Is offshore equity attractive?

JOHANNESBURG – While numerous asset managers have indicated that global equities currently offer better longer-term investment opportunities than local stocks, some investors are concerned that the rand could strengthen and dilute their offshore gains.

Last year, investors with exposure to specific offshore unit trust funds benefited from gains in international equity markets. The slide in the rand sweetened the deal and added several percentage points to returns during the period in some cases.

Right now, the fear seems to be that the situation could reverse. Is there a right time to go offshore?

Speaking at an Old Mutual Investment Group roadshow, John Orford, portfolio manager at MacroSolutions, said there are periods when timing is more important.

Around 2012 when the rand was quite strong (trading at around R7.50 to the dollar), there was a compelling case to move money offshore quickly. Since then the rand has weakened substantially.

“I guess we are somewhat more agnostic about the rand than we were a year or so back,” Orford said.

While there are arguments for near term currency stability and medium term weakness, their current view on offshore equities is less about the rand than it was a year or two years ago, he said.

“It is now about the fact that equities globally are the most attractive asset class and we need to build up exposure to that.”

The group believes that of the conventional asset classes (equities, property, bonds and cash) global equities will offer the best risk-adjusted returns over the next five years, with an expected real return of around 5.5% per annum over the period in US dollar terms.

Right now timing is not that important, but rather to get the right amount of offshore equity exposure, Orford said.

While this will differ amongst investors, various studies suggest that the level could be somewhere around 30% to 35%.

Orford said this is slightly higher than the 25% allowed in a balanced fund, but not significantly so. However, investors have to bear in mind that there should be a match between their assets and liabilities.

“But I would agree that it is not so time critical now in terms of timing the rand. It is about choosing the best asset class.”

Peter Linley, head of Old Mutual Equities, said while he still believes there is some downside risk to the currency, he wouldn’t build a portfolio heavily slanted towards a weaker rand.

Global equities

Hywel George, director of investments, said the equity market in the US has been driven by a rise in corporate profit margins.

Since the lows of March 2009, profitability in the US tripled and the S&P 500 went up threefold.

As the economy recovers and consumer confidence improves, revenue also starts improving, he said.

But while the US is recovering, emerging markets are still expected to show better growth than developed economies.