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Why offshore investing is so important

Most clients believe, in part due to the clever marketing of the Asset Managers, that sufficient diversification can be achieved by investing in a selection of South African based assets and that this will deliver the returns that they need. Investing only in JSE listed stocks (with just over 340 listings) cannot be considered diversified.

We have been advising clients to invest offshore for many years now. This recommendation was influenced mainly by prudent wealth management guidelines, to expose our clients to the 99% slice of the world’s pie of instruments not listed in South Africa. Even if you were a resident of another jurisdiction, wise wealth management would point you towards a diversified global portfolio rather than a locally concentrated portfolio.

Holding mainly South African assets has not been a winning strategy for investors and this was before Covid struck. Besides politics, South Africa went into the COVID-19 pandemic with negative GDP-numbers in the previous year (2019 Q3: -0.8%, 2019 Q4: -1.4%, 2020 Q1: -2%). As the saying goes, when America sneezes, the whole world gets a cold. We anticipate SA’s Q2 GDP numbers for 2020 to be pretty dismal if we look at the numbers being reported for other countries (US GDP 2020 Q2: -32.9%).

Amongst other things, weak economic policy has led to the JSE over the last 5 years being practically flat.

*Source Bloomberg June 2020

You would have made some return on the JSE over the last 10 years, but hardly enough to deliver the long-term expected risk premium of CPI + 6%.

Local Versus Offshore Investments (ZAR) end of June 2020

*Source Bloomberg June 2020

If you consider that the Rand has weakened substantially against the Dollar over this period, rand hedge stocks would have delivered the majority of the returns on the JSE. Compared to the MSCI in Rand terms, you would have been disappointed. When the above numbers are show in US Dollar terms, the picture becomes even more bleak.

Local Versus Offshore Investments (USD) end of June 2020

*Source Bloomberg June 2020

You would have become poorer in real terms over the last 10 years.

Inflation (%) end of June 2020

*Source Stats SA June 2020

If you are a client of a regular run-of-the-mill financial adviser or broker, chances are that your money probably ended up in a Balanced Fund or a selection of Balanced Funds. After looking at what the JSE has done over the last 10 years, it should come as no surprise that balanced funds behaved similarly.

Here is a look at what some of the run-of-the-mill funds would have given you:

*Source Morningstar report 30 June 2020

Some of these funds have a return target or benchmark linked to CPI + 5% over a rolling 5 to 7 year period. Majority of these funds fell short of that over the last 10 years.

If you are employed at a company you are likely a member on their Pension or Provident Fund and the unlucky beneficiary of a Regulation 28 portfolio (Balanced Fund) that limits your exposure to international markets. Similarly, if you have a Retirement Annuity or Preservation Fund you would have been placed in a Balanced Fund. The above picture paints a bleak one.

Most Pension or Provident Funds have a minimum contribution percentage linked to your earnings that will eventually replace a percentage of your income in retirement. Looking at the dismal returns, it is unlikely you would have increased your savings to compensate.

If you weren’t invested offshore, you would not have enjoyed the inflation beating returns you need to maintain your purchasing power in real terms.

In context, interest rates are at unprecedented lows and stocks are priced at historically high levels, therefore, looking ahead at the next 10 years, we believe investment returns (locally and internationally) will be underwhelming and unlikely to be in line with long-term expectations. As such, you should adjust your expectations (especially when projections are made) and not buy into an adviser promising you better returns than recent history has proven to provide.

Unrealistic returns should not be the deciding factor when doing your planning or choosing an adviser. Remember planning makes use of assumptions where your actual value will be determined by real achieved returns. It is always better to under assume and over deliver. Assumptions are made of cotton candy dreams.


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