STEPHEN CRANSTON: Greater investment choice means more responsibility

It is difficult for people who weren’t in the financial markets in 2000 to realise how little SA money was invested overseas. Or how few options there were.

Pieter Koekemoer and Peter Kempen from Coronation gave a presentation on the changing face of global investing at the Investment Forum last week, the leading annual event in SA for investment managers and financial advisers organised by The Collaborative Exchange at Sun City.

This year the theme was the paradox of choice. We have more choices than ever, but we must all take responsibility for those choices. Gone are the days when we would take out a five-year endowment, trust the life office and hope to get a nice chunk of change when the policy matured.

As Koekemoer and Kempen pointed out, back in 2000 there was less than R20bn invested in rand-denominated international unit trusts, such as the Old Mutual Global Equity Fund and the Standard Bank International Fund. No less than 95% of this was invested in 16 developed market equity funds — predominantly comprising North America, the UK and Europe and Japan.

Today there are 300 rand-denominated funds from 150 managers. A large number of these are still global equity funds, but there are also global balanced funds, low-equity funds and fixed-income funds, though until recently the yields on global bonds were so miserable few people chose to invest in them.

Rand-denominated funds are convenient for most investors. There is no need to go through Reserve Bank clearance before investing in them, and investors can switch in and out of them on the same platform as their domestic funds.

Approved offshore funds

There was no such thing as an approved offshore fund in 2000, though there was a lot more leeway to invest internationally through life endowment policies. Some endowments even offered global hedge funds as the underlying investment.

A quarter of a century later, as Koekemoer says, there are now no less than 850 approved foreign currency funds (known in the industry as Section 65 funds). Financial advisers can sell these to private individuals. If advisers want to sell, or even give information about an unapproved fund, investors have to sign a “consenting adult” form.

I have had to sign one just to get information on a hedge fund, for example. I had to accept that I was prepared to take on the risk of investing in an unapproved fund. And, as Koekemoer points out, the choice of funds is now mind-boggling. There are active funds that call themselves core, unconstrained or portable alpha. Funds are also divided by factor, also know as style. The familiar ones are growth, value, size, quality and momentum.

Investing in index funds might seem the obvious way to keep it simple. But Koekemoer points out even that isn’t simple — though he would say that as an active manager. There are obvious choices such as whether to track the MSCI global index or the more emerging markets-heavy MSCI all country world index.

Many investors are seduced by flavour-of-the-month thematic funds, which often have a short shelf life. Themes such as robotics and AI might seem positively quaint in a few years, particularly if these shares fall out of fashion as the dot.com shares did back in 2000.

Thematic funds were huge in 2000, accounting for 46% of the combined equity and balanced bucket (which excludes fixed income). Many are now long forgotten, such as the Brait Superhighway Fund and the Regal Intellectual Capital Fund. Others lived to fight another day, such as the Investec (now Ninety One) Emerging Companies Fund.

Balanced funds accounted for just 13% of these assets in 2000, with the remaining 41% in general equity. In 2025, just 2% of this asset pool is invested in thematic funds. Only baby boomers can remember the excitement the launch of Peter Major’s Syfrets Mining Fund generated back in 1994. Now, 74% of the funds are in balanced, or multi-asset, funds. General equity accounts for 24% of this bucket and 18% of the unit trust industry as a whole.

Loss of structure

Kempen says one flavour-of-the-month product that has not had a major resurgence is the structured product, which he believes was designed for yesterday’s problems. Still, they appear compelling, especially when sold skilfully. They provide a floor — a guarantee that the value of the policy will not fall below a certain level. They also promise to deliver a premium return, say 150% of the return of the S&P 500.

But Kempen says the lock-ins are punitive. If a client needs the money urgently before the end of the term the penalties are enormous. Most of the top independent advisory forces, notably market leader PSG Konsult, do not market structured products. At least they worked well for the bottom lines of the merchant banks that promote them.

Some of the next generation of promoters such as Discovery will argue that the new structured products are more equitable, with a fairer profit-sharing arrangement between the client and the bank or life office that promotes the products. But they remain highly opaque.

As the investment markets become more unpredictable there is increased counterparty risk. As a result, the international banks that sell the derivatives that support these products have increasingly questionable balance sheets. 

• Cranston is a former associate editor of the Financial Mail.