A strong case to increase your offshore investment exposure

Marriott believes that it is still a good time to increase ones offshore investment exposure as it is possible to invest in some of the largest and most recognizable companies in the world on yields in excess of local equity yields. These attractive valuations afford investors the opportunity to improve the overall quality of their personal portfolio.

However it is difficult to convince local investors to invest offshore at present, especially after the experience of the last decade. Back in 2000 investors were encouraged to invest offshore for three major reasons.

1) Good returns in offshore markets – The S&P500 index returned approximately 29% p.a. in the 1990’s compared to 14% from the JSE All Share Index (the returns are in Rands for the period Dec 1989 til Dec 1999).

2) Protecting themselves against currency weakness – The Rand was R6.56/USD at the beginning of 2001 and ended that year at approximately R12.00/USD.

3) Diversification – It is always a good idea not to put all your eggs in one basket especially when South Africa comprises only 1% of the world’s economy.

The reality was that these investors had a misrable experience compared to those invested in local markets. For the decade that followed (Dec 1999 til Dec 2009) the South African All Share Index significantly outperformed first world markets and many South African investors continue to adopt a “local is lekker” investment strategy.

The table below shows the annualised returns for major world indices (in Rands) for the decade ending Dec 2009:

Source: Bloomberg

With the JSE All Share Index currently at a historic high (above 50000) and dividend yields below historic averages, we feel investors looking for good returns from the South African market may well be dissapointed in the years ahead. We feel the South African equity market offers little value; however our outlook for certain global equities is very positive.

The table below highlights how much more attractive the dividend yields of three first world businesses are compared to their dividend yields back in 2000. Importantly the outlook for dividend growth looks secure and are inflation beating.

Johnson & Johnson

Johnson & Johnson is a global manufacturer and distributer of pharmaceuticals, medical supplies, and dozens of everyday brand name consumer products. It has been in business since 1887. We all grew up with Johnson’s Baby Powder and Johnson’s Baby Oil. The company’s consistent performance has enabled it to generate an exceptional track record of growth that few, if any, companies can match: 29 consecutive years of earnings growth; and 50 consecutive years of dividend increases.

Nestle

Nestle probably owns more brands than any other company in the world. The company sells over 1 billion products a day in 132 different countries. This unrivalled portfolio of brands allows Nestle to be a part of the day to day lives of all of us in every corner of the world.

Proctor & Gamble

P&G provide products that people use daily in bathrooms and laundry rooms all over the world. Many of P&G’s products have been market leaders for decades. With manufacturing plants all over the world and sales in over 100 different markets P&G is a giant in the global consumer product market. Every day a billion or more people use a P&G product – items that wear out quickly and need to be replaced. There are 25 billion batteries consumed every year. P&G’s subsidiary Duracell is the world’s leading manufacturer. P&G’s Gillette has 70% of the global market for razors and blades.

What all these companies have in common are brands that are trusted and products that consumers can’t go without. These characteristics allow them to operate largely unaffected by macro events. This is evident if one looks at the uninterupted dividend track record of Johnson & Johnson since 1978:

Invetsors can access these companies in two ways:

1) using Marriott local feeder funds which invest into global first world funds, or

2) using their R4 million offshore allowance per annum to invest directly into Marriott’s first world funds or the international investment portfolio.

In summary, local assets are expensive and investors looking for value will need to look offshore. First world companies like Proctor & Gamble, Johnson & Johnson, and Nestle are on attractive dividend yields which affords investors the opportunity to improve the overall quality of their personal portfolio by buying into some of the biggest, most respected companies in the world. It will also help increase the long term expected returns and diversification qualities of the investors’ personal portfolio.