Casparus Treurnicht & Megan Fraser

March 2024

Late in February 2022, the prudential ceiling on foreign exposure for investment assets was raised from 30% to 45%, no strings attached. With this announcement, the Minister of Finance paved the way for a substantial volume of local assets to be invested abroad. Given the robust performance of the S&P 500 over the past decade, one would expect investors to seize the chance to capitalise on this opportunity.

This graph illustrates how international developed markets have outperformed the local market over the past decade, measured in Rands.

It’s important to note that only a handful of stocks are responsible for the bulk of the difference in returns.

The “Magnificent Seven” is the term in vogue used to classify the market’s major players: the tech-focused giants, namely Microsoft, Apple, Nvidia, Amazon, Meta, Google, and Tesla. Currently these stocks hold center stage; everything else is considered passé and somewhat mundane.

But let’s take a step back and examine a broader context: the starting point of any investment matters a great deal – the market tends to follow cycles, underscoring the importance of accurately determining your position within a cycle upon entry.

Right now, technology and AI are riding high. However, market peaks are usually followed by downturns, albeit their timing remains capricious, and accordingly, the importance of caution when making investment choices. Furthermore, it’s crucial to remain mindful of the significance of diversification. While investing in a market with remarkable growth may seem appealing, it’s essential to consider the risks associated with having an overly concentrated exposure to a single market. We would caution against over-allocating the international component of any portfolio to the USA at this time given the notable outperformance of the USA compared to the rest of the world in recent times.

Contrary to a popular narrative, the local stock market has delivered respectable returns for investors over the previous two decades as illustrated in this graph that compares the MSCI World Index with the FTSE/JSE All Share index.

Given that global assets have notably outperformed local assets more recently, combining local with offshore is what would have proven beneficial for investors, particularly in capitalizing on the increased offshore allocation to 45%. Top of Form

Indeed, this regulatory shift provided local active fund managers with the opportunity to increase their international exposure enhancing the likelihood of outperforming the usual local equity benchmark, the FTSE/JSE All-Share Index.

While it may be too early to draw definitive conclusions in the wake of the amended regulations, current data suggests that active managers have their work cut out for them. As these two charts show, the average active manager has struggled to outperform the FTSE/JSE All Share Index over both the short and the longer term – despite many having the advantage of being able to make use of an outperforming offshore allocation.

Upon reflection, it becomes evident that the true benchmark for the local market should evolve; it is simply no longer adequately defined by the FTSE/JSE All-Share Index. Fund managers with an allowance of 45% foreign exposure would be more accurately assessed against a benchmark that better aligns with their broader investment choices.

[Technical alert: The FTSE/JSE implemented changes to its index construction methodology, leading to a reduced representation of offshore companies within the All Share Index. In June 2023, nearly 70% of the index consisted of companies with offshore earnings. However, due to these changes in methodology, this ratio currently stands at approximately 55%. It is possible that these changes motivated investment managers to take advantage of the increased offshore allowance.]

Comparing the average South African active equity fund manager to a more relevant benchmark (i.e. 55% FTSE/JSE and 45% MSCI Developed Markets) reveals the struggle to outperform this ‘contemporary’ index despite/because of higher fees. It behoves the prudent investor to take advantage of the opportunity to invest offshore, to diversify their equity holdings and contain the costs of investing.

Gryphon has a solution for investors looking to expand their investment horizons while leveraging the effectiveness of index trackers.

The Gryphon Global Equity Fund, now in its tenth year, offers cost-effective exposure to the MSCI World index. When paired with the Gryphon All Share Tracker, this combination performs admirably against the peers in their respective sectors.

As investors navigate the ever-challenging landscape of the investment world, diversification across both local and offshore markets remains prudent. Combining Gryphon’s Global Equity and All Share Tracker funds offers a solution for those seeking to build a global, well-balanced and resilient portfolio, one that can help mitigate risk, leverage growth opportunities, and effectively manage costs.

In conclusion, wise words from John Bogle, “Don’t look for the needle in the haystack. Just buy the haystack!”