How do South African asset managers invest in foreign markets?

By Puleng Kgosimore, Manager Research Analyst
November 2017

Investing globally is one of the pertinent topics on investors’ minds taking into account South Africa’s economic and political environment. Is there an opportunity cost for investing only in South Africa?

Being biased towards a local only portfolio may come at a cost for investors

How do South African asset managers invest in foreign markets?

Offshore presence – managers who have international offices with separate research teams dedicated to analysing global stocks. Interesting to note is that most of the managers in this category are large in terms of their assets under management.

Through the JSE – managers who provide global exposure in the form of rand hedge stocks listed on the JSE.

Locally in-house – managers who actively search for international opportunities through their locally based research team.

Passively – managers who provide global exposure through exchange traded funds.

Fund of funds – managers who provide global exposure by selecting a combination of global asset managers and packaging them into one fund to provide the desired offshore exposure.

 

Offshore presence
Through JSE
Locally in-house
Passively
Fund of Funds

Should it matter how investors invest offshore?

We analysed various local asset managers and grouped them into active and passive managers. An active approach implies that the manager actively selects individual stocks within a particular index, while a passive approach mainly focuses on tracking specific indices.

What are the positives and challenges for each approach (active vs. passive):

Positives     Challenges

Active managers

  • Invests in well researched stocks

    Interaction with companies' management may provide industry insights

    Unique or diverse portfolio constituents possible

    Active risk management
  •  
  • May miss short term opportunities given the time required to research companies

    No guarantee that alpha will be generated

Passive managers

  • Management costs are fairly low

    Duplication of market returns with less deviation

    Good transparency regarding the fund's underlying holdings

  •  
  • Lack of proper understanding of business drivers in underlying investments

    The fund may not produce alpha

    Cannot manage the risk of unwanted exposure within the index

There are a number of important considerations before investing globally. For more information on this subject, Joao Frasco, STANLIB Multi-Manager’s Chief Investment Officer, explains the most important considerations before investing globally in his article titled  “Global investing strategies – currency matching and rand cost averaging”