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Offshore diversification is not about eliminating risk

It’s about managing it.
‘Fleeing risk is a basic way of thinking about diversification, and it's wrong.’ Picture: Shutterstock

The last few years have seen a growing appetite among South African investors to take money offshore. The combination of poor returns from the JSE, a weak economy and political uncertainty has encouraged many people to invest elsewhere.

Most would claim that this is diversification, and that diversification is always desirable. However, just taking your money somewhere else is not necessarily diversifying your portfolio.

As David Nathanson, global equity specialist at Bellwood Capital, explains many South Africans think that global diversification is about fleeing risk. However, he believes this is a misconception.

“Diversification is about managing risk,” he says. “It is not about avoiding or eliminating risk, which cannot be done without sacrificing investment goals. It also isn’t about trading one risk for another, presumably lesser, risk, nor should it be about taking risk indiscriminately for the sake of diversification.”

Investment process

To explain this, he points out that there are two broad components to an investment process.

“The first is selection,” he notes. “Whether that be country or stock selection. This part is about looking at different countries or stocks, assessing the risks, assessing the potential return, and deciding if you would hold them.”

This cannot just be an evaluation of risk, because it must also consider the potential return. This is certainly worth bearing in mind when considering South African assets at the moment.

“I’ve heard people make excellent cases for investing in South Africa now,” Nathanson says. “Valuations are depressed, the market is cheap, the rand is weak, and we could see good returns from here. On the other hand, I’ve seen people make very good cases against South Africa, looking at the political risks, what’s happening with state-owned enterprises and our national debt.”

At this stage of the investment process, you are only assessing whether or not a country or stock is worth investing in.

“South Africa has risks, and it has a potential return, but assessing that is about stock or country selection,” says Nathanson. “It’s not about diversification.”


That comes in the second part of the process, which is when you consider all of the investments you would be happy to hold, and decide how to allocate between them.

“At this stage you have to decide how much risk you are willing to take with any one of those investments,” Nathanson explains. “How many of them do you want to spread your money across?”

Part of this could be thinking about how much risk is too much to take.

“For example if you’re looking at South Africa, what is the probability of something going horribly wrong and you losing your purchasing power in a global sense?” he asks. “If that is a risk you are concerned about, then you wouldn’t put everything here even if you had a positive view of future returns in South Africa. That is diversification.”

Importantly, this is true of other individual countries as well.

“It doesn’t help to say I’m scared of the risk in South Africa, but I’ll put everything in the UK or Australia,” says Nathanson. “You are making the same mistake essentially.”

This is something investors sometimes forget when they are simply trying to flee risk.

“Fleeing is saying I’m scared of South Africa and so I want to go to the UK,” says Nathanson. “Over the last five years that wouldn’t exactly have helped you either because returns have been very similar. Fleeing risk is a basic way of thinking about diversification, and it’s wrong.”

Taking good risks

Investing offshore therefore does not mean that you are eliminating risk. It is rather about managing different risks.

“Every investment you make has risks,” Nathanson explains. “Even so-called risk-free cash investments have default or inflation risk associated with them. So there is no investment that comes without risk.”

What investors should be doing, however, is making sure that they take good risks.

“Those are risks where the expected return is commensurate with the risk you are taking,” explains Nathanson. “Managing risk is also about not over-exposing yourself to any one source of risk, and having uncorrelated risks, such that if something goes wrong in one part of your portfolio, you will be protected by others.”



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Patrick, we all understand we need to manage risk.

Moneyweb readers would like to know HOW though. Could you offer practical advice? Giving 1.5% to a financial advisor per year is horrible waste imo.

Here are some options using example:

Home value: R1m
Income per year: R0.5m
Investments and funds: R1m

Since your home and income are heavily exposed to SA risks, so makes good sense to allocate 50% of wealth outside SA in diversified offshore funds.

Let’s face it, few of us will ever open international brokerage accounts so best to use SA based offshore funds.(Allan Gray for example has Orbis 100% equity, Orbis balanced, Orbis low equity options to choose depending on how you much equity exposure you want).

Thoughts on practical solutions from the community?

Sygnia/ Satrix offshore etf’s

Sad reality about this comment and the article at large is that it doesn’t consider the effect of currency in an investors outcome… These Asset Swap type funds which are housed on local platforms even the coveted and much loved “international” ETF’s are all just a bunch of asset swap funds… In other words, Rand Out Rand In… Many miss this fact, that the currency is the single greatest determining factor to an investors return in such a fund or “index tracker”

Direct offshore in HARD CURRENCY provides an investor with an imbedded option to realize a inflation beating return in hard currency or to repatriate and play the Rand/Dollar/Pound/Euro/Kiwi etc exchange rate… IE Asset Swap… so this form of offshore investing is better because the outcome is optional… Think about it… it makes sense…

FXJalarupa – you get the same FX exposure with these funds that you’d have with what you call hard currency (expatriated) investments.

However I agree that taking the money offshore is better – but only because no-one can trap it here in finrand one day.

However the tax (CGT crystalisation in doing the deed, and the higher CGT and estate duty offshore) is a bitter pill / trade off.

FXJalarupa & WTF – so in short, do ZAR denominated funds still offer some hedging? Or will a hyper-inflated Rand also render these investments worthless?

My reason for asking, take the Coronation Global managed Fund (USD) as an example – minimum investment amount is US$15k.

On the other hand, Coronation offers the Global Managed ZAR Feeder Fund as a tax free saving with a minimum of R5k or R500pm deposit.

“Normal” salaried people don’t just have US$15k lying around. So my thinking is rather combine your tax free allowance with some “offshore” exposure on something like the ZAR feeder. Is this a flawed understanding?

In short, what products are the easiest to access for a normal salaried worker to protect their money from currency devaluation / hyper-inflation?

Higher CGT and estate duty? Only if you make decisions without thinking them through.

You can hold UK based index funds which are not subject to UK IHT or CGT, so taxed by SARS as usual. Or you can hold Irish based funds with the same outcomes.

The SA based trackers are quite a bit more expensive than their foreign counterparts and I would equally prefer to have the funds physically outside SA.

@StephanG — sorry i do not seem to be able to respond directly to your comment.

So, the easiest way to answer is if you research various offshore funds you will notice they have a USD class, Euro class, maybe a yen or GBP share class.
SA does not allow for a ZAE class to be added so fund managers have to create an entirely separate feeder fund. Denominated in zar it simply means you invest in ramds, rather than dollar or pound or euro.
The feeder refers to the fact that the entire fund invests into the global fund, using the asset managers swap capacity rather than your own.

Because you invest in rand, your return will be in rand.
So there is a plus/ minus effect year to year when compared to the us dollar return of the fund.

The return is still driven by the assets owned by the fund.

If the rand weakens your returns (mostly) will be boosted.
And vice versa.
So yes, it is a good inflation protection strategy.

Should the rand hyper-inflate and even become worthless, your assets still exist within the fund and will have value.

Your currency is the medium of access to the assets, it is not the asset itself.

For a normal salaried worker — ja sure, put R500 a month into a tax free global feeder fund. It is a good strategy.

Daviddebeer – Thank you, that is exactly the clarity I was looking for. Thanks for responding.

The Satrix Nasdaq 100 ETF is listed on the JSE. It is a rand hedge and exposure to the best offshore opportunities. You are not capped at 30% offshore. You can buy 100% offshore on the JSE. No transfer fees, no extra bank accounts, no management fees, no probate risk, no offshore estate duties.

Hang on…there is more… – no matter how much you pay any fund manager, nobody will outperform this ETF. Why pay more? This ETF is going at this special price….at a brokerage firm near you…..while stocks last.

But as they say, there are risks……

Int brokerage accounts are not that hard to open these days.

Easy Equities seems like a great option to me for the average investor, simple and offer offshore.

+1. Am also trading on the Easy Equities platform (so far, only local equities & TFSA account). Yes, very tempted to use their Forex converter to buy USD…especially now with stronger ZAR. The forex-conversion is cheaper than many banks, especially if small amounts are involved, and in line with some online “money transfer” companies’ costs.

The US equity market I prefer not to touch now, but perhaps after a huge correction (whenever that will happen), so probably sensible to leave it in the Easy Equities US Cash Trading Account (interest negligible, but no cost at least) as temporary investment. Another attraction of the USD account, is the choice of ETF’s offered by iShares / BlackRock and Vanguard including useful selection of global regions, and asset classes….more focussed ETF’s than that is offered locally.

Also there’s asset protection in case EE goes bust.

Another option is to invest via foreign Stockbroking platform, but then one will need a foreign bank account(?) , and for that, one has to physically visit a foreign bank as non-resident & open bank account with online-banking facility. Perhaps try Georgia (Tbilisi) for easy offshore banking…no VISA required for S’Africans 😉 Or visit Russia.

Lastly, the big 4 local banks all offer some kind of “foreign currency account” facility, but have suspicion that’s held locally in their “NOSTRO/VOSTRO” forex accounting system…so if a local bank fails, that money will also be gone(?) Comments are welcomed…

I have an offshore portfolio with PSG – minimum investment levels are manageable and the holding costs are cheap. They are a bit pricier on the transaction side, but as I have these as long term investments, I don’t mind.

The real cost of economic and political mistakes are measured by the price of bread. If you live in a country where the voting majority insist on repeating the mistakes of history, your total pension fund will be able to buy 5 loaves of bread. All the political mistakes are condensed into the price of a loaf of bread.

The inflation rate in Venezuela is 200 000 percent at the moment. A loaf of bread that costs R10 in January will cost R2 million in December. A Venezuelan who saved R10 million for retirement will be able to buy 5 loaves of bread.

Supporting the wrong political party for the wrong reasons can turn out to be a costly affair. This is how voters pay for their mistakes.

Sensei – it’s so cheap its a wonder Magda can make ends meet!

In a nutshell, the exchange rate is to the economy what the thermometer is to the body.

Buffet says (approx) “If you know what you are doing you don’t need to diversify” – obviously he is only talking about investment risk, stock picking, the USA is not in Africa! The local take away on this is that if investment advisors knew what the best investment strategy is they would have it spelled out clearly and precisely but firstly they really do not have a clue themselves and secondly confusion is to their benefit.

My interpretation of old Buffet is that if you know what is the best investment, you’ll focus to put your money there, without any of it going elsewhere to less profitable instruments.

In other words, the more you know about what is the best investment, the more focused you will be.

So I conclude that the “shotgun” approach (of investment advisers/ consultants/ funds) aims at covering all bases, replicating the market aggregate and clearly ignores the strategy of doing better research and gaining better knowledge, for better than aggregate performance.

Problem is that there are the known unknowns and the unknown unknowns so risk is totally beyond even the best research. However,it is the best way to make a rational decision with something always put aside for the totally unexpected.

Warren Buffet also advised us to “invest in a company that can be managed by a monkey, because some day it will be managed by a monkey”. According to this rule South Africa is uninvestable.

End of comments.





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