June 7, 2018
Fazila Manjoo, STANLIB Index Investments: Head of Research
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Demand for low-cost global index funds is growing rapidly as more and more research shows that costs have a dramatic effect on long-term returns. Global exchange-traded funds (ETFs) and index funds offer investors more choice by providing exposure to a large selection of geographies and industries. Generally, they replicate a popular market index and are a cheap and easy way to get transparent access to global markets.
- 99.9% of global economic output comes from outside SA
- Five largest economies by GDP: US, China, Japan, Germany, UK
Source: World Development Indicators database, World Bank, 15 December 2017 The case for geographical diversification
The development of the world’s economies and the interconnectedness of its markets provide an attractive opportunity to profit from faster growing economies around the world.
SA vs Global stocks: FTSE/JSE SWIX index minus MSCI World Index
As the chart above shows, there are years when SA stocks outperform global stocks and years when global stocks are the winners. Investing outside SA can expand your investment portfolio’s growth potential. For the same reason that it is wise to invest in more than one company, investing in assets globally reduces the risk of an entire investment portfolio being exposed to local events.
How to use global index funds
You can build an entire investment portfolio using global index funds. They are a good way to fulfil long term and short term investment objectives. For example, they can be used as core building blocks for long-term asset allocation or to implement short-term strategies. The amount of global exposure that is right for you depends on your risk tolerance and objectives. If you require broader exposure, you can buy global funds that provide access to several geographies in one investment, for example a fund that tracks a broad world index like the MSCI World Index. For a more focused strategy, you can buy single-market funds or ETFs, for example funds that track a specific country index or a single sector like information technology or global real estate.
Easy and efficient access
With the large number of recent global ETF listings on the JSE and global unit trust fund launches, local investors are spoilt for choice. ETFs are traded through brokers in the same way as equities, while index-tracking unit trusts are easily accessible through various investment platforms.
We believe funds that provide access to long successful track records and leaders in their respective categories benefit from scale and efficient fund management. Global funds denominated in rands are especially useful for individual investors who want to invest globally but keep their money in SA. They offer investors the benefits of a rand hedge and geographical diversification, but are structured as ‘onshore’ funds to allow South African investors easy and instant exposure to securities and currencies in global markets without using their foreign exchange limit or requiring foreign exchange clearance from the South African Reserve Bank. Rand-denominated funds can give local investors a taste of global blue chips like Amazon, Apple, Google and Johnson & Johnson without incurring the extra costs of currency conversions and the reduced performance impact of implementation delays.
Local investors do not need to be experts in global securities or pay prohibitively high costs to benefit from global investment returns.