Alexander Forbes: despite SA outperformance, case for offshore investing still strong

The South Africa equity market performed very well in 2009 relative to some offshore markets leading investors to question the case for offshore investing. However, the rationale for offshore investing remains strong as long as its objectives are understood.

John Anderson, Head of National Consulting Strategy at Alexander Forbes, said: “The primary reason for including offshore investments in a portfolio is to diversify the stream of investment returns.

“This allows exposure to additional asset classes and investment managers and most importantly, it allows the portfolio to reduce its risk exposure.”

Diversification does not aim to produce positive returns for every asset class in a portfolio, but to ensure that for a given level of return, the risk attached to that return is minimised over the relevant investment time horizon.

“Unless the diversification case for offshore investment falls away, the case for offshore investment is still a strong one,” he added.

Currently retirement funds are able to invest up to 20% of total assets in foreign assets, with a further 5% being allowable in the case of assets in Africa.

“Retirement funds need to be aware that in most cases, investment strategy is set in the context of a long-term investment horizon.

“Investors need to be aware that over the long-term, there may be short-term periods where offshore asset classes do not behave as expected, but this should not detract from the long-term benefits of having diversification from these asset classes in a portfolio with long-term objectives.”

There are however both advantages and disadvantages to investing offshore.

Said Anderson: “Diversification allows a split of investment by economy, currency, listed exchange, products and investment managers. Investment in markets and economies where the correlation to South African investment markets is not perfect will reduce the overall portfolio risk.

“Offshore investing allows for a much greater opportunity set to the investor, which can include industries and sectors that are either not available or not well represented locally.

“These diversification factors are a primary reason for offshore investment.”

Offshore investment can also enhance returns to the investor based on where a chosen economy is within its own economic cycle. Where markets are inefficient, mispriced assets can also provide opportunity for enhanced returns.

“Offshore investment allows investors to protect against the devaluation of the local currency Increasing domestic inflation will tend to lead to a depreciating local currency, resulting in increased domestic currency returns on overseas investments,” said Anderson.

Disadvantages include adverse currency movements, withholding taxes implications of overseas economies, the need for specialist expertise, differing accounting standards and legislation other countries and potential political risks possibly preventing the repatriation of funds.