Go offshore for investment benefits
Find room for global assets in your portfolio
Today, as a consequence of the instability of the rand and political uncertainty in SA, the majority of local investors’ investment choice has shifted in favour of offshore assets.
Global assets have a place in an investor’s portfolio. Failure to sufficiently diversify is one of the most common mistakes made by investors. Studies on optimal portfolios recommend a minimum offshore allocation of 20%-30% through the cycle for long-term investors. Here’s what to look at when investing offshore: Diversify your investment portfolio to
● include international assets. Beyond the opportunity to invest across ● a broader market, global markets have diversified the returns of SA investors, on average.
The rationale for diversification is clear ●
– SA assets are exposed to the local economy, while offshore assets offer access to developed and emerging economies. The world is changing: technology, medicine and urbanisation are driving the global economy. Simply focusing on the SA stock market means an investor has no stake in companies that will drive global growth. These businesses such as Apple, Facebook, Uber, Coca-Cola and BMW are based in other countries.
A portfolio made up exclusively of SA-focused
● businesses, concentrated in consumer services, mining and resources and retail, would be underweight “new economy” industries. So, you not only lose investment opportunities, but also the diversification benefits of investing in industries not on the JSE. A portfolio investing solely within the local stock market automatically excludes 99% of the global opportunity set.
Protect yourself against major price increases
Most of the goods and services we consume are imported. As we purchase a significant portion of consumer goods from overseas markets, we should protect ourselves against price increases by holding foreign currencies.
While this aspect of offshore diversification cannot be ignored, it makes sense for investors to protect themselves from currency weakness. The weakness of the rand will likely remain a strong driver of increase in the prices of goods and services. All else being equal, we would expect the currency to continue to be a diversifier for non-SA investments from the standpoint that currency movements directly influence inflation between countries.
An opportunity to allocate money to cheap assets
It is the price you pay that counts in investing. Global stock markets’ returns move in cycles, and this creates opportunities to buy assets at very attractive prices. You can allocate assets to take advantage of any market inefficiencies across the world.
This is different from using the weakness of the rand, where investors only allocate funds offshore when they feel negative about the local currency. We have created model portfolios to select offshore funds through a combination of qualitative and quantitative research, to remove the uncertainty of offshore investing.
Global equities offer value
Global diversification has merit. Research suggests that, for long-term investment, international diversification can have a favourable effect on portfolio risk and returns. We cannot speculate on the future path of returns, but we are confident that returns for SA and non-SA assets will continue to differ, leading to a continued benefit from diversification.