Investing Offshore

Ensuring that your asset base is appropriately diversified


Overview 

One of the best investment strategies for a South African investor is ensuring that your asset base is appropriately diversified.

By not putting all your “eggs” into a single (and notably small) basket, you spread your investment risk and return opportunities across geographies and, importantly, jurisdictions.

This edition of Corolab demonstrates the benefits of strategic diversification into international markets, why it makes sense to consider doing so with a manager who has proven and established global capabilities across both emerging and developed markets, and how best to take action.

The benefits of an appropriately diversified asset base

Strategic diversification into international markets holds the following benefits for your portfolio:

1. Reduced overall risk through uncorrelated returns

When considering which asset classes to include in your overall investment portfolio, it is vital to consider correlation. Correlation measures how closely the price movement of two asset classes is related.

Combining asset classes with a negative or no correlation is most desirable. This is because if one asset class in your portfolio declines during a market downturn, the other asset class/es will either rise or remain unaffected, which results in a better overall outcome and thus reduced overall risk.

For example, in a risk-off event, equities (global and SA) typically sell off, developed market bonds appreciate, emerging market bonds depreciate, cash remains stable, gold appreciates, and the currency (ZAR) depreciates. For an SA-heavy portfolio, the inclusion of developed market assets (especially bonds) and gold adds some much-needed diversification.

Typical direction of price movements in risk-off scenario.png

When building an investment portfolio, combining asset classes with a negative or no correlation (like DM bonds and gold in the example above) is most desirable.

This is because if one asset class in your portfolio declines during a market downturn, the other asset class/es will either rise or remain unaffected, which results in a better overall outcome and thus reduced overall risk.

The following table demonstrates the value of introducing global assets to your South African portfolio. South African equities and bonds have a low correlation with their global equivalent asset classes, and there is an even lower correlation when looking at the correlation between asset classes. For example, South African equities have a low correlation of 0.58 compared to global equities. This correlation drops to -0.05 when compared to global bonds. Similarly, SA bonds have a low correlation of 0.35 compared to global bonds and a negative correlation of -0.23 compared to global equities.

SA equity and bond returns are uncorrelated.png

The key take-out of this exercise is that by allocating money internationally, you add another asset class/set of asset classes to your overall investment portfolio, which behaves differently to that of your local asset class mix, especially when factoring in the impact of the local currency.

2. Enhanced returns through larger, more diverse and deeper markets

The sheer magnitude of investment opportunities outside our home market is evident in the combined market capitalisation of the world’s top five exchanges*, which exceeded $80 trillion (and comprising close to 13 000 listed companies) compared to the JSE’s ~$1 trillion (and universe of 283 listed companies) as at the end-March 2024. When you widen your investment universe, you gain access to engines of innovation and growth and access to industries that are simply not as deep in our home market, with the likely outcome of improving your overall investment outcomes.

Diversify your asset base into larger and deeper markets.png

By adding global diversification to your portfolio, you can enhance your investment outcomes through access to companies that are industry leaders, have access to the latest technology and research, and benefit from supportive government policies and institutions that promote innovation. (Read more in the WIPO Global Innovation Index 2023.)

WHAT DOES IT LOOK LIKE WHEN MAPPING THESE BETTER RISK-ADJUSTED RETURNS?

The following graph demonstrates that South African investors who diversify their asset base with meaningful international exposure can expect better risk-adjusted outcomes from their long-term investment portfolios.

At 0% international exposure, investors get compensated with 1 unit of return for every unit of risk taken. But by having international exposure of 45% – the optimal point – investors’ return increases and their risk decreases, meaning that they can achieve 1.32 units of return for every unit of risk taken.

Risk-return frontier since 1950.png

3. A further perk – hedging your future shopping basket

Many items in the South African consumer’s shopping basket (from fuel to food to healthcare) are largely priced in foreign currencies as the inputs are either commodities (with prices struck in global markets) or heavily reliant on imported content.

Having adequate international exposure within your overall investment portfolio is a hedge against the long-term change in the price of this part of your future shopping basket.

Your future shopping basket.png

Episodes of currency weakness will more than likely remain a strong driver of price increases into the future. Having more than the minimum offshore exposure recommended for retirement savers may also be warranted for those planning for future liabilities in hard currency. This would include expenses such as overseas travel (for leisure purposes or visiting family members living abroad), business opportunities, investing for the next generation’s education, or emigration.

We invest anywhere in the world using a tried-and-tested approach

We’ve spent the last 25 years steadily rolling out a considered global fund range to meet South African’s every offshore investment need. Today, this range has a demonstrable track record, and we are proud to be one of the few local investment firms with:

  • proven and established global capabilities across both emerging and
    developed markets;
  • a single, valuation-driven investment philosophy and approach that has been
    tested through many market crises; and
  • having successfully replicated our skills in building multi-asset class
    portfolios offshore.

When investing offshore with us, you gain access to a global team of skilled investment professionals (see below) who consistently collaborate to identify the most attractive opportunities (regardless of asset class or geography) for inclusion in each of our global funds.

A highly experienced, stable and integrated global investment team.png

THIS APPROACH HAS CREATED SIGNIFICANT VALUE IN GLOBAL MARKETS

Our proven capabilities to allocate across markets and asset classes have generated significant value for investors over the long term, as demonstrated by the 25-year track record of our longest-running multi-asset class portfolio, Coronation Global Optimum Growth - needs to link to the ZAR fund as it has a longer track record. The Fund is an unconstrained global portfolio that allocates to our best ideas across asset classes in developed and emerging markets.

Key highlights for the rand-denominated feeder fund as of end March 2024 include the following:

  • outperformed SA inflation by >7% p.a. since inception in March 1999; and
  • ranked first in its ASISA category since inception.

As demonstrated in the graph below, for every R1 invested at inception in March 1999, you would have R22 today compared to R4 needed to keep up with inflation – resulting in a 5.5 times increase in purchasing power over that period (or a 3.5 times increase in purchasing power in USD terms over that same period).

25 years of significant value creation in real terms.png

We also offer three other international multi-asset portfolios aimed at meeting specific investor needs, each with an investment track record of more than 10 years, as detailed in the table below.

A multi-asset fund for every offshore need.png

How much international exposure is appropriate?

The amount of international exposure that you should have as part of your long-term investment portfolio depends on how much you have to invest.

If you only have the budget to save for retirement via compulsory/traditional retirement vehicles such as an RA or employer-sponsored retirement fund, the following guidelines apply - this phrase can be unbold:

Pre-Post-retirement.png

Typically, these investors would consider investing in a Regulation 28-compliant (Reg 28) multi-asset fund in which the international allocation decision is made on your behalf. At Coronation, we offer two Reg 28-compliant multi-asset funds that are aimed at the different stages of investors’ retirement journeys – Coronation Balanced Plus and Coronation Capital Plus (or read more in our respective pre-retirement and post-retirement investing editions of Corolab). These funds are managed with an integrated view of portfolio construction across all asset classes to ensure that: the offshore allocation makes sense within the context of the overall portfolio; and any associated unintended consequences are addressed through holistic risk management.

WHAT IF I WANT MORE THAN 45% OFFSHORE?

Investors who can justify a larger international allocation include those who:

  • spend regularly in foreign currency;
  • are considered high net worth in a global context;
  • need to consider offshore bequests because multiple generations live on different continents; and/or
  • do not need to draw a significant domestic income from their savings.

At Coronation, we offer solutions to investors with larger international budgets. Read more in How to invest your rands offshore with Coronation

Investing offshore with Coronation

Investors who require more international exposure than what is achievable by way of their retirement savings (as discussed earlier) can consider using their discretionary (or non-retirement savings) to invest in a fund incorporated in another country (i.e. externalising your rands), most often in the EU. In this case, the laws of the country of incorporation govern your investment.

Coronation offers a range of funds incorporated in Ireland with the same underlying market exposure as our rand-denominated international funds but with the added benefit of jurisdictional diversification. All you need is $500/£500/€500 to get started.

We also offer rand-denominated feeder funds that allocate all or most assets to international investments while remaining easy to use and access, as the funds are established in South Africa. While these funds provide full economic diversification, they still operate under the laws of South Africa and, therefore, do not diversify jurisdictional risk (e.g. exchange controls, which limit the amount an asset manager can invest outside of SA on behalf of clients).

Choosing the right international fund.png

AN ESTABLISHED INTERNATIONAL FUND RANGE

To give you access to the best global opportunities, we offer a range of multi-asset class solutions (as per the table below) that are designed to meet specific investor needs. We also offer three equity-only portfolios in the form of the developed marketfocused global equity fund (Coronation Global Equity Select), a global equity fund of funds (Coronation Global Opportunities Equity) or our global emerging markets funds.

An established international fund range.png

Read more about the funds mentioned in this table

Conclusion

As we have argued throughout this edition of Corolab, it makes sense to diversify your asset base as a South African investor. By living, working and owning a house in our local market, you already have significant country-specific risk, arguing for additional international exposure.

At Coronation we have spent a quarter of a decade building a considered global fund range that meets the needs of South African investors. All of our global funds are available in rands and in US dollars, and are managed by a global team of skilled investment professionals, collaborating and applying our single, valuation-driven investment philosophy to identify the most attractive opportunities, regardless of asset class or geography.


Disclaimer
SA retail readers


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