The risks and rewards of offshore investing
12 Jun, 2024

 

Horacia Naidoo-McCarthy, manager in the institutional clients’ team, Allan Gray

 

Most investors are aware that investing offshore should form part of their long-term diversification strategy. “The problem is that many of us suffer from home-country bias, which means that we invest a disproportionate amount of our savings locally,” explains Horacia Naidoo-McCarthy, manager in the institutional clients’ team at Allan Gray. She provides compelling reasons why you should consider investing offshore, both to take advantage of global opportunities and to diversify your portfolio.

 

Spreading risk and exposure to different sectors

 

As part of your long-term investment strategy, investing offshore allows you to spread your investment risk across different geographies. “In doing so, you improve your chances of achieving returns when one region may be underperforming and you avoid being overexposed to a particular region or currency,” she says. As an example, while the Nasdaq fell more than 30% in 2022, Brazilian and Indian equities delivered positive returns.

 

Another reason to invest offshore is it gives access to companies not represented locally. “South Africa does not have a developed technology sector, nor does it have a biotech sector,” comments Naidoo-McCarthy. “Lithium is an example of an investment that is not available locally, but is poised to play an important role in the global push to transition to renewable energy.”

 

A deterioration in the rand/dollar exchange rate is a further justification to consider investing overseas. “The rand is one of the most tradeable and volatile emerging market currencies,” she states. “South African motorists are all too familiar with the pain at the pumps, as a weaker rand is one of the contributing factors to ever-increasing petrol and diesel prices. Numerous other dollar-denominated goods, which include clothing, electronics and entertainment, continue to put pressure on local consumers. As such, it is necessary to invest offshore to protect your investment from whatever the rand may do in the future.”

 

But how much is enough offshore exposure?

 

Naidoo-McCarthy notes that Regulation 28 of the Pension Funds Act provides strict investment limits for retirement funds, which are designed to protect members’ retirement savings from being overly exposed to a single asset or concentrated basket of assets. This regulation suggests that 45% offshore exposure diversifies your portfolio, but still manages the risk that comes with offshore investing.

 

“This can be used as a guide, but there is no one-size-fits-all answer. You need to figure out the right ratio for yourself, with the assistance of a good, independent financial adviser, if need be. As with other investment decisions, consider your unique investment objectives, risk appetite and lifestyle,” says Naidoo-McCarthy.

 

The risks of offshore investing

 

While there are many good reasons to invest offshore, it is important to confront the risks. “The expansion of the opportunity set is accompanied by a risk-return trade-off, which should not be ignored,” asserts Naidoo-McCarthy. “Investing globally means venturing into unfamiliar territories with different political and economic risks.” She says changes in regulation or changes in government can have a significant impact on your overseas investment.

 

Similarly, it’s important to understand the impact of currency on your investment returns. “The underlying price of your investment fluctuates, but so does the value of the currency,” she says. For example, in 2015, a South African investor would have had a 34.6% rand return investing in the MSCI World Index, while the very same investment would have lost about 0.3% in US dollars. However, in 2016, a US dollar investment would have done much better.

 

“South African investors tend to rush offshore as the value of the rand deteriorates in the hope that we will protect our investments,” states Naidoo-McCarthy, although this logic is counter-intuitive. “Buying offshore investments when the rand depreciates means we are buying expensive offshore investments with a relatively weaker currency. The more rational time to invest offshore is when the rand is stronger.”

 

Investors looking to access additional offshore investments have numerous options, including rand-denominated offshore unit trusts, offshore unit trusts accessed directly through offshore managers or via an offshore platform, or by using products, such as an offshore endowment, like the one recently launched by Allan Gray.

 

“Investing offshore can be rewarding when a considered, long-term approach is taken,” concludes Naidoo-McCarthy.

 

ENDS

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@Horacia Naidoo-McCarthy, Allan Gray
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