Diversifying offshore to

hedge against risk

author image

Alwyn van der Merwe

Director of Investments

Offshore investing is an essential ingredient in any discerning investor’s overall portfolio. In tumultuous times, diversifying your portfolio allows you to hedge against risk – both domestic political and economic risk, and potential currency depreciation. There are different ways of accessing the global market – at Sanlam Private Wealth we provide the full range of options, with a customised offshore solution to complement your individual investment strategy.

Besides protecting against the not inconsiderable headwinds facing South Africa, international diversification provides an opportunity to gain exposure to growth across different markets as well as asset classes. Investing offshore may also allow you to benefit from opportunities not available locally, including certain high-quality assets.

PRICE REMAINS CRUCIAL

A word of warning before you decide to ship out, however. In our experience, investors often attach too much value to the principle of reducing risk, and in the process all but ignore that most crucial of factors – price. There are two types of price of which you need to be aware:

  • The relative value of the assets you want to buy. In other words, the price of the assets in your home country compared to the price of those same assets in your new investment destination. You need to make doubly sure you’re not selling a cheap asset to buy an expensive one. If you are, you may not be reducing risk!

  • The price of currency. Here you need to consider the price of the currency you’re selling (in our case, the rand) versus the price of the foreign currency you’re buying. We’ve seen far too many instances where investors have ignored this comparison and focused only on perceived reduced risk – but the timing has been disastrous. Why is this so important? Well, for one simple, very human, reason – emotion. When making decisions based on currency fluctuations, it’s a huge challenge – especially for sceptical South Africans – not to let fear get in the way.

The bottom line is that you need to ensure that when you invest and diversify internationally, you’re not overpaying for the benefits associated with these investments.

Having said this, what are the various options for increasing your global investment exposure? Remember, to invest offshore with Sanlam Private Wealth, you can use your offshore allowances (effectively around R11 million a year) to transfer your funds abroad, or make use of our asset-swap capacity, or invest in rand-denominated options.

MULTI-ASSET CLASS SOLUTIONS

If you’re not restricted by the SA Reserve Bank or SA Revenue Service from holding direct offshore assets, and you don’t want to go the equity-only route, Sanlam Private Wealth has a multi-asset class offering – our Global Balanced Fund. The fund’s investment objective is to provide long-term capital growth. Alternatively, our expert team can put together a customised multi-asset class portfolio for you – based on your individual risk profile and investment objectives.

FIXED INCOME EXPOSURE

What if you’re interested in global fixed income as part of your broader offshore exposure? Actuaries would argue that based on historic evidence, international bonds are the best risk diversifier in a multi-asset class portfolio. At Sanlam Private Wealth we can provide access to the Sanlam Strategic Bond Fund – a global fund with an excellent track record. It aims to provide monthly income generation with the potential for capital growth, and invests in best-value corporate and government bond opportunities from a broad global bond universe.

GLOBAL EQUITY OFFERING

If it’s pure equity you’re after, Sanlam Private Wealth has a global equity offering, which you can access in three ways:

  • If you have regulatory approval to do so, you can invest directly in the Sanlam Global High Quality Fund, managed by our global equity team in London. The fund invests in quality blue-chip international companies that have diverse sources of revenue in terms of product line, geography and currency. It’s built an enviable track record since inception five years ago. In 2018 it was named best fund in the City of London Wealth awards, best fund manager in the European Wealth Briefing awards and the winner in both the Investors Choice and Private Asset Managers awards.

  • If you’re restricted from going the direct route or if it’s simply not practical for you, you can invest offshore via our rand-based Sanlam Private Wealth Global High Quality Feeder Fund, which provides convenient access to the Sanlam Global High Quality Fund.

  • A third option is for our global equity team to put together a customised share portfolio for you. You can transfer your funds onto our platform and the team will construct a tailor-made, segregated portfolio of individual companies listed on international exchanges.

OFFSHORE TRACKER FUNDS

At Sanlam Private Wealth we’ll always recommend a long-term, active approach to investments. However, some of our clients may be interested in a more ‘passive’ offshore solution and require low-cost access to global markets in a single transaction. For this reason, we can help you to access offshore tracker funds on different indices – including the MSCI World, the MSCI Emerging Markets and the S&P500.

STRUCTURED PRODUCTS

What if you’re keen to diversify offshore, but want some level of capital protection during periods of market uncertainty and volatility when downside risk is high? There are now several structured products in the market that provide a guaranteed pay-off while offering protection against loss. We can assist you with accessing those products that meet our approval. Unlike traditional investments such as unit trusts and index trackers, they provide a level of principal protection against negative returns at maturity of the investment.

RAND HEDGE STOCKS

A final option for investors who can’t or don’t want to physically take funds out of South Africa is to invest in dual-listed or rand hedge companies on the JSE. For these clients, we can put together a customised portfolio consisting of high-quality companies that have a significant portion of their operations or income generated in foreign jurisdictions. Remember that despite rand hedge stocks offering some protection against a depreciating rand, they don’t always protect investors and their share prices can be positively correlated with the rand.

CUSTOMISED OFFSHORE SOLUTIONS

In a nutshell, Sanlam Private Wealth has all the building blocks you’ll need to put together a stand-alone offshore solution or one that complements your South African investment portfolio. People invest offshore for different reasons, and every international investment strategy therefore starts with your unique set of circumstances. Supported by our fiduciary and tax experts, your portfolio and wealth managers will work with you to design a customised offshore solution based on your personal financial circumstances, and your dreams and plans for the future.

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