Offshore investing as a diversifier

Michael Dodd, Head of Equities at Old Mutual Multi-Managers, explores a vital ingredient when it comes to investing and risk management, and what should drive investors' needs when considering investing offshore.

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Introduction

Recently, we have had a lot of interest and enquiries from investors regarding offshore investing. This has no doubt been driven by the low return environment we’ve experienced in South Africa over the past 5-10 years, and particularly when you compare those returns to what has been delivered offshore. It is encouraging that investors are increasingly taking control of their investments. However, offshore investing is not necessarily about moving all one’s investments offshore.

Apart from the fact that retirement fund investors are limited by the constraints of Regulation 28, which only allows a maximum of 30% offshore, it may not necessarily be the right thing to do from an investment management perspective. Let us look at the considerations for choosing to invest in certain stocks, sectors, assets, economies or geographies.

Risk in the context of investment

As human beings, we’re programmed to think about risk as a situation involving exposure to danger. We wonder what could possibly go wrong? How much or who we can lose if we take specific actions? For investment professionals, risk is broader, wider and much more complex.

When we talk about risk in the context of investing, this often refers to how unstable an asset is and how it is likely to behave over time. This change in an asset’s value is referred to as volatility. When you own only one stock or one type of asset, in isolation this can be very volatile. When investment professionals talk about risk management, though, we are typically talking about it in the context of a collection of all assets in a portfolio, rather than a singular stock. A portfolio should contain a variety of different stocks and asset classes, which serve to offset each other and reduce the risk of the total portfolio.

Ultimately, though, when it comes to investing, sometimes you need to take a risk as the more volatile or risky assets tend to come with the greatest reward and give investors the greatest return.

Diversification – a free lunch

One of the most effective ways to manage risk in an investment portfolio is through diversification, which has been called the ‘free lunch’ when it comes to risk management. Rather than investing in one singular stock, sector, asset class or geography, diversification is about spreading the risk across all of these. Investors need to have different types of investments in their portfolios, so that when the inevitable down days come for some, they can be offset by others that are moving in the opposite direction.

The best way to manage risk in your portfolio is to have diverse investments and assets – in other words, a broad range ­– spread along the investment spectrum.

Investing can be scary because it is your hard-earned money at stake. But it is relatively simple to manage investment risk within a whole investment portfolio context using diversification. Ultimately, no one knows what the future holds, and what works in one year may not necessarily work in the next. Rather than betting on one single outcome, spreading the risk across different assets ensures that you always have something in your portfolio that is working on your behalf.

The best way to manage risk in your portfolio is to have diverse investments and assets – in other words, a broad range ­– spread along the investment spectrum.

However, investors need to be careful of over-diversifying in a way that doesn’t improve the risk and return characteristics of their portfolio. We often see investors who’ve put together too many funds that are all doing the same thing and not bringing anything different to the mix. In the investment world, we sometimes call that ‘diworsification’, because it actually worsens things.

Offshore investing – a form of diversification

In the context of South African portfolio management, investing offshore is classified as ‘geographic diversification’. With South Africa making up only 0.5% of the world markets, diversifying offshore gives investors the opportunity to invest their money in various markets – developed, emerging, frontier and in stocks which may not available on the Johannesburg Stock Exchange (JSE).

Offshore investing can sound unattainable to the average South African. However, there are many ways for South African investors to invest offshore. One such way to do so could be through buying a unit trust, like a balanced fund, that has offshore exposure.

At Old Mutual Multi-Managers diversification is one of the cornerstones of our investment philosophy. In addition to diversifying our portfolios at stock, sector and asset class levels, we also diversify at an asset manager level. Here we allocate money to investment managers, both locally and globally, that we believe are best suited to manage this money on our clients’ behalf.

Old Mutual Multi-Managers has recently launched a range of offshore funds, which are currently open to all South African investors via the Old Mutual International (OMI) platform. These funds offer pure equity, aggressive balanced and moderate balanced options. In line with our investment philosophy, the offshore range of funds aim to achieve their investment objectives through diversification at manager and asset class level. The asset classes the funds have exposure to are; global equity (developed and emerging markets), global cash, global fixed income and global property.

Take your time

Time isn’t just an important concept, it is THE most important concept when it comes to investing. It is a vital ingredient when it comes to investing and risk management, especially as it relates to a volatile asset class such as equities. In today’s world, we thrive on instant gratification.

Approaching investing as a long game and having a sound investment case behind those volatile stocks can see investors rewarded with higher returns over the long term.

The digitally driven world has ensured that many investors have the power to see information on demand and in real time. Seeing your portfolio value being lower on any given day can trigger an emotional reaction. When emotions are running high those are the times when investors can make their worst decisions, selling on panic and locking in losses.

Whilst it can be tempting to disinvest when a volatile stock dips in value, it is often not a good strategy. Approaching investing as a long game and having a sound investment case behind those volatile stocks can see investors rewarded with higher returns over the long term.

Conclusion

Markets are moved by the unexpected and are therefore difficult to predict. They continuously price in all available information in real time, but tend to accentuate current events, whether good or bad. One is more than likely to be behind the curve. When you time the market, you need to get the timing right twice: when you sell and again when you buy.

Therefore when considering investing offshore, an investor’s need should not only be driven by underperformance in South Africa, or outperformance in global markets but by the amount of risk they are willing to take, whether their portfolios are sufficiently diversified and the commitment to long term investing, among others.

With all the complexity of financial markets, it important to consult an experienced financial expert when making investment decisions.


About Old Mutual Multi-Managers

Old Mutual Multi-Managers is a specialist investment boutique, within the Old Mutual group, South Africa’s largest and most established financial services company. We offer affordable investments that blend together the best of South African and offshore asset managers.

The above content is for information purposes only and does not constitute financial advice in any way or form. It is important to consult a financial planner to receive financial advice before acting on any of the above information.

For more information, visit: https://ommultimanagers.co.za/