September 3, 2005
 By Bruce Cameron
One of the big problems for investors in recent years has been the excessive cost of investing in foreign markets. These costs, particularly in the case of life assurance products, have knocked the stuffing out of any performance.
Effectively, financial services companies saw an opportunity to make a big hit when exchange controls were partially lifted in July 1997.
Investors clamoured for the opportunity to take money abroad legally, particularly as the rand was dropping in value against the main foreign currencies almost every day. The currency depreciation reached its nadir in December 2000, when it cost R20 to buy one British pound. (I was in London at the time, and it cost me R20 to spend a penny at Harrods.)
Leading up to December 2000, local investors were prepared to pay almost anything to get money into foreign investment markets. However, capacity for foreign investment was restricted by the remaining exchange controls. The result was that the financial services industry could push costs to you ever-skywards, knowing there would be someone prepared to pay up.
But then the rand regained its strength and the high costs took their toll on performance, while other high cost and dubious products, such as structured index funds, turned sour.
Many investors have been spooked out of investing in foreign markets. On top of this, investors have been receiving excellent returns from the local equity market.
So, with this extra cash in your pocket, now may be the time to take a good look at your investment strategies. You should consider whether:
You are likely to get the same wonderful returns from equity markets in the year ahead as you have received over the past 12 months. (I doubt it.)
You should take some profit now from your local equity investments.
You should use that profit to invest in foreign markets.
Beat the costs
The good news is you can thumb your nose at those financial services companies that overcharged you in the past for foreign investments.
On October 6, two new exchange traded funds (ETFs) based on international indices will be listed on the main board of the JSE, opening up cheaper access to foreign markets for individuals and retirement funds.
You will be able to invest any amount over the minimum of R10 000 without any exchange control restrictions, apart from the requirement that your investment is made in rands and your will be paid out in rands.
The new ETFs are a joint venture by Deutsche Bank and the JSE Limited and will trade under the name of Itrix ETFs. The two ETFs are:
The Itrix FTSE 100. The underlying shares are the largest 100 shares listed on the London Stock Exchange. This blue-chip index includes the shares of global giants such as BP, GlaxoSmithKline, Barclays Bank and Anglo American.
The Itrix Dow Jones Euro Stoxx 50. The ETF contains the 50 most liquid blue-chip stocks within the "euro-zone", such as ABN Amro, Bayer and Deutsche Bank.
Two additional Itrix ETFs, which track the performance of major United States and Asian indices, will be listed in the near future.
Initially, you will only be able to purchase the Itrix products as a lump-sum investment through a stockbroker. However, Itrix is considering a share plan that will enable you to make regular monthly investments directly and save on stockbroker fees, as you can with the Satrix ETFs.
You can learn all about these new funds by signing up for the ETF and index investment seminars that will be held in Cape Town and Johannesburg next week. You will find the programme and registration form above.
What the terms mean
Exchange traded funds (ETFs): A stock exchange-listed investment which allows you to invest comparably small amounts of money in a number of underlying listed shares. An ETF is a hybrid of a listed investment company and a unit trust/mutual fund. All three are pooled investments whereby your investment enables you to hold a fairly wide portfolio of shares through a single investment.
Unlike a unit trust/mutual fund, an ETF is listed on a stock exchange, but unlike a listed investment company, the number of "shares" that an ETF sells is open-ended (they are created and destroyed as investors invest or disinvest). As both ETFs and unit trusts are open-ended, their value reflects the total value of the underlying shares.
On the other hand, the shares of an investment company may trade at a premium, or discount, to the underlying value of its share portfolio.
Index investment (or passive investment): An investment which aims to match as closely as possible the performance of an index, such as the All Share index.
Index funds (also known as tracker funds): Funds that follow or replicate an index. The shares bought by the funds are modelled on a particular index.
Price/earnings ratio (p:e): The p:e ratio is the current price of a company's share (or of an investment market) divided by the last annual (after-tax) earnings a share. The lower the ratio, the cheaper the price of a share or market relative to the profits it can be expected to make.
One way to describe the p:e is that it shows how many years of future earnings a person buying the shares is prepared to pay for now. For example, at a p:e of 25, investors are buying this company's earnings into the next 25 years.
Local and international markets 'are not trading at unrealistic valuations'
An interesting perspective on the current status of equity markets comes from Jac Laubscher, Sanlam's group economist, who this week assessed whether we can expect a market crash either locally or in foreign climes.
One of the main points he makes is that "market crashes originate mainly when investors realise that valuations have been pushed to unrealistic levels".
Laubscher says there is no sign of unrealistically high valuations either in South Africa or in the main international equity markets.
He says the price/earnings (p:e) ratio for the Standard & Poor's 500 index in the United States is currently 19.6, which is its average value for the past 25 years. The S&P's p:e ratio peaked at 46 in 2002.
He says the US, which sets the tone for global equity markets, had its bubble pricked in 1999/2000, and a crash from the current levels is therefore highly unlikely.
Laubscher says the signs for South Africa "are mixed, but generally supportive of current price levels".
The p:e ratio for the JSE All Share index is currently 15.6, compared with a 10-year average of 14.3. The growth in profits of about 10 percent will be sufficient to bring the p:e back to its average level.
But he says you also need to drill down a bit.
"It is striking that it is mainly the resources sector that is responsible for pushing the overall p:e above its long-term average. Industrial and financial shares are trading on generally realistic valuations," he says.
"It is highly unlikely that the JSE will experience a market crash in the near future, although a pull-back after the recent increases cannot be ruled out. Nevertheless, it does appear as if earnings growth has peaked, which will act as a constraint on the market", Laubscher says.
  
 
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