Strategies will differ from one person to another and there will be risks, writes Johann Barnard
Offshore diversification strategies will vary from one person to another and there will be risk
The performance of global stocks over the past three to five years has more than rewarded investors who have diversified their portfolios into international markets.
The higher yields (in rand terms) simplifies the job of wealth managers responsible for growing clients’ capital.
Brenthurst Wealth’s Renee Eagar says the JSE all share index has returned 6.39% annualised growth over the past three years, and 10.38% over five years. The S&P 500 has grown 13.26% and 17.81%.
“SA is tiny in terms of the world economy, and the reality is that you can’t get access to specialised themes like technology, biotechnology and health care,” she says. “Your investment universe offshore is so much greater.”
She says investors have become a lot more aware of the need for offshore diversification. Nenegate was a pivotal moment in the awakening of investors, suddenly exposed to the dangers of too heavy an exposure to the local economy.
Eagar says the opportunities for global exposure are numerous and relatively simple, even for investors who don’t have the wherewithal to maximise their R10m annual allowance.
The easiest way is to buy into locally listed stocks that earn a significant proportion of their income from abroad. Then there are rand-denominated funds, so-called rand-swaps, that feed into offshore funds. They can be accessed through unit trusts that cater to the desire to diversify local risk.
“The most popular way is obviously direct offshore investing through your annual R10m allowance.”
The chosen route, or blend of these options, is dependent on an individual investor’s circumstances and financial goals.
“A person retiring in SA, for example, can’t have all their assets offshore because they will need income here. So that’s an instance when we will use asset-swap funds to create balance in a local portfolio.
“Also, offshore investing tends to be more volatile, and there has to be a longer-term horizon. When we take clients directly offshore, we say to them that it has to be seven years or longer.”
The global economy is not without risks. Economic growth will be hit by the trade war in which many economies have become embroiled, and major markets, including the US, have had an extended run of continuing growth and strong stock market returns.
Nadia van der Merwe of Allan Gray says this has led to higher valuations, which appear quite stretched.
“We think developed markets broadly look more expensive than others, and there have been a number of tailwinds that have contributed to their returns,” she says.
“The one area where we would argue for caution is the US market, in particular, which has been pulling on all levers to sustain elevated valuations. It’s not clear to us that these valuation levels are sustainable, and second, if it’s not sustainable, how things will play out over the next couple of years.”
Factors like the sustained quantitative easing by the Federal Reserve, which has only recently come to an end, and the latest corporate tax cuts have supported the market’s elevated levels, she says.
With the possibility of a pullback, Van der Merwe emphasises the need for proper analysis and evaluation of individual stocks.
“We analyse individual companies on a fundamental basis and construct our portfolios from the bottom up. While we are finding fewer opportunities in the US than we have in the past, it is not devoid of opportunities. This is where the value of an active investment manager comes through, in constructing portfolios.
“We don’t have to invest in the market as a whole, we look for individual opportunities that are trading below what we think they are worth and offer potential for attractive longterm returns, irrespective of movements in global markets overall.”
Bradley Mitchell of Sasfin offers some broad outlines on how investors might construct their offshore holdings. This obviously differs on an individual basis and should be planned properly in consultation with a financial adviser.
He suggests an investor with an aggressive growth mindset of earning around inflation plus 7% would need offshore exposure of 40%-plus.
“If you’re targeting returns of inflation plus 5% or 6%, an offshore allocation of around 30% is appropriate and prudent. And on the conservative side for clients approaching retirement targeting inflation plus 2%, they can reduce their direct offshore exposure to 10% or 20%.”
Nadia van der Merwe