A smart bet to invest offshore

SOMETIMES IN a debate, both sides can be right – it depends on where the protagonists are coming from and what their objectives are.

Recently, I have found myself on one side of a debate with other financial advisers and fund managers regarding how much people should have in offshore investments.

I have long thought it essential for New Zealand investors to have at least 40 per cent of their investment funds offshore. This is partly because it gives access to bigger and better markets and to industries we simply do not have.

New Zealand investment opportunities are fairly limited, and only by investing offshore can you get exposure to industries like pharmaceuticals, banking and clean tech.

However, my greatest reason for making investments offshore is risk mitigation. New Zealand has a very small and rather brittle economy that could break under economic shock. New Zealand depends on its exports and we have two major export industries: Agriculture and tourism. It is not hard to see something happening which could skittle both: A major biosecurity breach (think foot and mouth disease); another big earthquake (we are due in a few places); major volcano (imagine if it was in Auckland); political turmoil in China (our second biggest customer).

Any or all of these things (and, no doubt, a few unthinkable others) could hit New Zealand’s economy hard, collapsing the exchange rate and making it very difficult for us to buy anything imported (petrol, clothes, cars and so on).

So, I maintain a full exposure to offshore investments and I do not hedge these back to the New Zealand currency. Many advisers/ managers hedge back to the New Zealand dollar, which increases returns and reduces volatility. However, in the event of a major economic crash in New Zealand, you are still effectively exposed to the New Zealand dollar – and so your ability to buy imported goods or travel would still be severely restrained.

Financial advisers and managers who I have discussed this with concede my points but then tell me New Zealand is now the investment place to be. Returns have been lower offshore than in New Zealand for a decade or more.

Anyway, they say as their last shot, these doomsday scenarios of mine are not very likely, are they? We cannot run our portfolios for something that is unlikely to happen. Well, hold on – these things are not that unlikely. There have been five biosecurity breaches in this country since 1999; we average an earthquake of over magnitude 7 about every six years; volcanoes are fairly common; and China does not seem a perfect model of stability.

Even if these things were of low probability, they would be high impact. A major event as mentioned (or some other completely unforeseen event) could devastate the New Zealand economy and currency.

There have been better investment returns in New Zealand and I really hope that continues. However, wholesale tactical asset allocation away from global markets and into New Zealand is effectively pushing hard for higher returns at the expense of more risk.

As an investor and an adviser, I follow that old medical maxim: First, do no harm. This means to put safety before higher returns. Warren Buffett has two rules of investment: Rule No 1 is do not lose money. Rule No 2 is always remember rule No 1. Again, this is safety first.

So, in many ways the advisers/ managers who want to tactically allocate more to New Zealand and I, not wishing to, are both right. It is just that we each have different perspectives and objectives: Mine is about safety of capital and the managers/advisers are about higher returns. I readily concede New Zealand has been the place to invest lately – I celebrate this fact and hope it continues.

However, being risk-averse with a safety-first approach, I am not going to bet my life savings that this country will go on forever without a major economic shock: I will accept lower returns and continue to keep 50 per cent of my money offshore. Martin Hawes is an authorised financial adviser and his disclosure statement is available free of charge at www.martinhawes.com. This article is of a general nature and no substitute for personalised financial advice.