than the return of the asset, the purpose of investing offshore is to reduce the concentration risk that comes with exposing all your investments to one market. “This strategy works particularly well, especially if the assets in your portfolio underperform at different points in the cycle.”
In these instances, Wales explains that the risk of the portfolio can be below the weighted average risk of all the assets within the portfolio. “This holds true for the MSCI ACWI and the JSE ALSI because, since 2008, their rolling annualised 5-year returns have exhibited a low correlation with each other.”
Better diversification, however, is not the only reason investors should invest globally, he adds. “Investing offshore offers South African investors a world of growth opportunities. Why would an investor limit themselves to an investable universe of $1.2 trillion (the market cap of the JSE), much of it concentrated in a handful of companies, when you could be investing in an enormous universe of $79 trillion in which no single stock accounts for more than 1%.
“This includes great companies like Coca-Cola, Google and Microsoft, whose products the average South African uses every day. When last did you drink a soft drink that wasn’t manufactured by Coca-Cola, use a search engine that wasn’t Google or use a spreadsheet that wasn’t Excel? These businesses have the added benefit of being globally diversified: so the degree to which they are impacted when one country invades another – think Russia and Ukraine, its neighbours boycott it – think Qatar, or a finance minister is replaced – think South Africa, is very small indeed.”
Wales points out that a potential risk of investing globally is that global markets are currently expensive. “Looking from the top down, this is true, but there are many companies that individually offer value. An example of this is Legal and General, a UK insurer, which trades on a low forward P/E multiple of 11X and a dividend yield of 7%, even though it is growing at high single to low double digits.”
He adds that even some of the stocks which look expensive at the moment, like the so-called ‘FANGs’ (Facebook, Amazon, Netflix and Google), look far cheaper if you adjust for the multi-decade growth opportunities that are available for them to exploit. “A stock that can grow its earnings north of 20% per annum doubles its earnings in just north of three years – not in five, due to the benefit of compounding – and one that can grow north of 50% – as Facebook did – doubles its earnings in less than 1.5 years, not 2.”
Wales concludes that he believes the only sensible investment strategy for the average person is to decide what portion of their monthly savings they wish to invest globally and what portion in South Africa and to keep this percentage stable, regardless of what happens in South Africa.
“At Old Mutual Titan, we follow a long-term valuation-based investment philosophy. While we are always cognisant of the price we are paying for assets and through this discipline avoid becoming embroiled in market greed or fear, our preference is to invest in good businesses that we spend sufficient time getting to understand. We believe this strategy delivers the best returns for our clients over meaningful time periods, which we define as five years plus.”
Old Mutual Investment Group
Old Mutual Investment Group is a leading African investment manager, offering both actively and passively managed listed and unlisted capabilities, including private equity, impact investing, infrastructure, agriculture, and property. We offer these through a multi-boutique model, in which our fund managers have ownership stakes and invest their own money alongside their customers’, ensuring they are fully focused on delivering sustainable market-beating returns for our customers.
Investing responsibly is a top priority because, as a long-term investor, we understand the importance of taking environmental, social and governance (ESG) considerations into account. Our clients range from the man-on-the-street through to company retirement funds, international investors, sovereign wealth funds and development finance institutions.