Allan Gray offshore investment warning

Asset manager Allan Gray said that while diversifying a portfolio by investing offshore is important, investors should not ignore the risks associated with going beyond South Africa’s borders.

Allan Gray’s Horacia Naidoo-McCarthy said investing offshore should always form part of an investor’s long-term diversification strategy. 

South Africa comprises about 0.3% of the world’s market capitalisation, and ignoring the other 99.7% could be detrimental over time. 

“Investing offshore can be richly rewarding when a considered, long-term approach is taken,” she said.

“Investing offshore allows you to take advantage of global opportunities to create a diversified portfolio that can protect your investment from a range of risks and deliver robust returns over time.”

However, while there are many good reasons to invest offshore, it is not without risk. 

The expansion of the opportunity set is accompanied by a risk-return trade-off, which should not be ignored when crafting a portfolio. 

“While valuation – the price you pay – should be at the core of your investment decisions, it is important that you are cognizant of the different risks weighing on your investment,” she said.

Naidoo-McCarthy highlighted five risks associated with offshore investing.

1. The risk of the unknown

Investing globally means venturing into unfamiliar territories with different languages, regulatory, financial, and accounting systems, and cultures and customs. 

“Trying to navigate this landscape with limited knowledge, flow of information and understanding may be challenging, but this should not discourage you from investing offshore,” she said. 

2. Political and economic risks

“The fact that almost half of the world’s population will be heading to the polls this year makes it particularly pertinent to assess the potential impact of a country’s political climate on your investment,” she said. 

While investing offshore gives you access to a much wider investment opportunity set, it will inherently expose you to economies and geographies that face their unique challenges. 

“Although some of these will not pose obvious risks, you should be aware that changes in regulation or changes in government can have a significant impact on your investment,” she warned. 

“A relatively recent example of this was the sudden Russian invasion of Ukraine, which saw listed Russian stocks and business interests go to zero given sanctions.”

However, she said political uncertainty and volatility are often temporary and can result in attractive opportunities for long-term investors. 

While investors tend to be attracted to economies that are doing well, data from long periods suggests that strong economic growth does not necessarily mean there will be good stock market performance. 

She used Japan as an example. The country’s real GDP only grew 1.9% in 2023, in contrast to the stellar 25% return of its market, the TOPIX.

3. Currency risk

Naidoo-McCarthy said exchange rates profoundly affect the returns of international investments. 

“Not only do you need to consider the company that you wish to invest in, but also the currency of the market that the company operates in, and whether the overall mix of currencies will serve as a good long-term store of purchasing power,” she said. 

“It is important to understand the impact of currency on your investment returns. The underlying price of your investment fluctuates, but so does the value of the currency.”

She said South African investors often focus on their returns in rand terms, but currency matters. “As currencies oscillate from relative strength to weakness, we often see startling swings in returns,” she said. 

For example, in 2015, a South African investor would have had a 34.6% rand return investing in the MSCI World Index, while the very same investment would have lost about 0.3% in US dollars. However, in 2016, a US dollar investment would have done much better.

“The historical behaviour of South Africans indicates that we tend to rush offshore as the value of the rand deteriorates in the hope that we will protect our investments,” she said. 

“This is counter-intuitive. Buying offshore investments when the rand depreciates means we are buying expensive offshore investments with a relatively weaker currency.” 

She explained that the more rational time to invest offshore is when the rand is stronger. “This will enable you to stretch the value of each rand used to purchase offshore investments.”

“However, timing the market is difficult, and we believe a steady strategy of diversification will serve you better over the long term.”

4. Liquidity risk

Liquidity refers to how quickly an asset can be bought or sold and is a factor portfolio managers will always consider across various markets.

Naidoo-McCarthy said portfolio managers think carefully about pursuing investment opportunities within markets that are relatively less tradeable – i.e. where it may be difficult to sell the investment. 

“Liquidity constraints and considerations tend to be more prevalent within emerging markets,” she said. 

“Ideally, a portfolio should have sufficient liquidity to meet withdrawals and be in a position to take advantage of future investment opportunities.”

5. Hidden costs

Naidoo-McCarthy said investing in certain markets or countries may incur additional costs. 

“Over and above some of the transactional costs, there may be exchange control regulations and tax implications in foreign jurisdictions,” she said.