Investing in passive index trackers offshore: getting started, choosing funds

BizNews Editor Jackie Cameron first met founder of GinsGlobal Anthony Ginsberg about 20 years ago when he had decided to start a business providing access to low-cost index trackers. Now, GinsGlobal has around R85-billion under management. In the BizNews Finance Friday webinar, hosted by Cameron, Lisa Segall – director and certified financial planner at GinsGlobal – and independent financial expert Dawn Ridler, of Kerenga Wealth Management in Johannesburg, three discuss the importance of investing in passive trackers offshore, the 'massive rush to passive' and how to get started on tracker funds such as ETFs. – Nadim Nyker.Read also: Meet South Africa's global index-tracking pioneers.The reason GinsGlobal started.Jackie Cameron: You've managed to turn this business into a global entity, which is hugely impressive, are most of your clients South Africans?.___STEADY_PAYWALL___.Lisa Segall:.Bogle did with Vanguard.So the business initially was started on an altruistic level, not actually just for profit. And the reason why is that you can't hide your fees and index tracking and there isn't much money in it because it's very transparent. You can see the difference between the fund and the index and the difference between those two is your fee. So I think that's why it wasn't started earlier in the 2000s. There's not much you can hide with index tracking in terms of heavy annual performance..The 'massive rush to passive' investing.JC: Dawn, are you finding a lot of your clients are wanting passive funds? .Dawn Ridler: Yes, they they certainly are. And I have a bit of a love-hate relationship with ETFs. I am concerned, particularly in the States, that ETFs are actually starting to distort the market because they've become so popular and it's become a matter of the tail wagging the dog rather than purely following what the market's doing, that they're actually becoming money market makers. Purely because of the amount of new money that's flooding into these ETFs..But having said that, they form a very important part of most of my client's portfolios. I think they're an excellent way, especially if you don't have the critical mass, to get an exposure to either a market or a part of a market or something like, say, gold without having to physically do it. So, yes, they are really important, but they're not the be all and end all..[ETFs are] really great for people who are just starting off investing, they can get their feet wet without spending huge amounts of money…But they're not the be all and end all..They're really great for people who are just starting off investing, they can get their feet wet without spending huge amounts of money. They can put a thousand rand a month, whatever else it is into these investments. But, you have to start balancing the portfolios in this kind of thing. And if you don't want it to be pure equity, because the risk of too much market volatility, especially if the clients get into their 50s, ETFs then start to play a smaller role in the portfolio even though they'll always still be there..Create an active and passive portfolio when investing.LS: Look, I think Dawn has said some very salient points. I don't think that's a debate between active and passive. I think both strategies should have a place in your portfolio. The only thing is, it's very hard to find an active fund manager that consistently outperforms the benchmark. So one year they might do well, in the second year they don't. So in that case, we actually believe in building a foundation for your financial solution..It's very hard to find an active fund manager that consistently outperforms the benchmark…especially on a long term, like five to seven or 10 to 15 years, 90% of U.S fund managers are underperforming the benchmark..LS: And over and above that you can choose, if you can find one, an active fund manager that's more flexible in terms of changing the asset class…Especially on a long term, like five to seven or 10 to 15 years, 90% of U.S fund managers are underperforming the benchmark..DR: You can actually get the best of both worlds because what we're talking about here is the equity portion of a class portfolio. Certainly when it comes to the equity portion, ETFs are almost a no brainer and can form the core of a client's portfolio. But when you have to have more certainty in capital in these uncertain times, you have to have add the other asset classes and you have to have an asset manager or be able to have somebody who constructs a portfolio around that that equity. .What is the best way to invest in the S&P 500?.LS: There are a few issues you've got to look at. For a Vanguard S&P 500, you've got to look at where the domicile of the fund is. So people look at the Vanguard S&P 500. I think maybe it's three or five basis points, which sounds very cheap, but it's actually only for US investors because of the way it's structured from a tax point of view. If you have an investment in your own name in a US or in the UK, you're going to be subject to inheritance tax. So we actually run those kind of funds, but in an offshore jurisdiction..LS: What I mean by that is that our funds are roll-up funds, which means the interest and the dividends of the fund are automatically reinvested into the NAV, which is your net asset value, your share price. The share price gets higher. So for a South African, you're not going to pay tax on the interest in dividend portion of your investment, only CGT, when you sell. But you've also got to look at is your fund actually tracking the index as close as it should be..How much money do you realistically need to invest to start a decent portfolio of ETFs?.LS: We start at $1,500, so it's about R20,000, just over it. You've also got to remember that depends on the price of your share. In dollars your prices are different to rands..JC: Dawn, do you have something to add to that about the money you need to get started?.DR: How much you put into investment is going to be dependent on your age and how much you you put offshore. You can start really cheap with, you know, some of the South African ETF and that kind of thing, and actually get exposure to those offshore funds with much less than R20,000 or whatever. You can do that for as little as R1,000 a month or so. I think that's a very good place to start is. Start small at any age, you know, irrespective of whether you're in your 20s or in your 60s, is to to start putting money locally until you pulled up the critical mass..Where to diversify investment first: the UK or US?.LS: I would recommend, as I said, a building block. The foundation of your investment solutions is definitely the Global Equity or MSCI World. So if you look at the active fund managers, most of them are using that as their benchmark on a global solution. So it's best to actually just invest in the benchmark, so MSCI World is about 65% US and the rest a bit of UK, Japan and the rest of the European countries.

Investing in passive index trackers offshore: getting started, choosing funds

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