Parts of Europe, emerging markets offer great value

If you’re a South African, investing offshore probably looks a little daunting right now, with the rand plumbing the depths against the US dollar. However, offshore investments are still a crucial part of a balanced asset allocation – if you hold only South African assets your financial future is strongly tied to that of South Africa, but if you mix in some offshore assets, your risk of the ship going down is lessened. Thus, for a South African investor, it’s crucially important to be investing in assets that offer great value and significant returns, as this can help reduce the impact of currency risk.

So it’s interesting to hear California-based investment expert Anthony Ginsberg’s view on what global sectors offer the most value. In particular, it’s interesting to see Ginsberg pointing at emerging markets like Chile, Peru, Poland, and the Czech Republic, where price-to-book-value ratios are below one, and forward PEs are in the 5-6 range. Could be some real bargains available. – FD

To watch this CNBC Power Lunch video click hereAnthony Ginsberg

ALEC HOGG:  Joining us here to discuss recent developments in global financial markets and trends in emerging markets and he has some interesting views, is Anthony Ginsberg from Ginsglobal Index Funds.  Anthony, I was mentioning in the intro that you’re a South African, or a relocated South African who now lives in California.

ANTHONY GINSBERG:  I’m always happy to come back here, Alec.  Every time I come back, there’s always a lot of news in South Africa.  The perception abroad right now has not been the most positive on South Africa as I’ve seen it over the previous four or five years, so I wish I was coming back with better news about foreign investors wanting to buy into the local market, but there’s a lot of uncertainty.  I think the mining and the foreign direct investment regulations are really causing some uncertainty, unfortunately.

ALEC HOGG:  We’re so small in a global context.  I did some numbers the other day, which showed that if we were a state of the United States we’d come in at number 17 behind Indiana, in fact, one seventh the size of where you live in California.

ANTHONY GINSBERG:  Well, scarily enough, California on its own is either the sixth or the seventh-largest economy in the world.  Almost half of our business today is actually conducted in California.  We’re very big in the index fund business overseas and South Africa unfortunately, has a risk.  If we are downgraded in South Africa with our bond ratings – by SMP on the sovereign ratings – by just another level down, South Africa has a risk of potentially having further assets sucked out of here.  Currently, South Africa is part of the global government bond index, so we have to be rather careful with FTI and other rules here, your current account and other twin deficit issues, that these things have to remain in whack otherwise many foreigners are worried that with another possible downgrading there are going to be further flows out.  I become a little bit worried about the currency issue, particularly given your six or so percent current account to GDP deficit.

ALEC HOGG:  The Fragile Five: we know all about it in this country.  The business you run; is it index trackers both in developed and developing markets?

ANTHONY GINSBERG:  Yes, partly because of 2000’s meltdown and 2008, there has been a massive demand for more transparent rather than black box products.  You’ll find in the States today: 50 percent of all mutual fund flows are into ETF’s or into index funds.  Our big clients, such as AIG, Zurich Life Insurance, and ING Insurance are using indexing now within insurance policies, within annuities, within life insurance policies, and within all kinds of long-term retirement savings – RA’s, for instance.  Indexing has become a predominant means now for retail.  It used to be mostly institutional players like CalPERS of the world using indexing.  Today, about a third of all mutual fund assets as they’re studying them, are now also going to essentially be index products.  Thirty-eight percent of all pension fund assets in the States are in one way or another, in passive products today so it’s quite a big trend going on globally.

ALEC HOGG:  You know the South African scene.  You grew up here.  You have family here.


ALEC HOGG:  Why do you think it’s taken this country so long to click to the fact that index funds are pretty good investments for the ‘know nothing investors’?

ANTHONY GINSBERG:  That’s a very good question.  You always ask perceptive questions.  I think the answer is IFA (American Financial Advisors) earn their fees today based on a fee.  They therefore want the lowest cost building blocks, whether it’s the unit trust using indexing or an active fund, but they want the cheapest building blocks.  In South Africa, you still have a commission situation where people are being paid in a different format.  In the U.K. and in the U.S. increasingly, guys are looking for the lowest cost asset allocation building blocks, so if they want exposure to mining, small caps, or to emerging markets they’ll use indexing rather than finding some hotshot manager who, more often than not, is a comet that flames out after a couple of years.  The trend, increasingly, is someone who’s on the front cover of some of these famous magazines.  He’s already had his day in the sun, and he’s not necessarily going to be a star going forward, but rather a comet.  You’re therefore finding that the guys who are remunerated overseas in a different way…they already are in the U.K. as you know, and the IFA’s in America are typically getting paid now more for asset allocation advice and risk management advice.  They aren’t being picked or chosen based on hot tips or on who they think the next star manager is going to be, so you see their financial advisory job changing, being more risk-orientated, giving a full service based on families’ current accounts that are required, and also estate planning.

ALEC HOGG:  Is the population happy to pay fees?  I think that’s been the case in South Africa.  I remember years of being drummed into my head, that insurance policies, or investment or savings products are never bought – they are always sold.  Now, if you’re charging a fee it’s pretty hard to sell something, whereas if you get a commission from the insurance company or the asset manager, it’s a lot easier.

ANTHONY GINSBERG:  Well, the regulators have really slammed down on kickbacks, rebates, and under-the-table commission so increasingly clients are actually seeing all the fees now.  If they’d rather pay point-two of a percent on an index fund than maybe one-point-four percent on an active fund…  Just to give you a sense of this…  If the industry feels that the American market will grow seven to eight percent per year over the next decade, a one-point-four percent fee is almost – annually – about a twenty percent performance fee you’re paying essentially, on that return whereas an index fund fee of point two or point three works out to be about a three percent, essentially.

ALEC HOGG:  What do you guys charge on your index?

ANTHONY GINSBERG:  We’re between 20 and 40 basis points.

ALEC HOGG:  So you’re with Signia who’ve come to…

ANTHONY GINSBERG:  No, we’re not actually with…

ALEC HOGG:  No, but they’ve come to change the market, they feel, in South Africa with their ETF’s.  I think they’re at point three, as well.

ANTHONY GINSBERG:  Yes, we work with Satrix and some of the other big boys such as Old Mutual and Sanlam etcetera and for us we’re really trying to bring the fees as cheap as we can.  In fact, our offshore index fund fees are at 20 to 30 basis points.  We’re actually at 15 basis points global bond fee, for instance.  Some of our global equity index fund fees are also around 15 to 20 basis points.  We typically have a retail share class and an institutional share class, and our fees are significantly under some of the index fees offered in South Africa.  Unfortunately, the administration fees here (historically, you’re right) were quite high.  Administratively, in the States, they’re even using funds as loss leaders now, so the Schwab’s of the world and the Fidelity’s are trying to get people onto their platforms offering iShares and other vanguard and index funds like ourselves incredibly cheaply, because they know there are other products that could be wrapped where they could charge slightly higher fees.  Indexing is therefore seen as the cheapest and frankly, the most transparent way of getting global exposure.

ALEC HOGG:  Anthony, we spoke earlier off-air about California – where you live – being the bellwether for the United States and of course, what happens in the United States happens elsewhere in the world as well.  You have a good feel for the way developed and developing markets are going.  It was interesting reading your latest research report.  Do you think that emerging markets are now starting to offer value again?

ANTHONY GINSBERG:  Yes, well obviously, the trend as everybody says is to get out of Russia for instance, but Russia is trading at PE’s of about four and five.  Emerging markets, based on the MSCI are trading at price-to-book of below one and the MSCI…

ALEC HOGG:  Explain what that means: price-to-book of below one.

ANTHONY GINSBERG:  Well, based on the Net Asset Value of a company, you would think if it has good prospects – typically, banks and others may be trading at one-point-five or even two times their book value based on their balance sheet.  These things are trading sometimes in the MSCI emerging markets, at point seven to point eight.

ALEC HOGG:  So they’re paying you to buy those.  In fact, you’re buying it at today’s price and you’re getting a big discount.

ANTHONY GINSBERG:  It’s a real Warren Buffet-style value investor, so yes, I know it’s totally out of favour – emerging markets – but the truth is that they’ve gone nowhere in two-and-a-half years.  There’s been about a 40 percent gap between how the SMP 500 has done and even Euro stocks, relative to the MSCI emerging markets.  If you therefore say ‘where is value for money based on PE ratios’…simplistically, you have PE’s of 17 and 18 in the U.S.  That’s quite high.  Europe is about 20 percent less on the PE’s – arguably – but the emerging markets are a steal you could argue, at about nine to ten on the PE.

ALEC HOGG:  What countries?

ANTHONY GINSBERG:  We like Korea.  We like parts of Latin America meaning Chile, Peru, and Columbia, which has done very well.  When you look at Europe, obviously Eastern European countries such as the Czech Republic and Poland are very attractive frankly, right now.

ALEC HOGG:  So would you then be sitting in California, buying some of those markets in the same way as you would for example, Satrix in South Africa?

ANTHONY GINSBERG:  Yes – quite.  You can overweight Poland versus the U.K. so when we talk about Europe we don’t necessarily just stick to one particular index.  You can customise these indices.  There’s an emerging European index for instance, where you’ll get the Eastern European countries.  For us our biggest bet for our clients typically in South Africa, whom I go and see every nine months: they’re looking at global developed markets versus the emerging markets.  Right now, the belief is that Europe has underperformed, as has emerging markets relative to the U.S.  The U.S. has really run.  My property in the U.S….real estate prices have come back in California.  California is relatively healthy.  Unemployment numbers are at about a five-year low now, both in the U.S. by about six-point-seven percent as well as California numbers.  If you actually look at the trend, the U.S. has had a very good run.  We don’t believe that the bull market’s over by any means.  Dividend yields, Alec – you’ll know from what you’ve experienced – versus bond yields…  Typically, bond yields start becoming pretty frothy at a certain point, and we haven’t seen bond yields go anywhere.  Right now, the Federal ten-year Treasury is sitting at just over two percent still.

ALEC HOGG:  Do you know who was in town last week?  It was Ben Bernanke.  One of his very first – I don’t know if it was the first, but it was certainly one of the first – public appearances and he really came across so well, despite the fact that he’s now out of office.  He gave one a lot of confidence that this American upswing is real, and that in fact, they’ve pulled it off.  Do you agree?

ANTHONY GINSBERG:  Yes, and believe it or not, manufacturing is actually coming back to the U.S.  Because of some of the wobbles in China and some of the issues with transportation costs, America is (you know about the trail gas)…  All our manufacturing costs are starting to come down in America.  Energy prices in America are far cheaper than in Europe and increasingly, the unemployment numbers look very attractive.  America’s not completely out of the woods for new job hires, but for people who are savers there’s been a wealth effect the last four or five years.  We’ve had a tremendous run-up.  We’re over 100 percent gains.  The SMP was at 667 and now we’re at over 1800, so there’s a lot more optimism in America.  People know we’re not completely out of the woods, but the yields have been low and Federal Reserve Chairman Yellen will most likely keep yields very low.  This tapering is going to take a good year to still work its way through with the ten billion Dollars per month tapering, so we’re…

ALEC HOGG:  The confidence is well founded.

ANTHONY GINSBERG:  I think Europe is still undervalued in terms of the equity market, so we see our clients trying to be slightly more overweight now in European equities and in emerging markets.

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