Investing offshore: What are the best bets?

Many investors look anxiously to their advisors for guidelines as to where and what percentage of their assets they should invest offshore.

Diversifying your investments offshore offers some protection against volatility in the local markets. However, if you are only saving towards a South African rand based objective, such as children's education or retirement in South Africa, then investing in another currency exposes you to currency risk - the risk that the buying power of the currency you are invested in does not match up to the actual rand cost of your stated objectives.

This is according to Gavin Came from Sasfin, who adds: "Remember that the older the investor is the lower the percentage that should be invested offshore. This is especially true if there is a risk that the investor will outlive his funds."

Asset classes

"It would seem that whatever your domestic asset class split is determined to be in South Africa, should be mirrored offshore. One must, however, be careful of offshore cash – the current low interest rates, investment charges, domestic inflation and local income tax can result in an investor earning net negative returns on an apparently safe investment," advises Came.

"If the recent past has shown us anything, it's that the global economy and markets are more interlinked than ever, so it would probably be wise to start with the asset class decision - the most important starting point is the investment horizon," says Ian Michael Lane, CFA Chief Investment Officer of Third Circle Asset Management.

Investment horizon

"On a two to three year plus horizon, I believe equities and commodities offer a great buying opportunity globally, especially those that are trading at very cheap valuations and are exposed to the massive fiscal stimulus spending in developed and emerging economies. On a shorter horizon, cash offers low rates – a temporary measure only for investors who are sensitive to short-term volatility.

"Given the historically low interest rates, government bonds globally appear to be very expensive. I would avoid any long positions in bonds. Corporate bonds, on the other hand, offer superb value, and are likely a good investment irrespective of time horizon.

"I would also tend to stay away from property in general, as no benign scenario seems probable: either the economy stays in the doldrums and occupation rates and rents stay depressed, or the economy starts recovering and the vast amounts of money being pumped into the system drive high inflation. The last asset class, inflation-linked bonds, are probably good investments if held for income purposes to maturity given the long-term inflation view."

Where to invest?

"There are opportunities all over the world at the moment and I believe there is no particular geographical bias, except to say that nations at risk of sovereign bankruptcy, like Iceland, Argentina, Pakistan and a number of countries in Eastern Europe would best be avoided," advises Lane.

"Currency movements are always a major source of risk and volatility in offshore investing, and are notoriously difficult to predict. Having exposure to a basket of currencies is ideal, but I would lean towards preferring the Euro and commodity currencies like the Australian and Canadian dollars, and underweight the US dollar. If you can get your hands on any Chinese yen – a difficult thing to do – I would hold onto that with enthusiasm."

"A well spread global fund invested against an open or balanced mandate will give the best spread to an investor without the risk of getting country or currency bets wrong in the long term,' says Came. "The only possible deviation would be to take a view on the global presence of the manager you select and invest separately in the regions where they are not present."