How to build a diversified offshore portfolio


Investing offshore has always been a hot topic among South African investors. 

That is probably because South Africa’s economy only makes up a paltry 0.5% of global GDP, and the JSE acts as a gateway to less than 1% of the global investable universe. 

The world is a whole lot bigger than just South Africa, and savvy investors in this country know that. 

They do not want to miss out on the opportunities available,  which is why the topic has always been a hot one.

So hot, in fact, that a few years ago we saw a trend among South African companies to acquire assets and businesses offshore. 

It seemed that everyone was doing it and if you were the CEO of a local listed company which was not expanding internationally, you were doing something wrong. 

The reality is, however, that most of the local companies that we all praised for buying golden eggs in foreign markets have ended up holding several rather alarmingly large bags of lemons. 

Lesson learned then: do not back a company that is expanding offshore for the sake of expanding offshore. 

Rather back a company that has pretty much always earned most of its revenues outside of South Africa. 

A recent research note published by Dwaine van Vuuren of Sharenet Analytics brought to light that, as things stand now, 57% of the earnings for the companies that make up the Top40 index comes from abroad. 

Even more interesting was Van Vuuren’s research showing that companies which earn 70% or more of their earnings from outside of SA have greatly outperformed almost every other large-cap share on the JSE since end-March 2018. 

Note in the graphs how Woolworths and Netcare, with their relatively recent offshore acquisitions, are underperformers, while the likes of BHP, Sappi and Richemont – which have been making the majority of their earnings outside of South Africa for ages – are all outperformers. 

The moral here is that companies which operate primarily outside of SA are doing a lot better than companies that operate primarily within this country, even though they have some offshore earnings. This is mainly because of the long-term weakening of the rand due to the interest differential.

This, then, strengthens the case for South Africans to save and invest their hard-earned money in opportunities outside of South Africa in order to maximise returns.

Building an offshore portfolio

Which brings us to our first problem. 

How do we go about building a diversified offshore portfolio?

I can go about answering this question by leaning on complicated mathematics, or I can simply suggest that investors consider spreading their total available investment funds across a number of different economic sectors in accordance with how confident they are that those sectors will perform well in future. 

In other words, if you believe that computer gaming companies and microchip processors will outperform banks and retailers, then you would allocate more capital to the first two sectors than you would to the second two.  

There is no perfect way of doing it: the idea is just to back your best ideas with more capital.

From Van Vuuren’s research we can also conclude that when building an offshore portfolio, we can get access to certain sectors internationally by buying shares in companies listed locally on the JSE. 

However, we should not consider buying JSE-listed companies that make less than 70% of their total earnings outside of SA. 

This is an extract of the cover story that originally appeared in the 11 October edition of finweek. For the full story, which unpacks various offshore investment options, you can buy and download the magazine here. To receive weekly finweek stories, subscribe to our newsletter here.

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