Taking a broader view
It makes sense to look offshore to build a balanced portfolio
A n argument in favour of investing offshore is the vastly superior range of shares available, writes Johann Barnard. And with exchange controls more accommodating of highnet-worth individuals who wish to grow their wealth by participating in global opportunities it certainly makes sense.
Given that SA constitutes less than 1% of the global economy, the argument for accessing a broader range of opportunities is compelling — particularly given SA’s weak growth and depreciating rand.
“With SA being a small economy, as an investor your choices are limited. For example, within the pharmaceuticals sector on the JSE, you are limited to only three companies . . . whereas on the London Stock Exchange there are 60,” says Wayne Sorour, head of Old Mutual International SA.
“If you then add the US and European pharmaceutical companies, the choice becomes even wider. When you compare the valuations of those companies . . . they could be better than the three you can choose from locally.
“In the past, because of stricter exchange controls, we never had a choice. However, with the staggered relaxation of exchange controls, South Africans now have more opportunities to invest outside SA . . . It makes a lot of sense to do so. By diversifying offshore, you’re reducing your risk and thus volatility as well.”
Sorour makes the point that while emerging markets are at times favoured for their higher returns — which come with higher risk — local investors generally have sufficient exposure to this potential by virtue of SA being an emerging market. Diversifying into developed markets flattens the risk profile.
For some — investors who expect to emigrate, who take vacations abroad or want their children to study abroad — the hedge against the currency is even more important.
However, for those “looking at it purely from a return-on-investment perspective, then it’s easier from an administration point of view to look at rand-denominated investments or feeder funds”, he says.
“You also need to look at the tax implications. On direct offshore investments you’re taxed on the hard currency gain, whereas in a rand-denominated fund you pay tax on the rand gain. If the rand devalues, your tax bill will be higher but so will the returns.”
It is clear that it makes sense to look offshore when building a balanced, diversified portfolio, but such decisions should not be made lightly.
Maitland senior investment manager Greg Harris cautions against viewing offshore investing as an opportunistic hedge against the local market.
“You should absolutely be diversifying globally, but it should be a strategic decision, not a tactical on and off allocation,” he says. “As South Africans, our clients are more sensitive to the fact that you need to diversify globally given the local currency volatility, but it is generally best practice for international investors as well.”
The ultimate test, Harris adds, is whether there is scope in offshore markets for better assets that are able to deliver returns over the next 20 years. He believe this is so, given the wider universe of choice and
If you don’t want the volatility of an equity portfolio, alternatives are protected equity and hedge funds
higher growth rates outside SA.
But it does not automatically guarantee higher returns.
Citadel advisory partner and investment strategist Maarten Ackerman says, despite this cautionary note, that the valuations of many global companies are currently more attractive than JSE rand-hedge stocks that are trading at a premium.
“You can buy similar companies somewhere else in the world where economic growth is likely to be multiples of local growth . . . These companies are likely to generate better profits than many local companies and you pay less for them.”
Ackerman believes equities are the most attractive vehicle for capital growth, particularly given low returns from less risky instruments like bonds or money market accounts.
“If you don’t want the volatility of an equity portfolio, then some alternatives are things like protected equity and also hedge funds, or hedge fund of funds. Global listed property is also something to consider.”
Overall, he advocates a healthy exposure to global equities. “There is a major benefit to having offshore exposure in most market conditions, because of diversification across not only different countries, companies or industries but currencies as well.
“If you invest for the long term, the rand/dollar diversification will definitely help to improve the risk-adjusted returns if offshore exposure is included in a local portfolio.”
The arguments suggest global exposure makes sense. But it can be a little daunting. Making use of the guiding hand of an accredited financial adviser, wealth manager or broker certainly makes sense too.