Put your money offshore UP AND AWAY
RISING RISK: PUT YOUR EGGS IN AS MANY BASKETS AS POSSIBLE
Diversification may not provide the best returns, but it has never provided the worst.
With political uncertainty continuing to dominate locally, and other emerging markets adding additional risk to local asset price returns, the case for offshore investing remains strong.
Country-specific risks are reflected in all asset prices and the only way to reduce the risks rooted in any one market is to look elsewhere.
Because good diversifiers generally have weak, negative, or no relationship with other asset classes they may maintain or even increase in value when another asset class in the portfolio loses value or delivers low returns.
‘Offshore’ basically refers to the 194 countries outside SA, not all practically investable.
In the past, offshore exposure was affected through either buying foreign currency unit trust funds and traditional mandate exchange traded funds (ETFs) directly, mostly in hard currency; or building up cash savings in hard currency in an offshore bank account.
Do-it-yourself
Investors must no longer rely on the experts to invest on their behalf when looking offshore. Building a offshore equity portfolio is now a real possibility and costs have been trending lower. Big names like Google, Amazon, Facebook and BMW can be purchased directly.
No longer just the US
Offshore investments have traditionally been centred around developed markets, which makes sense, as SA asset prices are highly correlated with emerging market asset prices, but enjoy only moderate (even low) correlations with developed market assets.
Something not often considered, however, is how SA asset prices correlate with frontier markets.
By simply looking north of our borders, the diversification benefit will be even greater than investing in the US. The MSCI South Africa has an only 0.2 correlation with the MSCI Africa (ex-SA).
Investing in the future
Thematic investing is a way to make investment decisions based on predictions about trends, rather than on past performance of the market or the fundamentals of a specific company. By digging a little, you can identify the companies that could change the world, and provide you with attractive returns.
While this sounds good, it’s difficult to self-identify the best way to benefit from changes in the way that society operates. In this case, one can consider investing in thematic ETFs focusing on artificial intelligence, robotics, me- dical advances, and even just the digital economy.
Offshore investment in rands
Many options are now available which don’t require using your yearly Reserve Bank-stipulated offshore allowance. SA-based investors can look at inward-listed shares on the JSE or ETFs and unit trust funds.
With geopolitical risk rising, currency volatility in many emerging markets, and growth arguably peaking in developed markets there’s still a case to be made for putting your eggs in as many baskets as possible.
Chantal Marx is head of research at FNB Wealth and Investments