Page 29 - Waterfall January 2022
P. 29

proxy for future investment outcomes.                                   far below 50% would suggest that
        When valuations are similar, by all                                     you are not optimally diversifying
        means, go where there is growth.                                        to manage portfolio volatility.
        However, in the current environment,
        valuations are so high in the uS                                        SA still has plenty of benefits to offer
        that our belief is that earnings will                                   local investors from a tax perspective,
        only allow firms to grow into their                                     like tax incentives to local investors,
        steep valuations – don’t expect                                         retirement fund contribution tax
        much further multiple expansion.                                        deductions or tax-free investment
                                                                                benefits. Investing locally is also
        In contrast, South Africa is the    Adriaan Pask                        often more cost-effective. In addition,
        underdog – few retail investors                                         one needs to consider returns on
        expect much to happen here, and                                         an after-cost and after-tax basis.
        it shows in the ratings. Therein lies   is seen as less attractive, it does not
        the opportunity. Although much      preclude other offshore investment   don’t forget to consider
        improvement is required to turn the   destinations. Emerging markets are   sector and issuer
        economic fortunes of our country    brimming with opportunities, and    concentration
        around, that is less so for its investment   Europe is in a similar situation to   One of the key concerns currently
        landscape. Even a moderate surprise   SA, with moderate upside surprises   is that both the domestic and uS
        to the upside will see ratings improve.  set to deliver better returns.  market are heavily concentrated
                                                                                at the top. Domestically, we
        Looking beyond economic             Then there are the practicalities of   have Naspers dominating at
        growth and valuations               regulations and tax incentives. While   a 15% weighting, and in the
        It’s not all about the investment   the asset allocation in retirement funds   uS, the Top 10 stock in the S&P
        outlook. There are many other       may be constrained to a maximum     now account for almost 30% of
        factors to consider. Let’s not forget   of 30% in offshore equities, this   the market capitalisation.
        the first rule of successful long-term   exposure is closer to 40% or 50%
        wealth creation – diversification.   when the offshore exposure via rand   Data shows that sectors are not static
        Offshore assets need SA assets and   hedges is considered. According to   but evolve, making it dangerous
        vice versa. They work together as   our calculations, the appropriate level   to think your portfolio should
        a team. Sacrifice the one, and you   of diversification for discretionary   mirror global weightings. In 1899,
        sacrifice portfolio diversification. It   portfolios is around the 50% level.   the uk accounted for 25% of the
        really is that simple. We always advise                                 worldwide economy, but in 2019 it
        a healthy balance, tactically tilted   Levels far above 50% may introduce   only accounted for 5.5%. In 1900,
        towards the area of preference.     excessive currency risks and reduce   the rail sector was the biggest in
                                            the efficiency of risk management.   the uS and the uk, while today this
        Also, remember, just because the uS   On the other hand, an exposure too   sector is nearly non-existent and
                                                                                has been replaced by new sectors
        Table 1: Factors affecting the decision to invest in foreign assets     like health and technology.

                                                                                No one-size-fits-all solution
                                                                                Although it would make things easier,
                                                                                unfortunately, there is no such thing
                                                                                as one-size-fits-all financial advice.
                                                                                Each person’s circumstances are
                                                                                different. What we can confidently
                                                                                say is offshore investing plays
                                                                                an important role in terms of
                                                                                diversification and risk management.
                                                                                Any decision to invest offshore must
                                                                                be taken in a considered and sober
                                                                                manner. Contrary to common belief,
                                                                                headlines are not a good predictor
                                                                                of future investment outcomes.


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