Diversification: why it's important to consider offshore holdings
Diversification is the age-old practice of not having all your eggs in one basket. Spreading investments to limit exposure to any one type of asset class and sector, helps reduce the volatility and risk of a client’s portfolio over time.
To create smooth inflation-beating returns, your clients need a mix of sectors and companies in their portfolios so that when some investments perform poorly, this can be offset by strong performance elsewhere. For example, when interest rates are low and consumer confidence is high, the retail sector grows. When the rand is weak, retailers suffer by paying more for imported goods while the mineral sector grows as exports become cheaper for international buyers.
Diversification is especially important in South Africa where a large percentage of the Johannesburg Stock Exchange (JSE) consists of mining companies. Website Trading Economics shows that the SA economy contributes only 0.48% to global GDP, highlighting how risky it is for investors to expose 100% of their capital to such a low number.
The benefits of investing offshore
Access to global investment themes: This is one of the most significant benefits of investing offshore. Investors are able to access global investment themes that are either not available in South Africa or not as diversified as offshore markets. For example, the global pharmaceutical industry is currently estimated to reach US$1.12 trillion by 20221. Investors wanting to access the growth potential of this exciting sector have few local choices. There are three companies listed in the pharmaceutical and biotechnology sector on the JSE’s Top 40, one of which is Aspen Pharmacare one of the world’s largest pharmaceutical companies. By comparison, the NASDAQ has around 350 major pharmaceuticals listed as at February 2017.
1http://pharmaceuticalcommerce.com/business-and-finance/global-pharma-market-will-reach-1-12-trillion-2022/ November 2017
Diversification: Clients’ portfolios are diversified with exposure to different economies, investment strategies, currencies, managers and products. These economies and markets are impacted by different factors to that of the local market – the theory being that when the local market is performing poorly, offshore investments may have strong performance.
A buffer against rand depreciation: In recent years, the rand has performed poorly against stronger international currencies. Offshore investments can help investors earn returns in a stronger foreign currency, which when converted back to rands, can provide them with higher returns due to a favourable exchange rate. If the investor chooses to keep their portfolio offshore, they benefit from diversified currency returns.
When is the right time?
As with any investment decision, the principle of long-term investing must always be kept in mind. Historically, it was recommended to invest overseas only when the rand was strong. However, as the GDP growth forecast in South Africa continues to be low in 2018, it’s wise to invest in stocks and funds with a diverse geographical exposure to economies that are growing at a faster rate than ours.
Things to consider
Keep in mind that many offshore investments may require you to use your discretionary offshore investment allowance. However, if you invest in a rand-denominated investment, such as the Discovery Global Value Equity Feeder Fund, there is no need for you to convert your rands into foreign currency as you are effectively using the unit trust’s offshore allowance instead of your own. There is also no limit on the amount that you may invest through a rand-denominated offshore fund since you do not require any tax clearance for these investments.
Choosing the right offshore products and funds
The key principle is to choose a provider that you and your clients trust. Preferably one with a presence in South Africa as post-investment service and insight is very important when investing in a foreign market. By choosing an established local provider, you can be assured that the offshore product will be suitable for the unique circumstances of a South African investor and that you will be guided through the relevant taxation and estate planning considerations.
Discovery Invest offers a skilled and experienced investment team, efficient administration systems and technology, and focused relationship management - factors crucial to managing a successful offshore investment portfolio.
In summary
Your clients should consider investing offshore to diversify their exposure to currencies, asset classes, geographies and investment themes. The size of your client’s offshore investment portfolio must be suitable for their long-term goals. Never try to time the market – rather invest when your client has the capital to allocate offshore. Remember they are investing for the long term. Always choose an established and reliable provider of offshore products.
Discovery offers a full range of offshore funds for investors with varying risk profiles and return expectations.
Disclaimer
This article should not be taken as financial advice and is meant for information purposes only. For all advice related matters please contact your financial adviser.
Discovery Life Investment Services Pty (Ltd) branded as Discovery Invest is an authorised financial services provider. Registration number 2007/005969/07.