“Why Invest Internationally-?” “For large, long term returns, at an acceptable level of risk.”
Tools for Investing Overseas
-Cash
-Property-overseas
-Collective Investments
Multi-Asset Funds
Equity Funds
Fixed Interest (Bond) Funds
Onshore or Offshore Funds
Passive v’s Active Funds
ETFs
The Benefits of International Investments:
- The investment opportunities are huge.
- Risk may be reduced through good governance and stable currencies.
- Your portfolio risk is reduced through diversification.
- There are Investment products that suite the average saver.
- Skilled independent analysts will help you choose your investments.
Morningstar (www. morningstar.co.uk and www.morningstar.com) is one of the premier independent analysts.
Note: We will highlight the assets that the average investor can understand and make use of.
We do not discuss single equity investments, the choice of individual bonds, derivatives and other alternative investments.
Cash
- Cash is quick and easy to get hold of.
- This is important in an emergency.
- It is sensible to have cash rather than have investments if you are about to pay for something.
- Cash in the currency of purchase avoids exchange rate risk.
For example, we hold our children’s future U.S. college education in US$. A Kenya shilling devaluation will not threaten our US college education.
Return on cash:
The return on cash is equal or less than inflation.
Volatility of Cash:
There is no volatility of the cash holdings.
(You will get out of the bank the same number of USD that you put in. plus the usually small interest and less any bank charges).
Note the currency risk below.
Liquidity of Cash:
Money in a current account is highly liquid as it can be withdrawn immediately; for example through an ATM machine. The ease of accessing money from a Savings account depends upon the conditions set by the bank.
Risk to Capital:
Banks can go bankrupt. Countries will often guarantee depositors their money below a certain level.
See Institutional risk
Currency Risk
Note the effect of currency appreciation and depreciation.
Example – currency depreciation:
Jim is left KSh3,000,000 by Aunt Freda for his children’s education when 100/- = 1$.
KSh3,000,000 could get $30,000.
However, he delayed buying USD, for a couple of years, with his KSh3,000,000 until 1$ = 130/-
Because of the depreciation of the KSk to the $ he could only get:
KSh3,000,000/130 = $23,077, instead of the $30,000 he could have got.
Institutional risk – There are banks that have gone bankrupt.
In Kenya your first 500,000/- within a bank is guaranteed by the Kenya Deposit Insurance Corporation.
In the US the first US$250,000 per ownership category is guaranteed by the Federal Deposit Insurance Scheme.
Charges– There may be monthly charges or small withdrawal charges. These are usually minimal.
Special Issues of Cash:
- It is often difficult to open an overseas bank account.
-Your own bank may help if they are subsidiaries of, or have links with, overseas/offshore banks.
-Overseas financial institutions who operate in Kenya may also help.
- Available cash is a must for emergencies and other short-term requirements.
- As above, note the dangers of inflation-
(See Calculating Inflation) - Be careful in choosing a bank because of its higher interest rates earned on deposits.
Why does it pay more than other banks? Are other depositors worried about the bank?
Property-overseas
General:
Pros of Property
- Capital appreciation and rent can result in a good return on your investment.
- You can touch and feel what you own.
- A lower portfolio volatility results from Property prices moving up and down at different times to your other assets.
- Property can be dual purpose- e.g. to house your studying kids in UK, at the same time as being an investment.
Cons of Property-
- Management and maintenance is time consuming. This includes finding tenants, dealing with burst pipes, non-payment of rent etc.
- An agent can reduce the hassle. This will cost you money.
- There are tax considerations in the overseas country to consider. Advice is needed on this before buying.
- Note also the issues described under ‘Long term investing in Kenya’ : Property in Kenya.
Return on Property:
The positive real return and its benefits of diversification makes Property a core investment of your portfolio.
Inevitably real returns differ depending upon the areas researched.
The average annual real return on Housing and Equities were both found to be 7% across 16 developed countries over the 150 years studied. (Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, Alan M. Taylor 02 January 2018).
A separate study (Source: Deutsche Bank, GFD, ICE Indices) indicates that the increase in price of private housing in the USA in real terms (Less inflation but excluding rent) is approximately 1%.
Volatility of Property:
- Property appears less volatile than equities.
This is probably more due to available and timely information available to the equity markets than is available to the property markets. - Price levels in developing countries are more difficult to gauge than those of the developed world, as property prices are less transparent.
- Inflation and interest rate movements change price levels.
- Price movements may also be localised.
For example, new laws allowing commercial development in the area may raise the price of property. - Deterioration or improvement of the neighbourhood will also have an impact on prices.
Liquidity of Property:
Property is generally considered not to be liquid. It can take time to find a buyer comfortable paying your asking price.
Risk to Capital:
- Prices can rapidly lose their value.
- Pricing property can be uncertain and approximate. This is especially the case in developing economies.
- Property prices are, however, more available in the developed world.
- Property adds to the diversification of your portfolio of bonds and equities, reducing your portfolio volatility (Risk).
- Where a lot of properties are being bought and sold it is easier to more accurately gauge the price of properties. If there are only a few annual transactions price levels are more difficult to gauge.
An example of a useful source of data on past property transactions is the British Government WEB site:- https://landregistry.data.gov.uk/
It would be worth searching for similar data from the area of interest to you.
Charges- Property:
This will vary depending upon the country.
In the USA, Washington DC, a number of years ago, we estimated the cost of selling a small property at about 12% of its market value.
It would be wise to check your total costs before deciding upon a course of action.
These costs can be considerably more expensive than equities transactions.
Special Issues of Property:
Buying property in a foreign country you will be dealing with a different culture, with different laws, and different tax rates etc.
It is wise to do the research before you purchase.
International Financial Investments
The world’s financial markets are huge with many assets you can invest in, such as companies, commodities, derivatives etc.
This is a world where your money can slip through your fingers like grains of sand.
Fortunately, the financial industry has developed investment products for the average person. One of these products is the Collective Investment.
Collective Investments (also known as ‘Funds’)
-Money from different investers is pooled together.
-Assets are bought with this money.
-The fund manager has advertised what assets they are going to buy.
-The assets may include equites, bonds, property, gold etc.
-If the asset prices go up, the value of the fund will go up.
-If the prices go down, the value of the fund will go down.
The following Collective Investments are discussed below:-Multi-Asset Funds
Equity Funds
Fixed Interest (Bond) Funds
Onshore or Offshore
Passive v’s Active Fund
ETFs
In Summary– Collective Investments (Funds)
An example of a Collective Investment (Fund):
A financial institution such as Blackrock decides to start a Fund.
Blackrock, The Fund manager, will receive fees from investors in exchange for investing and managing investors money.
Blackrock decides the fund will invest in one hundred very large US companies. They believe this new fund, under their management, will produce a good return on the money invested
You invest $100 into this fund. You want to make a good return on your money.
Of $100 invested Blackrock will divide the $100 into the 100 companies of their choice. i.e. $1 per company.
If their 100 companies do well the $100 invested will increase in value.
If they do badly the investment will decrease in value.
In the first year the total value of the fund increases from $1,000,000,000 to 1,100,000,000 net of fees -(after Blackrock have taken their fees)- i.e. 10%.
The $100 will now be worth $110.
Collective Investments include mutual funds, UCITs, unit trusts, etc. They have different legal structures but are broadly similar.
We will refer to them as ‘Funds’.
Funds (Collective Investments)
Funds suite the average ‘man on the street’:
- They are managed by skilled investors.
- The investor spend little time managing the money. This is the job of the fund manager.
- Funds are regulated by the countries’ financial authorities.
- A little money can be invested in many companies, industries and countries.
- This can spread the risk of your investment and increase diversification.
- Good funds have turned a little money into a lot of money over time.
Wide variety of funds
Funds can be invested in a wide range of different assets such as bonds, global equities, small Japanese companies, gold, derivatives etc.
The fund managers decide the assets for their mutual fund. The investor decides if she wants to invest in this particular fund.
An Example: An investor wishes to invest in a Japanese small cap fund (i.e. a fund holding only small Japanese companies.)
The investor will search, through Morningstar or the Financial Times etc for the best small Japanes company fund.
Why would I want to invest in Funds?
You are looking for a good return with an acceptable level of risk. Funds will help you do this:
- Your investments being domiciled in a well-regulated financial market, within a strong legal system gives you a level of protection.
If something goes wrong you have recourse to the country’s financial authorities and their courts.
- Well managed financial institutions with competent fund managers are available.
- The process is reasonably transparent.
- Third parties will assess the funds.
They will question the competence of the fund managers, and the financial institutions housing the funds by looking at their investment processes and returns etc. - The investor will have access to the third party reports.
- There are a large number of funds of different types to choose from to suite your particular needs.
- People living far away from these financial markets, can invest in them.
- Once invested it is relatively hassle free.
- There are funds which add to the diversity of a portfolio.
An example is the Balanced Multi-Asset Fund.
The Balanced Multi-Asset Fund will hold equities from different industries in different countries, in different currencies, as well as in different assets e.g. bonds, commodities and other alternative assets.
How do I Choose the Funds to Invest in?
Asset Allocation is the proportion of your money that you invest in each asset class. For example: a third of your money in property, a third of your money in equities and a third in cash.
Asset Allocation is one of the most important decisions for your long term investments.
The Funds you choose will be highly dependent on your plan for your asset allocation.
Asset allocation requires a relatively high level of expertise. It may be wise to get the help of a financial professional to help you with this.
For a simple portfolio your financial professional may chose a Multi Asset Fund to help you properly allocate your money into the various assets.
It is then the job of the Multi Asset Fund manager to decide how much money to invest in each asset within the Fund.
(A list of Funds and analysis of available funds can be found on Morningstar.co.uk.
Click on Tools on the top right hand heading.
Click on fund screener.)
Multi Asset Funds:
The categories of Multi Asset Funds are usually simplified into Cautious, Balanced, and Growth funds.
Your financial professional may, given your circumstances, choose which of these suite you best.
The Multi Asset Fund manager decides the proportion of the money to be invested into the different assets.
Consideration is taken of the external environment, as well as the fund catagory i.e. whether it is a Cautious fund, a Balanced fund, or a Growth fund.
Mixed Asset Managed Funds may become the core of your investment portfolio.
( Please note the funds mentioned below do not constitute advice to buy. The description of the fund is there to help you understand the catagories. )
The Cautious Multi Asset Fund has a higher proportion of low risk assets i.e. cash, bonds and low risk Hedge Funds.
It has a lower proportion of higher risk assets such as equities.
The benefit is that the cautious fund will tend not to fall as far as midium or high risk funds if the equity markets fall.
Example of a Multi Asset Cautious Fund:
Wellington Dynamic Diversified Income Fund N Inc Unhedged ISIN: IE00BYZFN864
Input IE00BYZFN864 into Google and you will find information on this fund.
Moderate/Balanced Multi Asset Funds:
The choice of asset mix is similar to the Cautious Allocation but has higher proportion of growth, higher risk, assets such as equities.
Example of a Balanced or Moderate Allocation:
T. Rowe Price Funds SICAV – Global Allocation Fund A ISIN: LU1417861728
Growth/Aggressive Multi Asset Funds:
This is the most aggressive of the Multi Asset funds. It will hold a higher proportion of the investment in volatile assets such as equities, high yield bonds, property etc.
You would expect higher volatility with a higher return going forward.
Example of Growth/Aggressive Multi Asset Allocation
Mercer Diversified Growth Fund M-5€ ISIN: IE00BGSH7924
Search (Google) using the Fund name or the ISIN number.
A Morningstar address that will describe the fund is a good place to start.
The addition of equity funds to your main holdings which are multi asset funds will increase the long-term potential for growth, but also add volatility.
Equity Funds:
Equity funds invest only in shares of companies and usually hold 40 to 200 different equites. They may have cash available for investment opportunities as they arise.
A US Large Company Equity fund will include large US Companies.
A Small Japanese companies Fund will include only small Japanese companies.
An equity fund will give you the potential of a higher long term return, but with greater volatility along the way.
Information from independent analysts such as Morningstar will help you choose the funds appropriate for your situation.
Example Equity Fund:
‘Veritas Global Equity Inc A GBP ISIN: IE00B04TTW78 is an example of a pure equity fund.
Fixed Interest (Bond) Funds
A Bond is an investors loan to a company or a country. The investor expects to receive back the amount invested plus interest.
Bonds vary from low risk, low return Sovereign Debt (e.g. US Treasury Bills), to the higher risk potentially higher return of emerging market bonds and company debt.
As investors get older and need to draw down on their portfolios, the Fixed interest portion of their portfolio tends to increase.
Bonds, returns are expected to be lower than equities in the long run, but tend to hold their value better than equities during times of recession and financial stress. This is of value if you have a sudden need for cash.
The Equity markets have had periods when they have dropped in value and remained low for an extended period of time.
Example of a low risk Bond Fund:
It includes low duration, US Treasury debt.
A low return but low risk investment.
PIMCO GIS Low Average Duration Fund R Class USD Accumulation IE00B8FKXY51.
Example of a lower credit rated Bond Fund.
It includes International and longer duration debt.
A higher return but higher volatility fund.
Dodge & Cox Worldwide Global Bond Fund USD Acc IE00B5568D66
Passive v’s Active Fund
An Active fund manager will use his knowledge and skills to get the best return with an acceptable level of risk. He will buy and sell assets to try and achieve this goal.
E.g. Capital Group AMCAP Fund (LUX) A4
LU1926924827
A Passive fund manager will follow an index such as the S & P 500. His skill requirement is more limited. He makes no decisions other than to track the index. The fund charges are therefore lower.
E.g. abrdn American Equity Tracker Fund N Acc
GB00BDFZ7321
Charges are one of the most important factors to take into account when choosing investment options.
You will be charged whether your fund makes money or loses money.
Only a minority of Active fund managers beat their Passive fund manager counter parts, partly due to their higher charges.
Active fund managers do better in specialist areas such as emerging markets where the access to company data is more limited than for example US Large company funds.
An option is for a core holdings of Large Cap industrial world equities to be invested in low-cost Passive funds.
The expertise of Active fund managers is then used for the specialist funds e.g. an Africa fund. The fund manager could have access to information on African equities not readily available in the market.
Personal circumstances: Choosing the asset allocation of your portfolio depends upon your personal circumstances, i.e. employment prospects, age, level of wealth etc.
This requires ‘Active’ decision making.
It is worth considering using the help of a professional financial advisor.
ETFs
ETFs are similar to passively managed Mutual funds. The ETF manager has decided what to put into a basket. The basket, for example, may holds shares or derivatives of shares.
Usefully for the average investor they represent an index such as the S&P 500. As the S&P moves so they will similarly move.
Examples include Vanguard (VOO) and iShares (IVV).
They have become increasingly popular for people looking for low cost, passive Investments.
Due to their structure they tend to have lower fees, which will have a major impact on the investment’s performance.
Benefits of ETFs:
- Low cost tracking of an index
- Continuous trading, unlike a mutual fund that is traded daily. (This, though, is probably of little interest to most of us.)
- The fund manager has less of a responsibility for the performance of the fund. There is less room for management error.
Caution
- In extreme situation (Fat tail events), as with mutual fund index trackers, you will be swept along with the crowds.
As the index falls, so will your investment fall in value. - There is no fund manager attempting to minimise your loss.
Example of an ETF: Vanguard FTSE North America UCITS ETF | VDNR IE00BKX55R35
( Please note again that naming the funds above do not constitute advice to buy. The description of the funds is there to help you understand the categories. )
Onshore or Offshore
An Onshore Jurisdiction, the majority of financial transactions are domestic e.g. Within Kenya for Kenyans.
An Offshore Jurisdiction, the majority of financial transactions are from external sources e.g. International money invested through the Isle of Man, Singapore etc.
Onshore Financial Jurisdictions
- Usually cater for their own nationals
- Charge the national tax rate on investment returns.
- Often difficult for non nationals to open a bank account without a local residential address.
Example of a UK domiciled fund and so taxable in UK: Dimensional UK Core Equity Fund GBP Accumulation
GB00B15JMH94
Offshore Financial Jurisdictions
- Caters to non national and thus international money
- No or little tax charged upon investment returns
- Enhanced confidentiality
- Easier to operate for foreigners as their focus and expertise is international.
- Can be well regulated e.g. Jersey, Guernsay, Isle of Man, Singapore etc
In previous decades offshore was synonymous with tax avoidance.
Under international pressure this is no longer the case for many offshore centres.
There are offshore jurisdictions that are well-regulated with an effective legal system such as Isleof Man, Guernsey, Jersey, Singapore etc.
E.g. BlackRock Global Funds – Emerging Markets Fund D2
LU0252970164
Note: Your tax bill will be dependent upon your own circumstances including your country of residence.
Being Informed:
The better informed about the world of investing you are ,the better your choice of investments and the better your choice of financial advisor.
Good for the basics of investing, Morningstar.com and Morningstar.co.uk have many free articles for the beginner.
Morningstar.co.uk looks at offshore domiciled funds in addition to UK funds.
Morningstar’s quantitative analysis looks at the past performance of the fund.
Their qualitative analysis is an assessment of potential performance going forward.
More in depth information will require an annual subscription.
Major British News papers usually have a section on personal finances once a week. The Financial Times, as an example, has the statistics for funds past performance.
How do I invest in these funds?
Kenya is considered a ‘High Risk’ country regarding the source of any money.
An investor usually has to go through a Finance Advice Intermediary working in Kenya and acceptable to the International Investment Company through which you will invest.
While a search of the internet (Google ‘Investing in Kenya’) will give you some ideas of the choice of Finance Advice Intermediaries, word-of-mouth reputation is a safer option. (See Note below)
You may be offered a Life Insurance platform (e.g. Friends Provident, Utmost etc) that holds funds.
For large amounts of money (US$1million+) you can get an investment house to create your own portfolio to suit your own particular circumstances.
So, to invest internationally, you will need to look for financial advisors/sales people who operate in Kenya, and who have access to these investment opportunities offshore.
NOTE:
Most financial companies offering investments wiIl be earning fees for accepting your money. This is what motivates them to do a good job for you.
In choosing to follow a financial sales man / advisor representing a finance company note that they are paid a commission on the sale of a financial product. There is thus a motivation to sell their product however suitable or not.
There are those financial advisors who understand that a good service to their clients over the long term will lead to good long term financial results for themselves. They will earn fees from their happy client over the years.
There are those financial advisors that are more motivated by the short term benefits of the sales commission than the financial health of the client.
Choose your financial advisor wisely.
In Summary- Collective Investments (Funds)
General
If you choose wisely, Collective investments / mutual funds can be a relatively simple way of diversifying your portfolio and obtaining an acceptable return given your risk profile.
They can operate with little input from the owner and therefore little hassle over a good period of time.
Return:
There is a large number of options that will produce a good return over the long term.
Volatility:
Volatility varies
A lower return is usually expected of low volatility funds.
A higher return is expected from a higher volatility fund.
Liquidity:
Funds may be relatively liquid.
Getting your money back may take from 2 weeks up to a month from the financial institution.
Much of this time is spent getting the regulatory paper work in order (KYC_ Know your Client) .
This includes:
- Passports,
- Evidence of where you live, and
- evidence of where the money has come from etc.
Note: Beware taking out your money during a time that the financial markets are particularly volatile. You will lose money if the markets may have temporarily fallen, and so your own investments have lost value.
Risk to Capital:
- Investment in a well regulated market has a relatively low chance of loss of Capital from theft.
- If the fund is well diversified and well managed, the fund can be volatile, but probably increase in value over the long run.
- Cashing in your investments on a market down turn will lose you money.
Charges:
- Fund charges are low compared to buying and selling most assets.
- Passive funds are lower than Actively managed funds.
- ETFs can be especially low.
- Due to increased regulatory and market scrutiny of fund charges there is a general tendency for a lowering of fees over time.
- Fees are important and can eat away any gains you make through investment growth.
- In addition, for actively managed funds, there is statistical data that lower fund fees correlate to a greater fund returns.
A General Note on Inflation:
It is important to note the following example.
I get a return on my investments =10%
Inflation = 8%
So at the end of the year I can buy approximately 10% – 8% = 2% more goodies WITHOUT FEES.
I am charged 3% a year for management + other services.
Then at the end of the year I can buy 2% – 3% = -1% more goodies. That is, I can buy 1 % less at the end of the year than I could at the beginning.
Charges are an important factor in your investment decision.
Issues to Note:
- Mutual funds are very helpful in diversifying your wealth. They can be a core holding for a substantial portion of your wealth.
- Ensure that the fund is well managed and that the fees are within an acceptable range.
- The Total Expense Ratio should be below 2% for an actively traded multi asset or equity fund, and less than 1% for a bond fund. High yield bonds can just top the 1 %.
- Passive funds are lower cost.
- For a standard index fund the charges will be 0.5% or less. You are looking for a fund that does a good job in representing the index it is purporting to represent.
- If the fees are high there should be a good reason.
- Morningstar is a good source of information.
- Search the fund on the internet (Google), then look for Morningstar.co.uk.
(See also ‘Build your own Portfolio of Investments ‘, and ‘Example Portfolios‘)
Build your own Portfolio of Investments
Important: This information on this WEB site ALONE should not be used to make investment decisions. Investing is particularly personal and is dependent upon your circumstances. You are strongly advised to take independent expert advice before deciding whether to/ or whether not to invest your money.