Monday, August 27, 2007

Hold your offshore investment course

Now is definitely not the time to abandon your offshore investments. If anything, there are good opportunities to be had in foreign markets.

Global market turbulence arising from the sub-prime home loan debacle in the United States appeared to be abating this week, although many commentators say investors are still nervous about the prospect of further volatility.

Jeremy Gardiner, a director at Investec Asset Management, says since the noise began earlier this month most world markets have fallen somewhere between 10 and 15 percent from their highs.

If the events of the past month made you panic about your offshore investments or if you patted yourself on the back for not having any of these investments, your investment strategy is probably off course, asset managers and financial advisers say.

You should, they say, have a properly diversified offshore portfolio, which forms part of an overall investment portfolio that is determinedin accordance with your investment needs, investment time horizon and your appetite for risk.

If that is the case, when the trouble started some three weeks ago, you should have battened down the hatches and gone to sleep in your cabin, leaving your asset manager to do his or her job of steering the boat, Debbie Netto-Jonker, a leading financial planner with Netto Financial Services, says.

Netto-Jonker says investors who are in general managed or balanced funds that have a sensible blend of bonds, cash and equities did not see their funds shoot the lights out with high returns during the bull market. Butin the current market turbulence they should see the benefits of being well diversified.

Stay the course
If you were panicking as news of the market declines emerged, it is to be hoped that you didn't make any rash decisions.

Gardiner says "making fundamental changes to your portfolio during extreme turbulence is tantamount to trying to change the sails during a gale".

He says you first need to get your risk profile right (by looking at your needs, time horizon and appetite for risk), and then you can select an appropriate investment portfolio. If you do this, you will be able to sail through whatever conditions the markets experience.

Netto-Jonker says the real question long-term investors should be asking themselves is whether the fundamentals influencing the marketsin which they have invested have changed.

Only if the fundamentals have changed, should you consider changing your investment.

Most asset managers say the fundamentals of offshore markets haven't changed.

Gardiner says the world economy remains healthy, and global equity markets are still reasonably priced. He says over the long term, the current adjustments to the US credit markets will be healthy.

Netto-Jonker says you must remain focused on your long-term investment objectives and avoid any temptation to overreact to recent market movements.

In the long run, investment markets perform very well, but most investors fail to earn good returns, she says. The main reason for this is that investors allow their emotions to drive their investment decisions. This often resultsin investors withdrawing from the markets during periods of volatility, and in most cases this has negative long-term consequences, Netto-Jonker says.

It is in times like this that staying the course with your investment strategy will be rewarded in the long run, she says.

Kokkie Kooyman, the head of Sanlam Investment Management (SIM) Global who operates the Sanlam Global Best Ideas Fund and the rand-denominated fund that feeds into this offshore fund, agrees that a disciplined approach of investing onlyin undervalued equities - especially when those companies have above-average growth and have good, ethical and rational management - will generate superior returns over time.

Don't wait to get in
If you missed the recent offshore market turbulence because you are not invested in offshore markets, you may be pleased this time around, but it's not a good strategy to have all your eggs in one South African basket.

You should be exposed to offshore markets because it is a way of diversifying your risk: different markets often perform well or badly at different times.

Exposure to offshore markets also enables you to invest in sectors and companies that are not available in South Africa.

Investment gurus say you should buy into markets when they are low, rather than when they are delivering high returns and are about to peak before the next downturn.

This, together with the rand's relative strength against the major currencies, seems to indicate that if you don't have enough exposure to offshore markets, or if you need to rebalance your investments following good growthon local investments, now is an opportune time to move into offshore markets.

Kooyman says if you need to get into offshore markets, you shouldn't wait. He quotes First Rand Banking chief executive officer Paul Harris as saying: "'Wait and see' is the dumbest advice I have ever heard."

To generate excess returns, you have to take some risk, Kooyman says. You could wait until the crisis is over, but you'll forgo considerable upside, he adds.

You can always find undervalued, superior companies in any market, Kooyman says. However, at times investors push up (or down) certain sectors or geographies more than others as they (for a while) fallin or out of love with them.

Kooyman says over the past eight months the most undervalued markets have been South Korea and Taiwan, and they remain undervalued. Smaller cap stocksin China (listed in Hong Kong or Singapore) also still offer good value.

But, he says, SIM Global is increasingly finding good value in France, Germany, the United Kingdom and the US.

"At the moment the 'vision' on the future earnings of US banks is clouded by the uncertain outlook for loan growth and fee income, and the risk of increasing bad debts.

"But as surely as day follows night, the current sub-prime woes and feared US consumer spending slowdown will pass. When that happens, US banks will offer extremely good value."

Where the value lies
Kooyman says when investment banks, hedge funds and other investors that have been selling their shares in offshore markets go back into the market, they will initially avoid companies that are operating on borrowed money and ones with riskier strategies.

The preference will be for com-panies with proven track records that generate cash.Kooyman says the Sanlam Global Best Ideas Fund has been investingin these shares - the likes of US information technology companies Dell and Cisco, European media company Vivendi, German professional services company Deutsche Post, and US gas-drilling and exploration company Chesapeake - since January 2007.

He says his fund has also been invested in undervalued Chinese and Indian smaller companies, such as Great Wall Motors (a motor manufacturer in China), Global Green Tech (a beauty product manufacturer in China), Chaoda Modern Agriculture (a food manufacturer in China) and China Essence (a potato starch manufacturer in China).

These companies are unlikely to be affected by a global slowdown following the US sub-prime mortgage problems, Kooyman says.

Anil Thakersee, the managing director of Old Mutual Unit Trusts, agrees that current economic conditions and the relative valuations of local and offshore markets favour increasing offshore exposurein a portfolio with no or low exposure.

Offshore equity market valuations are at their most attractive levels relative to the JSE in several years, he says. For example, the historic price:earnings ratio of the US Standard & Poor's index is now at roughly the same level as the JSE, at 15 times.

At the same time, global interest rates have risen, and even offshore money market funds are offering relatively attractive returns.

"Should the local equity market become increasingly volatile in the next 12 months, it is likely that an offshore diversified portfolio will demonstrate lower volatility than one that is not. So when it comes to offshore investing, it is certainly more about managing risk than chasing returns," Thakersee says.

Looking ahead, he says, it is very difficult to forecast whether a local or an offshore investment will perform better.