Investing offshore for diversification | Ashburton

18 February 2020

Investing offshore for diversification

No matter where you are in the world, offshore investments outside of your domestic market is always a good idea. Over the past couple of decades, the equity returns achieved on the Johannesburg Stock Exchange (JSE) compared to the MSCI Global Index have been similar. However, as indicated in the chart below, had an investor diversified their investments globally over this period, they would have been able to reduce the risk in their portfolio without sacrificing their returns. This holds true whether you consider returns in United States (US) dollars or South African rand. Investors should always seek to maximise their returns at the lowest level of risk possible which investing offshore for diversification helps you to do.

Source: Bloomberg, Ashburton estimates
*Calculated on weekly correlations of JALSH Index and MSCI Global Index since 1995 using standard deviation

Over the past five years the JSE has virtually moved sideways, with the MSCI Global Index outperforming the JSE by around 8% per annum on average. In addition, this was achieved with lower volatility than the JSE exhibited over this period. Thereby reinforcing the importance of investing money offshore. Even though around 60% of the revenue generated by JSE listed stocks comes from offshore, by investing offshore from South Africa, investors can further benefit from directly investing globally because, as indicated in the chart below, the correlation of the JSE to the MSCI Global Index is not strong at around 0.4 (perfect correlation is 1 or -1, whist 0 indicates no correlation at all).

Source: Bloomberg, Ashburton estimates
*Calculated on weekly correlations of JALSH Index M

Investors do not need to expose themselves to high levels of risk when investing globally. We would recommend sticking to investing in offshore funds which invest in global high quality, well diversified, defensive stocks which are also very liquid. Following this diversified investment strategy will help investors to protect their portfolio downside in poor economic environments, whilst also allowing them to participate in bull markets during better times.