Why your clients should consider investing offshore

A successful investment strategy is a diversified one, and investing in a range of asset classes is a proven strategy to minimise risk and volatility. Offshore, or global, investments should be present within any successfully diversified portfolio.

By taking advantage of investment opportunities globally, your clients can access and share in the growth of the world’s most profitable industries and companies, and benefit from holding investments in other major currencies.

Our research shows that spreading investments across different asset classes, industries and currencies in different countries is an effective way to produce better risk-adjusted returns compared to investing only in South Africa. Your client’s risk/return ratio generally improves by 14.5% if they invest 30% of their assets globally, which equates to less risk for a similar return.

How to invest globally

It is always a good idea for clients to widen their exposure to other markets and currencies. To be adequately diversified, market commentators vary their recommendation from 15% of a portfolio to more than 50% when considering offshore allocation. A general industry ‘rule of thumb’ is around 25% to 30%.

South African investors can gain exposure to offshore markets in two ways: either by investing directly in foreign markets with foreign domiciled funds using their R4 million foreign allowance; or through rand denominated funds which are local investment options offering some global exposure. Both of these options would give a client diversification in terms of foreign markets and currencies.

Rand denominated funds

If your client is investing primarily to diversify their portfolio and to reduce investment risk, they may be best off selecting a rand denominated fund. In this way, they would get all the benefits of investing globally while dealing with a South African institution, which means they would avoid having to physically take their money offshore or do the paperwork.

With rand denominated funds, a client would still gain exposure to the same global markets and to the same foreign currencies. However, the returns will always be in rands. There is not necessarily a difference in the performance exposure an investor would get through rand or foreign denominated funds.

Investing offshore directly

On the other hand, it would be useful for a client to utilise their foreign allowance if they are planning to physically hold that foreign currency in the future. This could be for things like funding a child’s foreign education, or if they plan to emigrate or retire offshore, for example.

Where to invest

With GDP growth of many emerging economies far outstripping those of more developed regions, global investor sentiment has increasingly shifted in favour of equity markets in countries such as China, India, South America and South East Asia.

However, while these markets present significant opportunities, clients looking for offshore exposure should not overlook the importance of exposure to developed economies – in addition to developing economies – as part of a well diversified global portfolio.

The golden rule of investing is not to put all your investment nest eggs into a single basket of assets. The next time you sit down with your client to fine-tune their investment portfolio, impress upon them the need to diversify. Putting some assets offshore is definitely a good place to start.