Diversification and wealth creation through global exposure

07 July 2021

There are few more important tenets in investing than diversifying one’s exposures. While this tends to be discussed mainly in context of financial assets, it is important for South Africans to consider their overall household balance sheet. This would include not only financial assets in the form of pension funds but for homeowners, one’s home equity would also constitute a major asset class, which grows in value when the accompanying mortgage loan gets paid down over time.

While saving for one’s pension is one of the most tax efficient ways to save towards retirement, many households have been considering how to grow their wealth by putting aside additional discretionary income. Even though past performance is never an indication of future performance, we need to avoid recency bias when considering investment options. The Johannesburg Stock Exchange (JSE) has been on a tear over the past year fueled in large part by the performance of resources stocks but it is worth bearing in mind that in the previous five years JSE returns lagged cash returns.

Over the past decade, while you would have almost trebled your money by investing on the JSE, where the majority of companies’ earnings is derived from offshore, a better choice both from a diversification and rand return view point would have been to invest in a basket of offshore shares, which would have seen your money grow close to fivefold over 10 years.

One of the key components of returns remains the depreciation of the rand. After halving in value compared to the greenback from 2010-2015 – the rand has in the past year clawed back much of its value to be trading at 14 to the United States dollar (USD) – roughly in line with where it was trading in 2015. This is therefore an opportune time for investors who wish to diversify their wealth and to externalise some of their funds.

The South African economy represents a tiny portion of global gross domestic product (GDP), around 0.5%. So, limiting investment allocations to South Africa doesn’t make sense, especially considering the levels of concentrated exposures in the South African market, with the impact of Naspers and mining stocks to consider.

Global investing gives investors access to some of the fastest growing and most innovative companies in the world like Tesla and Amazon. Including global exposure in your portfolio, especially at current levels, makes sense for South African investors.

So, what can investors do to diversify and grow their wealth?

Ashburton Investments has two interesting options that are proving increasingly popular with investors who want to diversify offshore - particularly into industries that are not well represented locally such healthcare.

The Ashburton Global 1200 Equity Fund of Funds ETF (ASHEQF) captures 70% of the world’s market capitalisation via investing in seven regional Exchange Traded Funds (ETFs) as a way to keep costs low while ensuring tracking efficiency. These are the S&P500 (US), MSCI Europe, S&P TOPIX 150 (Japan), S&P/TSX 60 (Canada), S&P/ASX All Australian 50, S&P Asia 50 and S&P Latin America 40.

It has returned just over 16% annualised in ZAR over the last three years and has R1.2 billion assets under management. The S&P Global 1200, which is the index that the Ashburton Global 1200 Fund of Funds ETF replicates, has returned an annualized 10.37% in USD over the past decade, beating other global indices such as the MSCI All Country World Index and the FTSE All World Index. It has also achieved these returns with lower volatility.

The ETF provides cost effective geographic and hard currency diversification in one simple JSE listed investment that does not require the use of your offshore allowance. It has been strong performer because of its exposure to developed markets which continue to perform well thanks to world leading stocks like Apple, Netflix, Microsoft among others. Currently the fund’s biggest sector weightings are technology (22%), healthcare (12.3%) and financials (13.3%).

Another option for investors to consider is the Ashburton Investments SICAV- Global Leaders Equity Fund. It is an actively managed, concentrated portfolio of the world’s most prominent companies, household names and industry leaders.

Investing in these ‘world class mega-caps’ aims to deliver sustainable above average returns through the strength of their market position in an attractive industry such as Alphabet, Samsung and Warren Buffet’s Berkshire Hathaway. The fund has returned 11.18% in USD over the past five years, putting it well ahead of its benchmark and many of its peers.

South Africans have two ways to invest in this fund. They can invest using their offshore allowance directly into the US dollar-based Ashburton Global Leaders Equity Fund (the principal fund). Alternatively, they can invest into the Ashburton Global Leaders ZAR Equity Feeder Fund which is the rand-based feeder fund equivalent. 

Investing in a basket of quality international shares will allow local investors to be invested in some of the biggest brand names globally and gain exposure to businesses growing across a large number of markets. And by staying the course over the long term and leaving the investment to rise in value over time, investors will greatly benefit from the power of compounding.