Offshore equity can play a valuable role in your investment portfolio, adding diversification and, depending on your time horizon, a significant difference in your investment returns.
Investing in offshore funds as a South African adds the potential for better risk-adjusted returns, because it widens your choice of assets and offsets the risks of being invested in a single currency.
Offshore investing should not be an impulsive reaction to local events, rather it should form part of every investor’s long-term portfolio diversification strategy.
Hedging against the rand
Since currencies are highly volatile in the short term, taking an impulsive decision to invest offshore as a result of sudden currency weakness could be detrimental to your returns. One should rather take a medium to long term view and invest accordingly.
In the medium to long term, the rand is likely to weaken against other major currencies, in line with the inflation differentials between South Africa and those economies. That means that offshore investments are a way to preserve your wealth from erosion caused by local inflation.
Fluctuations in the rand/dollar exchange rate are influenced not only by foreign investor perceptions of opportunities in South Africa, but by sentiment towards emerging currencies in general. An investment in a developed market currency such as the dollar, sterling or even the euro can help to balance those fluctuations.
The performance of the FTSE/JSE All Share Index has been tepid overall, despite recent record performances – having returned a nominal 6.4% annualised over five years to end December 2020. South Africa’s weak economic growth forecasts could continue to constrain future returns.
Over a one-year period, December 2019 to December 2020, South African equities went up by 7%. In contrast, the Ashburton Global 1200 Equity Fund of Funds ETF, generated a total return of 19.83% over the same period. South African (SA) government bonds returned 8.7%, and short-term money market paper generated 5.4%.
Some allocation to offshore over this time would have enhanced the overall return of a portfolio made up of local assets only.
Of course, the opposite can be said in times of rand strength and relative outperformance of local assets. It is important to consider a well-diversified portfolio strategy and carefully select each building block by considering its specific risk/reward characteristics. Bear in mind that over longer time horizons, equity returns have historically outperformed those of fixed income and money market instruments.
Investors need to consider their risk tolerance and investment horizon when considering allocating money to offshore equities. The longer your time horizon the more likely a riskier portfolio will be able to weather the occasional market turbulence associated with a riskier asset class.