Tak­ing a broader view

It makes sense to look off­shore to build a bal­anced port­fo­lio

Financial Mail - Investors Monthly - - Feature: Global Investing -

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.

Pic­ture: iSTOCK

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