How to get the most out of global equity exposure

David Nathanson, Portfolio Manager at Bellwood Capital

Investors who ignore offshore opportunities deny themselves the significant benefit of exposure to a far wider range of stocks. David Nathanson, Portfolio Manager at Bellwood Capital, says that while more South African high-net-worth individuals (HNWIs) are investing globally, many others are still missing out on the opportunity of including direct offshore investing in their financial plan.

The 2018 AfrAsia Bank South Africa Wealth Report highlights the value of holding foreign equities. While the valuations of the JSE all share index were up 17% in US$ terms over the review period, 2007 – 2017, the increase in the value of global equities, as reflected by the MSCI World Index, was significantly higher at 43% in US$ terms over this review period, despite the impact of the global financial crisis in 2008/09.

Purchasing foreign equities is a great starting point for long-term investors wishing to unlock the significant value of investing offshore. Nathanson says that the South African market is less than one percent of the global market. Allocating a portion of your investments offshore provides access to markets, sectors and companies not available within the very limited investable universe of the JSE, increasing the possibility of better returns and spreading the risk through diversification.

However, he cautions that there are some simple – yet surprisingly often unheeded – guidelines you need to follow in order to extract maximum value from holding offshore equities.

Beware complexity and costs

Find the most transparent investment solution available when looking at offshore investments. Nathanson says, “Avoid highly opaque, layered structures, with limited flexibility and high costs. These often include complex tax structures, which may or may not add value.”

“A common example of layering would be where you invest via a local broker, onto a platform, into a feeder fund, into an international fund of funds with numerous underlying fund managers. Structures like this add layers of fees, reduce flexibility to access or change investments and make it very difficult to know who is actually managing your money and what their process is.”

A direct account held with an international low-cost brokerage firm, which allows you to log in via a secure website to view holdings and draw detailed statements, is usually the most transparent and cost-effective solution, according to Nathanson.

“Don’t turn a blind eye to costs,” says Nathanson. “2% per annum (p.a.) may sound negligible but saving just 2% p.a. in fees will increase your terminal investment value by 50% over 20 years. Make sure you fully understand the fees you are paying, especially when there are layers involved.”

Nathanson says you should strive to bring total costs down to 1% p.a. or less. You can achieve this by removing unnecessary layers, avoiding high cost structures, upfront fees, performance fees calculated on conservative benchmarks, and ensuring your trading costs are minimal.

Look for hidden agendas

Another red flag you need to watch out for is conflict of interest.  “Make sure that the interests of the people managing your investments and giving you advice align to your best interests. Watch out for ‘independent’ advisers who receive commissions from product providers when they direct business their way, or earn commissions based on activity.”

Also, be careful of performance fees. “While performance fees may appear to align interests, they are often one-sided, with you paying more if performance is above a certain target but still paying the management fee if performance is poor. These fees can lead to excessive risk taking on the part of your investment manager and add an extra layer of cost.”

Don’t underestimate the power of personal service

Investing offshore does not mean you need to deal directly with a company based offshore. In fact, South African-based investors are often disappointed with the service they receive from overseas institutions according to Nathanson, who believes a reputable local operation, which delivers a highly-personalised service and offers direct access to the portfolio manager, is a far better option.  “Having someone local in your corner that understands both the South African context and the global playing field makes the whole process that much smoother.”

Process is king

Understanding the investment process that will be used to manage your money is very important. Nathanson says process is the foundation for generating returns. Make sure your investment manager is able to articulate a clear investment philosophy and demonstrate a strong underlying process.

Also ensure they can adequately cover the available opportunity set, which includes several thousands of companies.

Do your due diligence

Select a creditworthy, properly-regulated institution to manage your offshore investments.

Nathanson says, “Businesses run by a single individual, with little or no regulation, are a red flag. Make sure your partner for investing offshore is a creditworthy institution. Also ensure you are dealing with a properly-regulated institution which, if operating in South Africa, should be regulated by the Financial Sector Conduct Authority (FSCA).”

He concludes: “Be sure to choose the right partner and follow these simple yet sound guidelines to extract optimal value from your offshore investments.”

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