Offshore doesn’t cut out risk
The last few years of poor JSE returns, a weak economy and political uncertainty has encouraged many South Africans to invest elsewhere.
Most claim this is diversification and that it’s always desirable. However, just taking your money elsewhere isn’t necessarily diversifying your portfolio.
“Diversification is about managing risk. It is not about avoiding or eliminating risk, which cannot be done without sacrificing investment goals. It also isn’t about trading one risk for another, presumably lesser, risk, nor should it be about taking risk indiscriminately for the sake of diversification,” says Bellwood Capital global equity specialist David Nathanson.
Investment process
There are two broad components to an investment process, he explains.
Country, or stock selection. “This part is about looking at different countries or stocks, assessing the risks, assessing the potential return, and deciding if you would hold them.”
“I’ve heard people make excellent cases for investing in South Africa now. Valuations are depressed, the market is cheap, the rand is weak, and we could see good returns. On the other hand, I’ve seen people make very good cases against South Africa, looking at the political risks, what’s happening with state-owned enterprises and our national debt.”
Diversification. This is when you consider all the investments you’d be happy to hold, and decide how to allocate between them.
“You have to decide how much risk you are willing to take with any one of those investments….” Part of this could be thinking about how much risk is too much.
“For example if you’re looking at South Africa, what is the probability of something going horribly wrong and you losing your purchasing power in a global sense?
“If that is a risk you are concerned about, then you wouldn’t put everything here even if you had a positive view of future returns in South Africa. That is diversification.”
It’s about managing different risks. “Every investment you make has risks,” Nathanson explains.