A case for offshore investing

When going offshore the best advice is to take a long view because time may prove to be your best risk diversifier and best assurance of solid returns," says Paul Hansen, Director of Retail Investing at STANLIB.

He adds that feedback from advisers indicates that the short-term focus of many retail investors makes offshore diversification a hard-sell. "The reason is currency risk. The rand may highlight offshore risks, but in the long run can you afford not to? The JSE accounts for only 0.6% of global market capitalisation. A number as thin as that means you can sometimes be investing on a knife-edge."

Concentrated local market

Louise Usher, Head of Asset Consulting at Momentum Wealth, agrees, "As at 31 May 2006, there were only 200 companies in South Africa with a market capitalisation greater than US$50 million, which can be compared to 14 000 in developed markets. Almost 60% of the South African market is accounted for by two sectors, with the top ten stocks accounting for over 45% of the total market compared with 6.5% in global developed markets.

The reality is that our market is highly concentrated in individual stocks and sectors. Investing internationally will provide your clients with a more balanced equity portfolio that is less likely to tumble in times of sector specific turmoil."

Optimal results

A 2006 risk-return study by STANLIB showed that a 69.5% commitment to a balanced domestic portfolio complemented by 30.5% in a balanced offshore portfolio produced the optimal result for an annual return of 1.5% in rands per unit of risk, compared with 1.3% per unit of risk for a pure SA balanced portfolio and 0.9% for a pure offshore balanced portfolio.

In percentage terms, the return on the optimal local and global mix was 17.3% a year, against the pure SA portfolio’s 17.9% return and the 15.9% gain by the pure offshore portfolio. The risk level of the offshore-onshore blend was 11.47, which was lower than the SA portfolio’s risk of 13.83 and 17.6 totally offshore.

Performance

"Management of risk is key to effective financial planning but it is out performance and exceeding expectations that really create happy clients" says Louise.

"Last year’s out performance of international markets shows that our market is no longer a one-way bet with the average price/earnings ratio of shares on the exchanges of developed markets on a par with comparable SA companies.

"The end result therefore cannot be refuted; investing internationally will not only provide increased diversification with some degree of protection, but also performance that should result in a pleasant client meeting."

Time is the key

The key issue is time in the market, says Paul. "An adviser consulting to an investor who takes a long view should not be afraid to suggest offshore solutions. The client looking out across a five- or 10-year (preferably even longer) investment horizon might usefully venture offshore – while keeping a weather-eye on needs and the risk profile."