Investing offshore could offer better returns at lower risk

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It was recently reported that, for the first time, the value of offshore assets owned by South Africans has overtaken the value of foreign owned investments in South Africa. PineBridge Investments believes this highlights that many local investors may have already started to increase their offshore exposure, and that the trend is expected to continue well into 2016.

Investing offshore is becoming an increasingly attractive option to many South African investors, and that offshore allocations should be a key part of any investment strategy for South African investors for a number of reasons.

"Investing offshore can potentially offer better returns at lower risk. This is because investors can have exposure to more countries, regions, currencies and companies," says Windall Bekker at PineBridge.

Change allocations

"An offshore investment strategy allows investors to change allocations relative to risk and return, rather than being restricted to a single market and limited underlying instruments and asset classes. The complexity lies in having the ability and skill sets to understand the various markets and how the interdependence affects the investment strategy.

"Country specific or sovereign risk can be diversified by investing in different regions. Currency depreciation can have a negative effect for an investment strategy with seemingly superior local returns being negated through currency depreciation. For example, if your local South African portfolio returned 20% over the past year (Cpi + approx. 15%), the returns in US dollars are basically flat due to significant currency depreciation over the past 12 months," Bekker says.

"Investors are therefore getting flat US dollar returns while taking on the sovereign risk of the local market. By considering offshore markets, investors can also diversify their allocation from local markets where valuations could be at very high or record levels to markets with more realistic valuations and better growth opportunities," he explains.

The final reason is that the local regulators have recognised the benefits of offshore investing and as a result have increased the offshore allocation for retirement funds to 25% in terms of Regulation 28 of the Pension Funds Act, 1956. The Act also allows for an additional 5% into Africa.

Clear strategy needed

While offshore investing can add significant value to an investment portfolio, it is not without risks and it is critical that South African investors have a carefully considered and clear strategy in place when doing so.

PineBridge provides a few offshore investment approaches to consider:

• A multi-asset or balanced approach - Using this approach means your portfolio can get greater diversification across asset classes, regions and currencies. This is a more complex solution as the manager needs to decide on a top down allocation across countries, asset classes and currencies while at the same time making a bottom up allocation to specific instruments and companies in the different countries, asset classes and currencies.

• A global equity approach - This approach means all assets are allocated to offshore equity markets. This may deliver greater long-term returns but investors can face downside risk and volatility in the shorter term. This strategy is normally better suited to investors with a longer time horizon who can manage the shorter-term market volatility and drawdowns.

A global equity approach can also be used as a building block for those investors who want to construct their own multi-asset solutions using different building blocks from the various managers and regions. This can potentially be quite difficult as the investor needs to make top down asset allocation decisions and conduct appropriate due diligence to select managers for each asset class.

"Once an investor has a clear investment objective and understands the benefits of allocating a portion of the assets offshore, an investment strategy can then be developed," concludes Bekker.