Consider global asset location to diversify for investment success

05 Sep 2019

Article featured in Business Report (Cape Times)

South Africa accounts for less than 1% of the sum total of investible opportunities in the world. When one considers the recent performance of the Johannesburg Stock Exchange, SA investors who are seeking long-term capital growth would be well advised to look offshore, without delay. There is a big world of opportunities out there and the most effective asset location warrants meticulous consideration.

This is according to Chris Potgieter, Head of Old Mutual Wealth's Private Client Securities, who notes that when it comes to asset allocation, there are a variety of considerations that make some sectors and geographies relatively more appealing for investors. "Panic and greed are never good reasons to invest offshore, a move that should rather not be attempted without credible advice. Effective portfolio diversification is about risk management. The principle is intuitive, but the implementation can be quite the balancing act - all too often, investors either find themselves with too much concentration or settle for average performance because of too much diversification. The investment portfolio management structure can also make a material difference in terms of tax and/or estate duty."

South African investors who are aiming to grow their assets would do well to ensure that their portfolios have sufficient exposure to global equities, says Potgieter. "Although a number of multi-national businesses are listed on the local market, the choice is significantly smaller than what is available on the global market. Consequently, offshore investments enable investors to diversify their portfolios across geographies, sectors, companies and currencies."

"Different asset classes, industries and sectors, or geographies don't often perform in sync; they should be rising and falling at different times. Effective portfolio diversification will therefore lower a portfolio's volatility by minimising the risk specific to particular industries, companies and even geographies, smoothing out the returns of the portfolio as a whole," he explains.

Emerging market opportunities
Considering the various global geographies and sectors currently showing value, Potgieter points out that emerging markets are going to drive global economic growth for the foreseeable future, with China and India leading the charge. "Since corporate earnings ultimately drive equity investment returns, and economic growth drives corporate earnings in the long term, emerging markets will play a significant role in driving global equity investment returns. Emerging market consumers present an attractive market for the long term, with personal consumption expenditure likely to increase considerably over the next two decades, be it for basics such as food, education and healthcare or for the consumption of fashion, luxury goods and entertainment or travel experiences."

He adds that the world's economic centre of gravity is shifting south and east, yet the global equity market remains firmly centred in the north and west. "South African investors overweight in domestic stocks and underweight in global stocks, and global market participants overweight the United States, have very limited exposure to the world's long-term growth drivers, namely emerging markets."

If long-term capital growth is an investor's key objective and assuming favourable valuations (bearing in mind that valuations can change quickly), broad emerging market sectors such as information technology, healthcare and consumption are rich in opportunity, says Potgieter.

He also notes that offshore investing can entail quite complex tax implications, so it is crucial that investors structure their investments with a focus on tax and estate planning. "Since South African tax residents are taxed on world-wide income, investors need to consider structures that legitimately minimise their tax liability and the administrative burden of filing tax returns.

"Wealth can only truly be protected and grown through coherent investment structuring and management - no amount of investment outperformance or cost savings can ever compensate for the damage done by poor planning and structuring, which is why the guidance of an investment professional is essential," concludes Potgieter.

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OM Wealth