The world is changing fast and to keep up you need local knowledge with global context.
It used to be a doddle getting rich as a fund manager or investment adviser working in the arena of global diversification. With the complexity of investment offerings, it was easy to convince people that they should be handing over a significant amount each year in exchange for an intermediary choosing and keeping an eye on investments.
The confusing maze of foreign exchange and tax regulations were an added bonus, providing the opportunity to cream more fees off savings pots. Amounts like 1-2% of assets under management don’t sound like much until you realise you are paying away 2% of your assets every year in fees.
These charges can erode your wealth significantly. And, that’s before we even consider the other fees and kick-backs in the background.
Much of this has changed. Tax advice is probably a good idea, as it is for your local investments. You need to be up-to-date with your tax affairs and have a tax clearance certificate in order for your bank to transfer funds for investment in a foreign currency.
But you no longer need to resign yourself to handing over thousands to a fund manager or adviser in exchange for help in developing a well-balanced global portfolio of assets. You can cut this expensive intermediary out of the loop.
DIY global fund management
You can be your own global investment manager for a fraction of the cost you would be charged by the professionals if you opt for pre-packaged portfolios that are bought like shares on international stock markets. These portfolios are called Exchange Traded Funds – or ETFs for short.
Multi-asset ETFs are specialist funds that combine asset classes to offer a diversified portfolio of shares, fixed interest and other assets.
If you go the do-it-yourself route through an internet-based trading platform, you can put your money into a multi-asset ETF for a one-off charge that amounts to a few hundred rands. If for example, you opt for a US-based ETF, you can expect to get away with paying a stockbroking commission of less than US$50 for the transaction and a charge – of about 1% of the value of the transaction – for converting from rands to another currency.
And, that’s it. No-one will deduct money from this investment, over and over, simply because they have made one clever decision for you.
You have a number of options in South Africa as well as elsewhere to access US ETFs. Obvious starting points at home are online trading platforms, which make international investing easy from South Africa. Standard Bank Webtrader is currently offering investors the opportunity to try out the system through a demonstration account.
You should ideally have anything from about R100 000 to put into shares. There are similar trading platforms elsewhere in the world that will take foreign currency investments from South Africans. You can also work through a stockbroker, though that will cost more.
Multi-asset ETFs: big choices
ETFs have proved so popular, raking in trillions of US dollars around the world, that many different types have emerged. Many professional fund managers include ETFs in collective investment schemes like unit trusts, so these are not just for investors who aren’t experts.
Within multi-asset class ETFs, there has been further specialisation. This is good for do-it-yourself investors because you can sift through ETFs that are labelled to suit your risk profile.
So if, for example, you are a conservative investor, you can opt for a multi-asset conservative fund. You may want a higher risk multi-asset ETF if you want better returns and don’t mind a bit of volatility.
Multi-asset class ETFs can build a portfolio by putting together other ETFs, for example one tracking an equity index and another tracking a fixed interest index. However, some are more complex and can use leverage. It’s probably best to start with the simplest varieties.
There are also multi-asset class ETFs that track a basket of assets designed to cater for specific target retirement dates. So, if you plan to retire in 2040, you can consider the iShares S&P Target Date 2040 Index Fund. If retirement is around the corner, the iShares S&P Target Date 2020 is an ETF to look at.
Pick popular funds. ETFs that do not attract sufficient funds are often closed. You want to be able to cash out of an investment when you choose and not because there has been a lack of interest in your choice.
Bear in mind that ongoing expenses within an ETF will reduce your return so look at the expense ratio (ER) before investing. Generally you should aim for an ER well below 1%. It is possible to find multi-asset ETFs with ERs in the region of 0.3%.
Choosing within the pool of multi-asset classes means you have some homework to do. But, it is worth saving huge amounts of money by spending a bit of time reading fund fact sheets and looking at the holdings within these ETFs rather than devolving this responsibility to a fund manager.
Multi-asset ETFs: Snapshot
Here are some New York-listed Multi-Asset Class ETFs to give you a flavour of what is available:
- iShares Growth Allocation ETF (code: AOR). According to ETF Database, this diversified portfolio has a low expense ratio of 0.3%. It has produced a return of just over 10% over one year, 26% over three years and more than 75% over five years. Its annual dividend yield is 1.91%. Its top 10 holdings are all iShares ETFs, with an S&P 500 tracker representing about one-third of the portfolio. A US bond market tracker comprises about 22% of the portfolio. US small and mid cap stocks are represented in this ETF. There is also exposure to emerging markets.
- db-X 2030 Target Date Fund (code: TDN). This portfolio is designed for people who plan to retire in 2030. According to the fund fact sheet, it tracks a Zacks Lifestyle index, shifting its weightings gradually over time among three broad asset classes: international equities, US equities and fixed income securities. As the target date approaches, the fund becomes more conservative, “aiming to achier a higher level of capital preservation”. Its top 10 holdings are dominated by the big New York listed global stocks, including Apple Inc (code: AAPL), Google (code: GOOG) and Exxon Mobil Corporation (code: XOM). This one would have doubled your money over five years and has a one-year return of about 18%. This ETF’s expense ratio is listed as 0.65%.
- Multi-Asset Diversified Income Index Fund (code: MDIV). Only around for two years, this ETF has an expense ratio of 0.67%. Its fund fact sheet says it is designed to provide access to small, mid and large capitalisation income-producing securities. There aren’t any international household names in its top 10. It has big exposure to medium and small cap US real estate and energy stocks. Dividend paying ETFs make up a quarter of the portfolio, while a junk bond ETF has a 15% weighting.
For more on how to buy international shares from your laptop in South Africa, and investment ideas, see the Biznews Global Investing section.
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