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Strate­gies will differ from one per­son to an­other and there will be risks, writes Jo­hann Barnard

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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

Re­nee Ea­gar

Bradley Mitchell

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