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.

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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.

Ex­change-traded funds

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

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