Investec Asset Management Botswana says investing offshore can play a key role in helping diversify from the narrow local market with tiny market capitalisation. However, the company that manages assets running into billions of Pula for clients warned that diversification has to make sense and advised managers that while managing volatility is important they should also consider the valuation of the assets in which they plan to invest.
The asset manager’s views come at a time when there is debate in the market between the regulatory authority (Non-Bank Financial Institutions Regulatory Authority) and the investment industry about a reduction in the offshore limit for pension funds.
Managing Director of Investec, Martinus Seboni said investment opportunities within the wider, global universe should meet both diversification criteria, namely, reducing volatility and enhancing returns.
“Botswana’s domestic market is fairly concentrated and does not offer a complete diversified solution for investors saving for retirement,” said the veteran retirement funds manager.
“An offshore allocation is key to provide a complete solution, not only to reduce volatility through diversification, but also to increase potential returns. We believe that an active manager with depth and experience can uncover global opportunities for investors,” he added.
Seboni said over the past three years, offshore assets represented a big investment opportunity adding that the valuations were very attractive and the macro backdrop was favourable, providing strong offshore returns. Even though Botswana’s equity market was attractively valued over this period, ‘our portfolios’ still had a substantial offshore allocation due to the narrowness of the local market.
“We believe offshore investing should never be a ‘paint by numbers’ exercise, based largely on historical return correlations. At times, developed markets will offer attractive opportunities for African investors and at other periods emerging markets will be more compelling,” said Seboni.
“Diversification has to make sense. While managing volatility is important, managers should also consider the valuation of the assets in which they plan to invest. A disciplined approach to valuation is required. Investment opportunities within the wider, global universe should meet both diversification criteria, namely, reducing volatility and enhancing returns,” he added.
Seboni is of the view that fixed income assets play an important role to help smooth returns. During periods of strong growth and inflation, bonds typically underperform risk assets, while a slowing economy and falling inflation favours the bond market.
Currently, retirement funds in Botswana are permitted to invest up to a maximum of 70 percent of their assets offshore. The highly concentrated domestic equity market means that diversification is limited and the generous offshore investment range has helped portfolio managers to materially widen their opportunity set.
He said changes to offshore investment limits are a big concern for investment managers adding that while the total offshore exposure limit was not lowered, asset class limits have now been introduced. Funds will only be permitted to invest up to 30 percent in offshore equities.
Similarly, the limit for foreign bonds has been set at 30 percent, giving investors a maximum offshore exposure to bonds and equities of 60 percent. Further limits on offshore property, offshore private equity, and hedge funds also apply.
“We believe a flexible investment policy would assist managers to achieve the best investment outcome for retirement fund members,” he said.
“Fewer offshore constraints will help managers to continue seeking the right opportunities at the appropriate time. International investing should form part of a holistic approach to diversification”.
The company revealed that the international equity component of its balanced portfolios for retirement funds in Botswana is managed according to Investec Asset Management’s 4FactorTM Equity investment process, which screens 4 500 companies worldwide.
The total number of counters listed on the Botswana Stock Exchange Domestic Company Index (BSE DCI) currently stands at 23, amounting to a total market capitalisation of $4.9 billion (about P45 billion) as at June 2014.