How to build a diversified offshore portfolio
Savvy investors know that the investment world is much, much bigger than what's on offer on the JSE. finweek’s practical guide will assist investors to broaden their baskets offshore.
investing offshore has always been a hot topic among South African investors. That is probably because South Africa’s economy only makes up a paltry 0.5% of global GDP, and the JSE acts as a gateway to less than 1% of the global investable universe.
The world is a whole lot bigger than just South Africa, and savvy investors in this country know that. They do not want to miss out on the opportunities available, which is why the topic has always been a hot one.
So hot, in fact, that a few years ago we saw a trend among South African companies to acquire assets and businesses offshore. It seemed that everyone was doing it and if you were the CEO of a local listed company which was not expanding internationally, you were doing something wrong.
The reality is, however, that most of the local companies that we all praised for buying golden eggs in foreign markets have ended up holding several rather alarmingly large bags of lemons.
Lesson learned then: do not back a company that is expanding offshore for the sake of expanding offshore. Rather back a company that has pretty much always earned most of its revenues outside of South Africa.
A recent research note published by Dwaine van Vuuren of Sharenet Analytics brought to light that, as things stand now, 57% of the earnings for the companies that make up the Top40 index comes from abroad. Even more interesting was Van Vuuren’s research showing that companies which earn 70% or
more of their earnings from outside of SA have greatly outperformed almost every other large-cap share on the JSE since end March 2018.
Note in the graphs how Woolworths and Netcare, with their relatively recent offshore acquisitions, are underperformers, while the likes of BHP, Sappi and Richemont – which have been making the majority of their earnings outside of South Africa for ages – are all outperformers.
The moral here is that companies which operate primarily outside of SA are doing a lot better than companies that operate primarily within this country, even though they have some offshore earnings. This is mainly because of the long-term weakening of the rand due to the interest differential. This, then, strengthens the case for South Africans to save and invest their hardearned money in opportunities outside of South Africa in order to maximise returns.
Building an offshore portfolio
Which brings us to our first problem. How do we go about building a diversified offshore portfolio?
I can go about answering this question by leaning on complicated mathematics, or I can simply suggest that investors consider spreading their total available investment funds across a number of different economic sectors in accordance with how confident they are that those sectors will perform well in future.
In other words, if you believe that computer gaming companies and microchip processors will outperform banks and retailers, then you would allocate more capital to the first two sectors than you would to the second two.
There is no perfect way of doing it: the idea is just to back your best ideas with more capital.
From Van Vuuren’s research we can also conclude that when building an offshore portfolio, we can get access to certain sectors internationally by buying shares in companies listed locally on the JSE. However, we should not consider buying JSE-listed companies that make less than 70% of their total earnings outside of SA.
Therefore, we can say that via the JSE, we can get access to:
Listed property in Eastern Europe,
■ Gold mining, ■
Diversified mining, ■
Luxury consumer goods, ■ Forestry and paper, ■ Pharmaceuticals, ■ Tobacco, and ■
Food services. ■
That may seem like a long list, but it is actually somewhat limited. There is still room for:
Listed property in other parts of the world,
■ Alcohol (which you get on the JSE ■ through AB InBev),
Tech and gaming (which you could get ■ through Naspers* on the JSE, but primarily with exposure to China only), Defence, ■ Finance and insurance, ■ Health and social care, ■ Retail trade, ■ Wholesale trade, ■ Construction, ■ Manufacturing, ■
US tech, ■
Education services, ■ Agriculture, and ■ Emerging sectors such as: ■ • the marijuana industry in the US, • Space exploration, and • Computer gaming.
This presents us with our second problem. How do we pick stocks in industries we hardly know anything about in countries we are not familiar with?
Luckily, we have options. We could enlist the services of a portfolio manager or adviser to help us pick individual companies, or we could invest in a unit trust and leave those choices to the fund manager. Or we could buy a variety of exchange-traded funds (ETFs) that represent different industries or indices in other countries.
Furthermore, if we opt for unit trusts or ETFs, we can choose to either take our money offshore and buy unit trusts or ETFs in an offshore account, or we could make use of local unit trust and ETF providers to gain access to offshore
Companies which operate primarily outside of SA are doing a lot better than companies that operate primarily within this country.
are clearly a great option for local investors wishing to access diversified offshore portfolios without having to deal with the hassles of taking money offshore and picking sectors or stocks yourself.
Handing over control of your portfolio to a fund manager is not everyone’s cup of tea, though. For investors who would like to control their own portfolios but still benefit from easy diversification, ETFs are probably the easiest solution – individual stock picking is not required, although you have to decide on the country or index to invest in.
Over the past few years, South African ETF providers have made a wide range of offshore-focused ETFs available.
I am listing some of the better ones below, but note that not all the information available on these ETFs are presented here. If you decide to invest in any of these funds, you are strongly encouraged to read through their fact sheets before making an investment decision. It would be wise to consider these ETFs, and ETFs in general, as building blocks for an overall portfolio.
Consider the top holdings in the ETFs in which you want to invest and make sure that you are not just repeatedly investing in the same companies and ending up with a highrisk portfolio anyway.
Most of these ETFs are considered high-risk investments, except for the ETFs focused on dividends, property and fixed income. But when combined with the lower-risk ETFs and some equity holdings, the overall risk profile of your portfolio should fall due to the diversification that spreading your investments across sectors and regions brings.
Below, a total of 11 offshore ETFs listed on the JSE are discussed. A portfolio could be constructed by allocating an equal amount of money to each of them, or, if you want to take less risk, put slightly more into the property and income-focused ETFs than into the rest.
You will have to decide for yourself which indices, sectors and regions you believe will perform the best in future and make your decisions from there.
Dwaine van Vuuren of Sharenet Analytics