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Good time to consider Offshore Diversification

Current rand strength may prove unsustainable against prime developed market currencies, suggesting that investors should consider placing a portion of their portfolio offshore – even if they have already used up their foreign exchange allowance. That’s the currency market view from Deutsche Securities, a South African leader in locally listed exchange traded funds (ETFs) that capture international index performance.

As these ETFs trade on the JSE there is no need for elaborate, costly structures and administration or Reserve Bank permission when taking this offshore ‘route’.

Every investor’s circumstances are unique, but at the moment many South Africans should consider offshore investment for long-term capital growth, rand hedging and better international diversification. Low-cost, locally listed but internationally focused ETFs require no Reserve Bank approvals or documentation. Many advisers may be advising clients to look offshore, but not all of them will highlight the advantages of fee-efficient ETFs. Consumers should be proactive and enquire about this increasingly popular option.

Passive investments or tracker funds mirror a specific index. An investor ‘buys the market’ rather than numerous specially selected stocks. This saves the sometimes high cost of ‘stock picking’.

Yet experience shows that, on average, passive funds outperform actively managed funds. Interest has grown in international index funds such as the db x-trackers developed by Deutsche because of their role as a hedge against rand weakness.

By the end of August, the rand was trading at R7.80 to the US dollar, R11.15 to the euro and R12,60 to the pound. But many commentators expect rand softness going forward, driving up the rand value of offshore investments. Gains would be compounded if offshore equities rose at the same time. This potential win-win scenario focuses special attention on db x-trackers.

The five options in the range reflect performance in the euro-zone (by tracking the Eurostoxx 50), in Britain (via a fund mirroring the FTSE 100), Japan (through the MSCI Japan), the USA (through the MSCI US) and across a spread of international markets (via the MSCI World).

History suggests the rand can be vulnerable against the developed market currencies in the longer term. Though it is currently strong, it has weakened in the last five years by 18% against the dollar and by a little over 39% against the euro.

db x-trackers create a hedge as rand investments into offshore equity markets are converted into the relevant base currency. So, if you invest in the MSCI World index, you are not only positioned to benefit from any market growth, you achieve heightened returns should your investment be reconverted to rand at a stronger US dollar rate.

The Deutsche ‘house view’ is that by the end of 2010 the rand will be at 10 to the US dollar, 12 to the euro and 15,10 to the pound. South Africans who believe the rand risk is to the downside have an opportunity to hedge this risk and simultaneously achieve portfolio growth.

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