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With increasing global geopolitical risks and a more favourable South African political landscape, one of the most crucial strategies we recommend to investors is ensuring that their asset base is properly diversified. Diversification is a key element in reducing risk and optimising returns by spreading investments strategically across various geographies, sectors and different asset classes.
We draw on a recent Coronation article that explores the benefits of strategic diversification into international markets.
The benefits of a diversified asset base
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Mitigating overall risk with uncorrelated returns
When constructing an investment portfolio, understanding the correlation between asset classes is crucial. Correlation measures the degree to which the price movements of two asset classes are related. By combining assets that have negative or no correlation, investors can significantly reduce overall risk. This approach ensures that if one asset class experiences a downturn, others in the portfolio may remain stable or even appreciate, leading to better overall outcomes.
For instance, during a market downturn, global and South African equities might decline, while developed market bonds could increase in value, and gold might appreciate. Including such uncorrelated assets in a predominantly South African portfolio provides essential diversification.
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Access to larger and more diverse markets
International investing offers a broader spectrum of opportunities compared to the domestic South African market. The combined market capitalisation of the world’s top five stock exchanges exceeds $80 trillion, encompassing nearly 13,000 listed companies. In contrast, the Johannesburg Stock Exchange (JSE) has a market cap of around $1 trillion with only 283 listed companies.
Expanding your investment universe to include international markets grants access to industry leaders, cutting-edge technology, and supportive government policies that foster innovation. This broader exposure can enhance your overall investment outcomes by tapping into engines of growth and development that are not as prevalent in the South African market.
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Hedging against future costs
A significant portion of a South African consumer’s shopping basket, including fuel, food, and healthcare, is priced in foreign currencies. Investing internationally serves as a hedge against long-term price increases driven by currency fluctuations. This is particularly important for those planning future expenditures in foreign currencies, such as overseas travel, education for the next generation, or emigration.
Episodes of currency weakness are likely to continue influencing price increases. Therefore, having offshore exposure in your investment portfolio not only provides diversification but also safeguards against future financial liabilities denominated in hard currency.
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Mapping better risk-adjusted returns
When examining the benefits of international diversification, the improved risk-adjusted returns are particularly noteworthy. A well-diversified portfolio, with meaningful international exposure, offers superior outcomes for South African investors over the long term.
To illustrate this, consider a comparison of risk-adjusted returns based on varying levels of international exposure. At 0% international exposure, an investor receives 1 unit of return for every unit of risk undertaken. However, by optimizing the portfolio to include 45% international assets, the investor’s return increases while their risk decreases. This optimal diversification point allows investors to achieve 1.32 units of return for each unit of risk taken.
This improved risk-return profile highlights the tangible benefits of incorporating international investments into a South African portfolio. By diversifying across global markets, investors can better balance their risk and enhance their returns, ultimately achieving more robust and stable investment performance over time.
How much should I hold offshore?
Investors should pay careful attention to how much of their personal wealth to invest in offshore assets. Here are some important factors to consider:
- The time you expect to spend overseas versus in South Africa in the future
- Your personal tolerance for investment fluctuations caused by currency movements such as the Rand/Dollar exchange rate
- Your personal risks associated with the South African economy, such as your employment industry and the nature of your assets (SA fixed properties as an example)
A general industry guideline is:
| Investment Strategy | Expected Time Invested | Portfolio Offshore % |
| Conservative | 3 to 5 years | 10% to 30% |
| Moderate | 5 to 10 years | 30% to 50% |
| Aggressive | 10+ years | 50%+ |
Investonline’s in-house Prosperity Fund continues with effective, stable returns
The Prosperity Worldwide Flexible Fund of Funds, managed by Investonline Director, Nick Brummer, is a moderately conservative fund with an emphasis on capital preservation. Over the last three challenging market years, the fund has returned an average 13% p.a. (net of fees) and provides a track record of Investonline’s experience of managing risk both locally and offshore.
Conclusion
Strategic diversification into international markets is an important strategy for investors seeking to reduce risk, enhance returns, and protect against future cost increases. By allocating assets across various geographies, sectors and asset classes, and working with an experienced investment team with proven capabilities, investors can build a more resilient and robust portfolio. Taking action to diversify internationally is not just a recommendation; it is a prudent step towards achieving long-term financial stability and growth.
If you would like to review your current investment strategy and asset allocation, please click the link below:
