Investing offshore: is the approach justified?

Selecting an offshore equity manager is daunting and a passive strategy’s apparent simplicity often seduces investors. Getting broad exposure to difficult-to-outperform global equity indices at low cost is often used to justify the allocation. We argue that a long-term active approach, with low portfolio turnover to minimise transaction costs, has clear investor benefits.

As the Bank of England’s Andrew Haldane argued in a 2014 speech, shorter-term mandates and passive investing have been proven to increase asset correlations and amplify pro-cyclical swings, reducing risk-taking detrimentally.

The perpetual nature of equity should make it an ideal source of long-term financing. When executed effectively, long-term active investment can be beneficial for shareholders, the wider economy and society as well.

The selection of an appropriate, actively managed global equity strategy is crucial. It’s imperative to use your offshore investment to complement your domestic assets and elevate risk-adjusted returns. Benefits of a quality approach

In assessing the ability of active quality investing to deliver longterm sustainable returns, we’ve studied how companies with a high return on invested capital (ROIC) mean revert. We found quality companies are more profitable, generating a higher ROIC, and are also less prone to mean reversion or a decay (long-term fall) in those returns over time.

These companies typically use capital-light business models and have enduring competitive advantages, i.e. intangible assets such as brands, copyrights, licences and distribution networks.

These competitive advantages create barriers to entry that protect quality companies from competitive threats and are typically found in the consumer staples, health-care and technology sectors. The local domestic equity market provides investors with limited exposure to these quality sectors.

Investing in companies with sustainable top quartile ROIC is most likely to deliver strong longterm shareholder returns.

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Rossouw and Finlay are with Investec Asset Management

Picture: Bloomberg ‘The mining industry has lost its nerve. The new fad in town is joint ventures. It’s very strange if you’re a major miner. They should be comfortable in their ability,’ Bloomberg quotes Randgold Resources CEO Mark Bristow as saying.