At Southwood Financial Planning we have always advised clients of the benefits of offshore diversification. The article below supports this and discusses many of the funds we utilise in obtaining offshore diversification for clients.

The article, written by Patrick Cairns, was originally published in Moneyweb’s monthly investment magazine.

As South African investors grow more sophisticated, they are better understanding the benefits of looking offshore. The importance of diversification and the wider universe that international markets offer are something that many investors now see as a vital consideration.

They also appreciate that you don’t need to take money offshore to get international exposure. Many South African asset managers offer rand denominated funds with a global mandate that are as simple to invest in as any local unit trust or exchange-traded fund.

Although not all asset classes have been equally attractive, in general local investors are increasing their exposure to global funds. Overall there have been net inflows of over R3 billion into global unit trusts and exchange-traded funds over the last year. That is opposed to overall net outflows of more than R4 billion from domestic funds over the same period.

The below table shows the flows into a selection of the main global fund categories between 1 June 2014 and 31 May 2015.

Fund flows to 31 May 2015
Sector Six month net flows One year net flows One year change
Global – Equity – General R1.6 billion R888 million 1.90%
Global – Multi Asset – Flexible R593 million R1.7 billion 15.01%
Global – Multi Asset – High Equity -R902 million R475 million 2.85%
Global – Multi Asset – Income -R17 million -R51 million -5.04%
Global – Multi Asset – Low Equity -R1.3 billion -R1.5 billion -35.89%
Global – Multi Asset – Medium Equity -R17 million -R46 million -5.78%
Global – Real Estate – General R743 million R1.6 billion 51.52%%

Source: ProfileData

The global equity general category remains by far the largest of these, with over R60 billion invested in these funds. The second largest is the multi asset high equity category with just less than R20 billion under management.

The large inflows over the last year have however been into flexible mandates and real estate funds.

In both cases this might represent changing investor attitudes.

Flexible funds potentially offer a more defensive way to access global equities as they are not required to be fully invested. It might be an indication that investors are looking for global exposure but are wary of current valuations and so prefer to have some protection in cash.

The surge in global real estate funds could be a knock-on from how well local listed property has performed. Understanding that the local sector is now looking expensive, investors who still want to be in property think that offshore now offers a more compelling proposition.

The global equity fund picture

Looking at the global equity general category specifically, the below table shows the funds that have enjoyed the highest net inflows over the last 12 months:

Fund flows to 31 May 2015
Fund Six month net flows One year net flows One year change
Old Mutual Global Equity Fund R1.1 billion R1.7 billion 36.32%
BCI Best Blend Global Equity FoF R1.1 billion R1.0 billion 124.80%
Coronation Global Opportunities Equity [ZAR] FF -R190 million R961 million 21.38%
Absa International Fund R252 million R291 million 122.88%
DB x-trackers MSCI World Index ETF   R261 million 12.14%
Satrix MSCI World Equity Index FF -R36 million R235 million 257.38%
Investec Global Opportunity Equity FoF R228 million R222 million 26.36%
Nedgroup Investments Global Equity FF R40 million R160 million 2.87%
Foord Global Equity FF R27 million R123 million 1566.09%

Source: ProfileData

The Old Mutual Global Equity Fund has been the stellar performer in this category over the last five years and it’s therefore not surprising that it is attracting the largest share of new assets. It has now overtaken the Nedgroup Investments offering as the second largest fund in this category, although it is still only a little more than half the size of the Allan Gray Orbis Global Equity Feeder Fund.

The funds flowing into the BCI Best Blend Global Equity FoF are less easy to explain on a performance basis, as it is delivered returns both below the benchmark and the category average. The inflows have all been over the last two months, which would indicate that it is a large tranche from an institutional client.

The Coronation Global Opportunities Equity [ZAR] Fund is another top performer over the last five years. It has grown its assets to now just behind the Nedgroup Investments Fund and may soon move ahead of it as the third largest fund in this category.

 It is noteworthy that two index trackers make this list. There is hardly any institutional money in either the DB x-trackers MSCI World Index ETF or the Satrix MSCI World Equity Index Feeder Fund, which means that these inflows are almost entirely from retail investors.

The Satrix product only launched in October 2013, but it has very quickly gained favour. The x-trackers product has been available for much longer and already has nearly R3 billion under management, making it the seventh biggest fund in this category.

Another point of interest is that the Foord Global Equity Feeder Fund only launched in May last year. The percentage growth is therefore irrelevant, but it’s noteworthy that Foord’s reputation has allowed them to grow this fund so quickly.

On the other end of the scale, the below table shows the funds that have experienced the largest net outflows over the last year:

Fund flows to 31 May 2015
Fund Six month net flows One year net flows One year change
Allan Gray Orbis Global Equity FF -R1.2 billion -R688 million -5.01%
Old Mutual Global Emerging Markets Fund -R241 million -R169 million -11.45%
Investec Worldwide Equity FF -R332 million -R123 million -3.65%
SIM Global Best Ideas FF -R40 million -R92 million -13.83%
Sanlam Global Equity Fund -R100 million -R88 million -8.70%

Source: ProfileData

The Allan Gray Orbis Global Equity Feeder Fund stands out on this list. The fund performed poorly in 2014 and investors clearly showed their dissatisfaction. However, it is worth noting that for the first five months of 2015, the fund has out-performed its benchmark and is one of the top performers in this category for the year-to-date.

While the outflows from the fund are significant in absolute terms, they are also only 5% of its assets. The fund therefore remains the largest in this category by quite some margin.