Look through cycles to gain a long-term perspective on investing offshore

Possibly the main advantage of investing offshore is the diversification benefit. This benefit may come through either enhanced returns, or reduced risk, or some combination of the two. One way to assess this is to calculate the annualised rand return per unit risk (the annualised standard deviation of returns, also known as volatility) one achieves by adding foreign assets to a portfolio of local assets. If the return per unit risk rises when adding foreign assets, the portfolio is benefiting from the offshore exposure on a risk adjusted basis. Similarly, it would not have been beneficial if adding the offshore exposure reduced the return per unit risk.

The graph plots the annualised return per unit risk for different mixes of local assets (represented by the FTSE/JSE ALSI) and foreign assets (represented by the MSCI All Country Index), assuming quarterly rebalancing. The graph shows the return per unit risk achieved by a portfolio over three time periods: