Financial Mail - Investors Monthly
Offshore investing
Offshore assets have pros and cons, and analysts stress the need for a diversified portfolio, writes
Global equities are recovering from their poorest annual performance since the 2008-2009 financial crisis. In the face of persistent risks, investors are understandably considering additional offshore investments to diversify and deliver returns.
“The global economic outlook is more complex than has historically been the case. Growth has slowed and greater volatility characterises the market,” says Peter Vincent, head of investment solutions for Europe, the Middle East & Africa at Franklin Templeton.
These factors have caused the US Federal Reserve to pause its interest rate hiking cycle as it shifts approach to a more patient, data-dependent response, says Vincent, who suggests that a diversified portfolio is vital.
Mike Wood, wealth director at Apio Group, explains that global bonds can generate investment returns because they offer opportunities to offset the negative impact higher interest rates can have on overall returns. “These strategies are not without some downside risk. Therefore it is best to implement a combination of strategies.”
According to Wood, investors should put their funds in short- and medium-term bonds because when rates rise, bond prices fall. “However, returns from global bonds are generally less volatile than equities, which means that shorter-term bonds provide protection against interest rate spikes, while offering stable and predictable returns.
“But shorter-term bonds deliver a smaller yield.”
While investing in government bonds may be tempting as investors seek safer assets, a key risk to consider is an inability to generate real returns in lower interest rate environments, suggests Allan Gray business analyst, Radhesen Naidoo.
“Consider that the yield on the JP Morgan global government bond index is only 1.5% right now but has a duration of eight years. A slight interest rate increase can have a significant effect on capital. Accordingly, these assets should be considered alongside other opportunities, as this strategy is not without risk.”
One opportunity proposed by Wood involves investing in floating rate securities. “The returns are adjusted for interest rates, which reduces the positive and negative effects of rate fluctuations to provide stable returns in volatile markets.”
Eric Streso, CEO at Eric Streso Financial Consultants, believes that structured notes also offer opportunities. “Principal protection and quarterly coupons for dividends are available from reputable fund managers, and the associated risk is far lower than equitylinked investments.”
In this regard, a diversified multi-asset fund that utilises an alpha, balanced and core investment approach offers investors numerous benefits. “Carlton James, for example, recently launched its diversified alpha fund. The ‘core’ aspect of the strategy delivers a quarterly dividend to investors on capital deployed through its lending programme and US commercial real estate fund, while its core element is a senior- and secured-debt approach running alongside ‘alpha’ generating components.”
Within developed offshore markets such as the US, where interest rates have begun to normalise, cash and credit are attractive options at present, as these investments offer real potential returns in US dollars, says George Herman, chief investment officer at Citadel.
However, interest rates in Europe and Japan are still extremely low, and the normalisation process will be detrimental to investors who hold bonds, credit and listed real estate in these markets.
“When interest rates rise, the price reaction from other major asset classes like bonds, credit, equity and real estate varies, depending on what the market priced in and reads from the hike, but in essence they all become less attractive relative to cash. The natural response in this case is to increase exposure to cash, while reducing equity and real estate exposure as the hiking cycle progresses.”
Now, following normalisation in the US Fed’s rate hiking cycle, Herman sees an opportunity for investors to take some profits off the table if they used the global equity sell-off to increase their short-term exposure.
“By selling into a strong recovery, investors can allocate more to US fixed income assets such as cash, bonds and credit and other shock absorbers like hedge funds and protected equity, which are all elements of a good risk-adjusted offshore portfolio.”
Bryn Hatty, chief investment officer at Stonehage Fleming Investment Management in SA, says opportunities have also emerged in the unlisted, private capital space for investors who are prepared to commit capital for 10 years or longer.