OFFSHORE SUPPLEMENT
30 June 2019
SANGEETH SEWNATH Deputy MD, Investec Asset Management
W
hile most investors understand the compelling reasons for investing offshore – which include diversification benefits, reduced emerging market and currency risk, and maintenance of ‘hard’ currency spending power – they tend to lose sight of the fact that offshore is only one component of their overall portfolio. Therefore, their offshore investments must be considered holistically, together with their local investments. The currency effect Studies have shown that when considering the historical returns of foreign investments, the impact of the exchange rate is uncertain and volatile, and that when measured over shorter time horizons, the exchange rate
CONSIDER YOUR PORTFOLIO HOLISTICALLY WHEN INVESTING OFFSHORE
can have a significant impact on the investment return and, as we illustrate below, the risk in rand. By simply looking at offshore investments in a dollar context, the overall picture – and accordingly, the appropriate portfolio construction strategy – is skewed from a South African investor’s perspective. Figure 1, a simple risk return scatterplot, illustrates this point. If you compare the dollar returns and standard deviation over ten years of a money market portfolio versus a bond, multi-asset and equity portfolio, the chart demonstrates the expected traditional banana curve (efficient frontier), with the money market portfolio in the lower left corner (lowest return at lowest risk or volatility) and the equity portfolio in the top right corner (highest return but with the concomitant highest volatility).
FIGURE 1: USD RETURNS AND STANDARD DEVIATION OVER 10 YEARS
Source: Morningstar and Investec Asset Management calculations. As represented by ICE BofAML USD Overnight Offer TR USD; FTSE WGBI USD; 60% MSCI ACWI, 40% WGBI; and MSCI ACWI NR USD respectively over ten years to 31.03.19.
FIGURE 2: RAND RETURNS AND STANDARD DEVIATION OVER 10 YEARS
Source: Morningstar and Investec Asset Management calculations. As represented by ICE BofAML USD Overnight Offer TR USD; FTSE WGBI USD; 60% MSCI ACWI, 40% WGBI; and MSCI ACWI NR USD respectively over 10 years to 31.03.19
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times, offshore equity markets are Next, compare these same four likely to perform well, bonds will portfolios in rand rather than dollars, be the losers and the rand would as illustrated in Figure 2, and the strengthen (resulting in a currency traditional efficient frontier is thrown loss on the offshore portfolio). off with an unexpected clustering. The opposite also holds: in ‘tough’ What the chart illustrates is that over times, equities perform poorly, ten years the bond and money market offshore bonds gain and the rand portfolios deliver the lowest returns tends to weaken as you would expect but, (resulting in a counterintuitively, they do currency gain so at higher volatility than YOUR RISK on the offshore the multi-asset and equity REDUCES portfolio). In portfolios! WHEN YOU’RE summary, rand This illustrates that depreciation adds the simple conversion INVESTED IN to the offshore from rand to dollars can AN EQUITY investment’s add in the region of 16% OR MULTIreturn calculated volatility to your portfolio. in rand, and rand So, when it comes to ASSET FUND appreciation offshore investment, as OFFSHORE detracts from the important to the offshore overall return. asset class decision is the We believe that offshore risk in taking your money offshore investors need to look past the (i.e. the currency decision). And the shorter-term movements of the evidence further suggests that your risk reduces when you’re invested in an currency. Furthermore, they should look to global equities equity or multi-asset fund offshore, as or high-equity global multiyour portfolio would benefit from the asset solutions with long-term diversification effect. track records that have proven their mettle through investment The performance of the cycles, such as the Investec rand is a key consideration Global Franchise Fund and the The rationale is actually very simple: Investec Global Strategic Managed offshore equities and the rand tend to Fund respectively. move in opposite directions. In ‘good’
