OFFSHORE INVESTMENTS The offshore opportunity set lA tour of the offshore investment landscape In the past year, a growing number of voices in the financial services world have been advocating that South Africans should externalise all their wealth offshore, even suggesting that individuals should cash in their retirement savings to do this. These voices were loudest at a time of peak negativity early in 2020, with the rand trading in the region of R19 to the US dollar, and the local stock market struggling. The recent sharp reversal in both the rand and local shares would question the wisdom of having a binary view on local vs offshore, as well as highlighting the dangers of disconnecting an investor’s portfolio from the underlying investment objective it is trying to achieve. We believe investing offshore can add significant value to a portfolio if it allows for the specific circumstances of each individual. Here we take a tour through what it means to be invested offshore by looking at the actual opportunities we are investing in, and the new risks we are exposed to in the search for returns. To understand offshore better, we start by looking at the local market. Local equities While the JSE is a reasonably large stock exchange by world standards (17th largest by market capitalisation), we are starting to outgrow it as an investment market. On an effective basis, around 65% of our listed equity market derives its revenues offshore. This is concentrated in a relatively low number of shares, but increasing as domestic shares expand offshore. As listed companies outgrow their domestic growth prospects, it is natural for them to look outside of our borders for opportunities. This has been the case for a long time; however, because our market has a relatively low number of shares, the composition can change, and has done, quite frequently. Ten years ago, we had almost half of our equity market (and by extension, pension funds!) invested in commodity producers. Today this is much less, replaced by Naspers (Chinese tech platform), British American Tobacco (cigarettes), Anheuser (beer) and until recently, Steinhoff (European furniture). This has meant that in our “local” investments, our equity market is dominated
OFFSHORE INVESTMENTS by a select few offshore companies, so in many respects, we are offshore investors before we even set foot there. What then are the benefits of investing offshore, if we can already access it in our home market? There are a few key points: • Diversification: being a smaller market, it is highly concentrated in a few shares (eg Naspers is 19% of the market), whereas offshore markets have a huge range and depth of opportunities, so we are not beholden to the successes (Naspers) and failures (Steinhoff) of a few. • Diversification away from South African-specific risks – economic, social and political. • Access to new types of investment opportunity in sectors not represented locally. Examples would include biotech, energy, technology and utilities (electricity producers). • Investment returns that are “hard currency” based – ie returns earned in currencies that generally appreciate against the rand such as the dollar, euro and pound sterling. Looking then at the range of global options available to us, we take a first step of asking what exactly it is that local investors require from their offshore portfolios? By doing this we ensure that they can gain exposure to the full range of opportunities, taking into account the fact that because the world is a big place, global managers have quite limiting biases in where they are comfortable investing. By looking at the world through a wider lens we can ensure that we correct for these biases. Broadly, we look at global investing – specifically equities – as six separate sources of return which provide investors with alternative opportunities to what we have access to locally. US-developed equities “The source of innovation” and the home of the large “old-world company”. The US accounts for over half of all listed equity on the planet, so it is hard to avoid a US bias in a portfolio. Not that this bias is necessarily a negative as companies listed there are subject to high corporate governance standards, liquid capital markets, quality management and entrepreneurial culture, which provide the platform for a broad and deep opportunity set for investors. Of late, the US has migrated to a tech-biased market with the FAANMS increasing their share of the market as these new platform/tech businesses breach their respective tipping points. A more pragmatic take on this change would be that tech in itself is less of a sector in the future, and more of a business as usual underpin for the bulk of industries. Tech will become pervasive in our portfolios, like it or not. With their size and reach, many US companies derive their earnings outside the US, with companies like Unilever as an example reliant on emerging markets for 57% of its revenues. Tech will become pervasive in our portfolios, like it or not. Around 40% of US company revenues are sourced globally. So, investing in the US gives us exposure to stable old-world companies, innovative new-world companies, and a range of sectors not available locally, many of which are doing business globally. This is a direct product of the globalisation of trade trend we have seen over the last couple of decades.