Focus on the company, not the country when investing offshore

Investors looking for offshore exposure are too focused on top-down issues such as a country’s overall economic and political situation, says Marius Fenwick, Chief Operating Officer at Mazars Financial Services. “They forget that even countries with extreme difficulties, like the USA, various European countries and Japan, still have companies producing strong profits.”

Fenwick says many investors are consumed with the negative news coming out of developed economies like the USA and Europe. Fund managers, on the other hand, are mostly aware that there is an inverse relationship between equity returns and Gross Domestic Product (GDP). “The highest equity returns often come from markets with the lowest GDP and vice versa. This is because high GDP leads to profitable companies, which leads to increased demand for their shares and inflated prices.”

He says it’s important to look at where a company earns its income. Leading Japanese companies sell their products all over the world. The fact that Japan is still recovering from the earthquake and tsunami earlier this year and has an ageing, frugal population is irrelevant. Japan is probably in as bad a position as the worst European country from a debt-to-GDP exposure perspective, however, they do have the benefit of their own currency and can print money when required unlike Greece, Italy and Portugal. This takes the focus off Japan even though the country is almost terminally ill from an economic point of view. Various fund managers have identified solid companies in Japan and large amounts of funds are accordingly flowing into the country.

“Equally, in an offshore fund, it’s important not to fixate on its geographical spread,” he says. The fund might have a 60% exposure to the USA, whose economy is in the doldrums, but only 30% of the overall earnings come from the US market.

The fact that many funds are priced in US Dollars is irrelevant. It is purely a pricing currency. A fund that invests in Japan, Europe, China and BRICS (Brazil, Russia, India, China and South Africa) can only report in one currency, quite often USD, and performance of the overall fund will not be materially impacted by currency shifts. The same applies to the Euro and the British pound (GBP).

Fenwick says the consensus is that, going forward, growth will emanate from emerging markets. But investors can still invest in blue-chip European shares, despite Europe’s economic turmoil, that supplies its goods and services to emerging market countries such as the BRICS and its balance sheet is driven by emerging market demand.

“Investing offshore continues to be a sound strategy, particularly as there is better value to be found in developed markets than is currently the case on the JSE,” says Fenwick.

“But make sure you’re investing for the right reasons, such as diversification, and with fund managers who focus on companies as opposed to geographical regions.”

He says fear of the Rand devaluing further should only account for around 20% of your decision. “In 2008, we learned that the Rand doesn’t only go down. It can appreciate as well, and rapidly. So don’t make currency your sole reason for taking offshore exposure in your portfolio.”

One of the other lessons learned post-2008 is to be wary of investments that tie you in for a long time, such as certain hedge funds and property funds. “If a fund invests in long-dated instruments, and the markets tank, you could be stuck. If you need liquidity, and your investment horizon is less than 10 years, be careful.”

This is not to say that Fenwick advocates switching in and out of funds in response to volatility. “When you switch in and out of funds in an effort to time the market, you are more likely to experience substantial losses.”

Another lesson for offshore investors is to invest with value managers, who focus on stocks with low valuations. “If an asset class is above its long-term average, it’s probably expensive. But if your fund manager invests in value shares, there’s a margin of safety.”

Diversification between asset classes still remains the ultimate strategy, now more than ever, Fenwick says. After 2008, asset classes have changed character and previously uncorrelated assets have become more correlated and previously correlated assets have become un-correlated. This calls for a different approach than in the past and it is advisable to appoint investment specialists that specialise in strategic asset allocation.

Fenwick says there is currently value to be found in offshore commercial property. However, the problem is occupancy rates. “If you invest in commercial property now, you could get a good bargain, but may have to suffer flat or even negative returns for a while. Commercial property only works well if the economy is growing.”

In conclusion, Fenwick says investors should have an offshore exposure of approximately 30% right now, particularly if they have an investment horizon of more than five years. “But stick to the basics, diversify, reduce your expectations for the next five years and don’t change your investment objective. Trust your investment specialist and ride the bad times along with the good. Trying to time the market is the most unreliable strategy and the one most likely to fail.”

Mazars Financial Services is a division of global audit, tax and advisory group Mazars.