A sensible approach to investing means incorporating both local and international assets into one’s portfolio, and it is vital to successful long-term investing. Fortunately, over the past few decades, (financial) technology has improved our access to offshore investments. This allows us, as everyday South Africans, to take advantage of well-developed stock markets such as the US, as well as fast growing emerging economies such as China.

However, even with all the offshore investment opportunity available to us, most South Africans still do not invest sufficiently offshore. This is mainly due to an investor-behavioural bias knows as ‘Home Country Bias’ and is then further amplified by structural restrictions and regulations limiting offshore investments as well as the perceived complexity of investing offshore.

Investors experiencing ‘Home Country Bias’, have the tendency to favour investing in companies from their home country. With the South African market representing less than 1% of the global market, Home Country Bias means that investors miss out on over 99% of investment opportunities available to them. Thus, they are not able to take advantage of broader opportunities for generating returns and they lose out on most of the benefits of a geographically-diversified portfolio.

The regulatory environment also has a structural bias towards local assets, and this results in an underrepresentation of global assets. Regulation 28 of the Pension Funds Act imposes a 30% limit on global exposure on all retirement products. Furthermore, outside of retirement specific products, National Treasury requires all South Africans to first gain permission and approval before they can invest above R1 million in global assets. Investors can address this challenge by using global investments such as ETFs and Unit Trusts, to supplement their already existing retirement products. Additionally, when individual investors choose Rand-denominated global ETFs they are able to invest as much as they would like in offshore equities without requiring permission from National Treasury.

An additional factor that further exacerbates our low levels of global investing, is the perception of added complexity (FX transactions, offshore brokerage, thousands of shares to research etc.). For most people just getting started with investing can be a hurdle, adding global investing adds a layer of complexity, potentially discouraging investors. One way to mitigate this challenge, is for investors to invest  in ETFs that focus on broad markets. This way, they would not have to concern themselves with choosing which stocks to invest in, or even which countries to choose. Importantly, this strategy also ensures the greatest level of diversification.

When investors limit their portfolio to the local market, they tend to lose out on some of the key benefits of global investing. These key benefits include:

  1. Increased diversification – by investing in global equities, investors broaden the number of companies, industries, and geographic locations in their portfolio. This is particularly important over the long term.
  2. More opportunity for return (broader opportunity set) – having both domestic and international stock exposure, improves the total portfolio’s expected return as there are more opportunities for generating that return.
  3. Safeguards investors against currency and country-specific risk – holding securities in a variety of countries and currencies can assist investors in hedging against currency risk and other geo-political shocks that have the potential to affect currency and/or companies operating in those countries.

Though expanding our investments across borders comes with great diversification benefits, it is important to note that it can still carry a few risks, which include:

  1. Currency fluctuations: an investor’s expected return on a global equity investment, is not purely based on what the global equity markets returns but is also dependent on the fluctuations in the value of the Rand. For example, even when the global equity markets are performing well, an investor may end up with lower-than-expected outcomes, due to the strengthening of the Rand (and vice versa). Although one would expect the Rand to depreciate relative to its “hard currency” counterparts over the long term there are prolonged periods where this is not the case.  Over the last year, the Rand has strengthened against the Dollar, thus lowering the return which South Africans investing abroad may have been expecting.

The converse can also be true, in times where the Rand has weakened, investment returns for South Africans have further been boosted over what the global equity markets have delivered in those times.

  1. As with investing in local equities, investing in global equities also carries with it the risks associated with all equity investments. These risks include the (short-term) risk of capital loss, volatility risk, market risk, timing risk as well as sector specific risk. It is thus important to remember that global equity strategies are best suited for longer-term objectives.

Including global assets is key to a well-constructed investment portfolio as investors stand to gain from this diversification and increased opportunity set. But as with all investment strategies, global investing must be approached with considerations and good financial planning. Investing in equities, whether local or global, will always come with risk and is best suited for long-term investment objectives/goals, such as the supplementation of existing retirement investments, saving for young children’s tertiary education or simply building wealth. Because these are long-term objectives, investors are better able to withstand the fluctuations of the global equity markets and currencies better enabling them to truly benefit from the diversification and growth opportunity offered by investing offshore.

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