Financial Mail - Investors Monthly
Navigating offshore
Tough decisions on where to invest outside SA, writes Pedro van Gaalen
As more local investors head offshore to realise better returns and buffer local market volatility, they will face vital decisions around where to invest.
“With so many options, it’s easy to become swamped,” says Greg Flash, chief investment officer at Cinnabar Investment Management.
“It is best to use a good independent discretionary fund manager that has defined portfolio construction techniques and can manage portfolios with a clear understanding of the investor’s required returns and risk profile.”
Offshore fund managers hunting growth favour global equities, with limited allocations to income products due to the low interest rates available in developed markets, he says.
“Combining cost-effective passive funds that provide market beta with true active global or regional equity managers is a sensible offshore investment approach. However, active managers should take significant bets away from the indexes against which they benchmark, and diversified portfolios should include funds with various factors or styles.”
Bryn Hatty, chief investment officer of Stonehage Fleming Investment Management in SA, highlights the importance of adjusting portfolios when market conditions change. “Correct asset allocation is particularly important in the current envi
ronment, where many assets have become highly correlated with one another.”
Doug Abbott, country head of Schroders in SA, adds that it is advisable for less experienced offshore investors to partner with an asset manager that delivers the broadest exposure to global markets.
“Investing in global equity markets or high equity multiasset strategies has generally served local investors well over the long term. Multi-asset strategies are beneficial because they allocate assets between classes and geographies, and can effectively manage volatility and maximise opportunities across global markets and market cycles.”
Chris Potgieter, CEO of Old Mutual Wealth Private Client Securities, says emerging markets, led by China and India, will drive global economic growth for decades.
“Corporate earnings drive equity investment returns, and economic growth drives corporate earnings over the long term. Emerging markets will play a significant role in driving global equity returns. Investors can get exposure to these fastgrowing economies by investing in Western multinationals that have operations in these economies, or by investing in domestic companies operating in those countries through their dual listings on developed market stock exchanges.”
Manoj Soni, chief investment officer of Capricorn Private Investments, believes that some diversification away from equities is prudent given the global climate. “We are more cautious about equities and have diluted our strategic holding from 60% to 40%, with a focus on quality US equities.”
Slower growth, the impact of trade tariffs and higher political risks will likely cause equities to lag in returns. Capricorn has reallocated the 10% difference into safe-yield and defensive assets such as asset-backed loans and absolute return strategies which are typically uncorrelated to public equities. While this reduces returns marginally, it significantly reduces portfolio volatility.
Richard Asherson, principal at Westbrooke Alternative Asset Management, says larger alternative investment portfolio allocations have resonated with global investors, particularly to counterbalance equity risk.
“Alternatives offer greater portfolio diversification, typically with a lower correlation to traditional asset classes. Alternatives tend to reduce volatility and provide investors with reliable or predictable income streams or some yield. Some alternative strategies also offer an inflation or currency hedge.”
Hatty suggests that investors should consider hedge funds and private equity (PE) where appropriate.
Soni is cautious on PE and later-stage venture capital. “Valuations are high, and there’s lots of dry powder. The flood of institutional investment into the sector may compress returns to S&P 500 levels. We prefer PE investments with smaller managers that are selective in their investment strategy and invest in companies with low to modest levels of leverage, which better positions them to withstand the recession expected in the next three to five years.”
Offshore property investments have also accelerated. Lisa Bathurst, an international property specialist at Hurst & Wills, believes that low local yields and growth have forced investors offshore.
“Property investment in stable economies like the UK has historically outperformed other asset classes over the past 30 years, providing confidence and stability. Yields and potential growth in other countries are also attractive and allow South Africans to build a strong foreign currency nest egg in a traditionally safe environment, and via an asset class they understand.” ●