With the year rapidly drawing to a close it's fairly safe to say that the investors, who, over the past year, took the plunge into the unknown waters of offshore investments, will have performed substantially better than their counterparts who elected to stay invested in local markets.
Despite the fact that many of the offshore investments have not run for a full calendar year yet, it's safe to say that the rand returns of these investments could average anything between 25 to 35 percent, depending on the portfolio and the choice of offshore investment manager.
The reasons for this are twofold. Firstly, the rand has dropped sharply against the US dollar and British pound. This immediately boosts the local returns when converted into rands.
Secondly, overseas equity and bond markets have also fared substantially better than the local markets. Hence the vast difference in rand returns.
While it is unlikely that such a divergence in relative performance could be expected every year, it nevertheless underlines the merits of portfolio diversification in terms of currency, country and opportunity. It is my view that local investors should, over time, have about 25 to 30 percent of their total assets in offshore investments.
As a result of many decades of foreign exchange controls, most investors are 100 percent invested in, and hence exposed to South Africa Pty Ltd. This risk is simply too high and needs to be reduced to more acceptable levels.
Until last year the opportunities of offshore diversification have been limited to rand-hedge shares, rand-hedge unit trusts and tank containers. With the introduction of asset swaps, a local financial institution can literally exchange a portfolio of local assets for an offshore portfolio.
Assurance companies have been given permission to create 100 percent offshore portfolios into which local investors can invest via endowment policies, retirement annuities as well as deferred compensation.
For some unknown reason unit trust companies have only been given permission to arrange assets swaps to the value of 10 percent of their respective local portfolios. I understand that talks are underway between the authorities and unit trust companies for permission to have 100 percent offshore unit trusts.
The stockbroking community, I also understand, are quite unhappy that they have been left out in the cold as they would dearly like to offer their clients offshore investments. While the rand-hedge shares offer something of a consolation prize, investors are restricted to the JSE which has been underperforming relative to world markets.
Make no mistake, there could be a time when the local market might well outperform overseas markets but over time a globally diversified portfolio should outperform a portfolio concentrated on the local market.
I'm not saying this because I'm unpatriotic, as some reader accused me of some time ago, but because I'm very mindful of the realities of living and investing in the local economy.
For instance, if the projections concerning Aids are anything near correct, it could have a devastating effect on the local economy. A slowdown or even decline in the the population growth would have a major impact on, for instance, beer, furniture and clothing sales. This would undoubtedly create problems for companies operating in those sectors. By investing globally one can reduce these risks by investing in countries not as badly affected by aids.
The choice of the assurance company to place one's funds is of vital importance as is the type of portfolio and the offshore investment house.