When considering offshore investments, go back to basics

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03 May 2016:

“Is the country going to collapse and should we be taking all our money offshore?”

“Given the rand has weakened so much, is it too late to take money offshore?”

“How much money should we take offshore for investors?”

Amidst a tide of reports of doom and gloom for the local economy, investors and financial planners faced with the above questions could be well-served to diversify their portfolios in global markets. However, it is crucial in times like these to stick to the basic principles of investing and remember to keep a long-term view and investment time horizon.

Choose investments that are appropriate for your risk profile

This is according to Trevor Garvin, Head of Multi-management at Nedgroup Investments, who urges investors to take a measured approach to investing offshore – and to choose  investments that are appropriate for their risk profile.

“In the current market, it is near impossible to be able to forecast with any degree of certainty what the future holds in terms of investment returns. Therefore, investors should keep the fundamentals of investing in mind – starting with diversification.”

Garvin warns against over-reacting to negative public sentiment and allowing one’s emotions to drive your investment behaviour. “Pessimists have been predicting the collapse of the South African economy for decades and we should remind ourselves that the Johannesburg Stock Exchange was one of the best performing stock markets in the world, measured in both South African rands and US dollar terms, for the past decade,” he says.

Remember that valuation drives long-term return

When markets are erratic or in a downturn, Garvin says it is easy to forget that valuation drives investment returns over the long term. This is why investment managers look for pockets of value to drive consistent performance over time. Your entry price is one of the biggest drivers of future returns.

“There will always be several excellently run businesses with fantastic growth prospects and management who allocate capital efficiently both domestically and internationally. These businesses, when identified, will provide one with investment opportunities,” he says.

Don’t base your decision on currency alone

Garvin understands investors’ concern when it comes to the rand but urges investors not to base their financial and investment decisions on currency fluctuations in isolation.

The South African rand is a volatile currency and very often tends to “over-react” in both directions – showing large appreciation or depreciation to either positive or negative market news. It is one of the most liquid currencies globally and the most traded emerging market currency, so it bears the brunt of macro events such as the slowdown in the Chinese economy last year. Over time it is expected that the rand should depreciate by the inflation differential of South Africa and its global developed country counterparts.

“Rand movements can have a material effect on one’s rand investment returns. However, predicting currency movements is also extremely difficult, and certainly getting it right on a consistent basis is even more so. The current exchange rate of the rand should be just one of the factors that investors take into consideration, along with valuation, diversification and personal circumstances,” says Garvin.

Make sure you are diversified

Garvin urges investors to speak to their financial planners to ensure that they have a well-diversified portfolio with both domestic and offshore exposure. Investors can gain offshore exposure by investing in rands via rand-denominated feeder funds or alternatively by using their foreign allowance money to invest in a foreign currency fund – such as the Nedgroup investments Irish-domiciled US dollar or British pound range.

“What the exact split should be is very difficult to say as it is largely dependent on that particular investor’s specific circumstances and requirements,” he says. It is likely that in time, measuring and growing one’s wealth in US dollar terms or that of a “hard” currency will become more important, particularly for investors who have longer-term goals to travel, live abroad for periods of time or pay for education in overseas institutions.