A Fin24 user writes:
Literature on portfolio make-up often limits the offshore
portion to 20%-30%. Why is this so?
Offshore funds, through reputable fund managers, give the
option of eg investing a portion of your money in emerging markets-only funds.
Why should investors not protect against unstable political
scenarios by taking larger portions, if not all, of their long-term funds
offshore, but still maintaining a proper diversity?
Kokkie Kooyman, head of Sanlam Global, responds:
These are two very good questions.
To answer the first - why is the general consensus that
investors should have only 20% of their investable assets offshore? - I think it's
a general rule that someone devised many years ago which has stuck.
So, to give you some background knowledge on this, what
should determine your decision?
First of all, your allocation to cash/equities and then
global equities as a percentage of equities should be determined by your risk
profile and cash flow needs.
That means if you need a cash flow of Rx from your
investments to live on, then traditionally you would have had a high percentage
of investments in cash flow generating (or interest bearing) investments, ie
low percentage equities.
By the way, if you live in a developed market where interest
rates are now very low, and dividend yields 2x and higher, that traditional
wisdom should be challenged as your cash flow via dividends is now better than
a fixed deposit.
But the main reason a low equity exposure is traditionally
recommended is because your cash flow could be impacted by the currency (ie if
the rand rises by 20% versus the dollar, your cash flow from dividends could be
20% lower than planned - assuming your shares are invested in the USA).
But if you are investing in equites for the capital growth,
then the percentage invested overseas should be determined by where you will
receive the highest return, and that is determined largely by the valuation.
On the basis that a Swiss, American or Australian investor
would not have more than a maximum of 5% (if any) of their assets invested in
South Africa, why should SA investors have 80%?
Hence, I feel the percentage should be driven by where you
think your money will generate the highest return (and obviously given the
degree of certainty).
At the moment offshore markets are very cheap relative to SA
markets, so I would advocate a much higher percentage of investment outside SA.
Investors' view of the expensiveness of the local market can
be influenced by their view of the current government. So, if the thought is
that the government will increase for example corporate tax rates, this will
reduce growth prospects or lower the return and make offshore markets more
Turning to your second question, the percentage invested in
emerging markets, conventional wisdom has it that because we live in an
emerging market and a large chunk of your assets are invested here, when you do
invest offshore you should diversify and not invest more into emerging markets.
There is logic in this, but again it depends on your risk
appetite and valuations. In 2002 developed markets were quite expensive and
emerging markets cheap.
Developed markets were flat over the next 10 years while
emerging markets generated excellent returns. It would have been very silly to
invest in developed markets at that point simply to diversify!
While it is wise not to put all your eggs in one basket, it
does not make sense to diversify simply for the sake of it.
Therefore if you invest in Europe, the reason should be
because the shares are very undervalued and you think returns will be high, not
simply to diversify away from the USA, for example.
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