BLUE CHIP ROUND TABLE
BLUE CHIP ROUND TABLE SERIES | Offshore investing Offshore investing: getting it right In an exclusive Blue Chip discussion, three of South Africa’s top investment professionals focus on offshore investing and why it is important to engage with a financial advisor. Part One deals with diversification and currency protection. MODERATOR EXPERT PANEL Philip Robotham, Head of Intermediary for SA, Schroders Simon Adler, Fund Manager, Schroders Andrew Finlayson, Co-Founder, Maven Wealth DIVERSIFICATION Philip Robotham (PR): How do you construct a portfolio which is sufficiently diversified? Simon Adler (SA): Diversification is the free lunch in investment markets. It is critical because none of us know what the future holds and so having a variety of assets is absolutely the way to go. I co-manage two funds that are available in South Africa, one of which is the Global Recovery Fund which is what’s called a value fund. We invest on a long-term basis, and we try to buy the lowest-priced assets available in the world. We spend our days looking at the cheapest companies and determining whether they are the right ones for portfolios. The long-term growth by doing this is almost unparalleled. Value investing is a way of growing your assets. If you invested 000 in value shares in 1926, today it would be worth over a billion dollars – unbelievable long-term returns. What we offer our clients are value portfolios. Notwithstanding difficult periods, over the long term they generate great returns. PR: Is there a demand from your clients asking specifically for certain types of themes? Or is part of the role educating your clients into what else is available offshore? Andrew Finlayson (AF): I think it is the latter. There are a lot of strong companies with very good management in South Africa, but there are several spaces that are underrepresented. An example is listed opportunities in the technology space, and biotech is another. Even in banking, which has very good management teams, there are only five investable stocks across banking. Internationally there are hundreds of opportunities to get into either in themes or different sectors. 34 www.bluechipdigital.co.za
ROUND TABLE SERIES | Offshore investing BLUE CHIP If you invested 000 in value shares in 1926, today it would be worth over a billion dollars. In asset management, there are a limited number of investable asset management sectors in South Africa where it’s a much bigger theme internationally. South Africa has a very strong mining sector and that’s where you deploy assets and there are several other themes that you can invest in here, but it’s just the breadth of opportunity that sits outside of South Africa that one would want to access and then some specialist themes within those. PROTECTION AGAINST CURRENCY DEVALUATION PR: To what extent is protection against currency devaluation client-led? AF: We, from a South African investor perspective investing offshore, must consider two things: one is effectively the price that you pay for the dollars or pounds that you buy when you take those funds overseas and the second part is what you’re buying on the other side. And it is not necessarily a straightforward or linear relationship because you do have times when the currency could be either weaker or stronger and the asset prices or the assets that you are buying internationally are either weaker or stronger. We find that we have to have a filtered process that we consider a client’s affairs through when we are making those decisions and again it is nuanced. You could have a client who has a one-off event who has benefitted from a big transaction for say the sale of a business in South Africa. They’ve gone ahead and got special permission today for funds overseas over and above their annual amount and that is a transaction that you’re looking to take funds overseas and lock in, and there we would be looking to target different rand/dollar exchange rates for example and trade at those various levels as opposed to trying to take everything out at once. If you look at the rand/dollar on a purchasing power of parity basis going back to, I think 1997, where inflation targeting was introduced into South Africa for the first time, the rand/dollar is currently at an extreme and probably two standard deviations away from a long-term average. We’re not going to try to drop the currency or time the market today versus tomorrow, but it does give us an indication that at 18/50 where it’s been, it does feel like the rand is a little bit too weak to be taking a whole bunch of money overseas. Similarly though, when you take the markets overseas they’re now suddenly starting to represent better value. If you think that the markets are down 10% and that presents a good opportunity to enter the market, you may be happy to pay a slightly higher price for dollars effectively to be able to access those markets, but it is something where there is quite a lot of nuance and where you have to take into account the price that you’re paying on both assets effectively, the currency and the asset that you’re buying. PR: Simon, how much of the currency talk comes into your conversations when you’re meeting these businesses and putting reflective valuations on them? SA: It varies. It depends on what type of business one is looking at. If one is looking at a Japanese business that produces its own goods, sells it domestically, the yen isn’t going to be a huge influencer on its profits whereas if you’re looking at a business that imports goods from China and sells them to America what the yen is doing is critical to what profits that business is going to make. Our view is that we must have a systematic but pragmatic approach. We must understand the currency exposures of a business, we must understand the balance sheet aspect so if they’ve got profits in one currency and there are debts in another currency, we need to understand the risks there. But I totally agree with Andrew that the best way to think about it is to consider the purchasing power of parity over long periods of times – where are you versus those long-term averages. Our view is to buy companies with more than enough upside so that if we get the currency right or wrong it doesn’t really influence the return we give to our clients. We’re looking for substantial upside in shares so if we’re saying 80/90% upside in a currency reaches 5% or 10% against us that’s unfortunate but it doesn’t undermine the return we can get from the investment materially. That’s how we try and normalise it but you have to understand that on a case-by-case basis. To watch the round table series in full, visit www.bluechipdigital or scan the QR code. www.bluechipdigital.co.za 35
