Local or Offshore?

Blog 43 – Local or Offshore?

The debate on whether to invest locally or offshore has been raging again recently. Many financial commentators are comparing the returns on the JSE All Share index to the S&P 500 Index. The JSE All Share Index (ALSI) represents the broad South African stock market and the S&P 500 index represents the broad US stock market.

Let’s take a look at illustrative 10-year returns on the ALSI and the S&P 500:

The Rand weakness against the US Dollar during the last 10 years (from 7.39 to 14.00) also played a significant role in the JSE ALSI’s underperformance in the most recent 10-year period. In the last 10 years to end December 2019 – the JSE ALSI significantly underperformed aginst the S&P 500; but in the 20 years to end December 2019, it is the S&P 500 that lagged the JSE ALSI. This is largely due to the significant outperformance of the JSE ALSI in the 10 years to end December 2009.

Hindsight is a perfect science and chasing past returns is generally a bad idea. Beginning 2010, if you looked the last 10-year returns, you would have been tempted not to take any money offshore. Looking back through this would have been a costly mistake.

But let’s be cautious here because it does not mean that because the JSE ALSI underperformed in the last 10 years against the S&P 500, that this will now reverse. We can find a variety of reasons that this may not be the case:

• South Africa is faced with low economic growth, high unemployment, the impact of COVID1-19 on the economy and state resources, corruption levels in the public and private sector, etc.
• The dominance of large multinationals and technology companies offshore further makes the case for investing more of one’s savings offshore.

The counter arguments against investing in offshore markets are also many:

• Valuations play a significant role in deciding where to invest. From a historical perspective, the JSE looks cheap and the S&P 500 looks in expensive territory.
• Despite the economic malaise in SA, there are many excellent businesses here with talented and hardworking people. During this doom and gloom time, we could see good opportunities to invest in businesses that would provide a good return over the medium to long-term, because their valuations have been hammered.
• Currency fluctuations can play havoc with assets valuations, and the direction of currency movements is difficult to predict. This is especially so for the Rand. Investors who are not comfortable with fluctuations in their investment portfolios may sell in a panic, locking in losses and ultimately destroying the value of their savings and investments. Rand movement in the long-term has been one-way bet, but in the short and medium-term it has not only weekend sharply but also strengthened significantly from oversold positions.

Offshore is very wide and very big: is it US, Europe, China, Japan, India? Is it Tech sector, bio-sector, resources, healthcare, retail, ….? Is it Equities, bonds, property, …? Offshore is not just the S&P 500. This wider set of investment alternatives provides both more opportunities and more risks for investors.

The point is that the decision of whether to invest locally or offshore is not an easy one. This should not be a binary decision; it is not one or the other. There are multiple factors at play, and these are not static; decisions made now or in the future may change the opportunities and risks.

Our position then is not to be one or the other, i.e. local or offshore. We could favour one view over the other, which would mean that we would have a heavier weighting for our favoured view. We currently have a higher weighting in offshore assets (broadly favouring technology and biotechnology sectors) but also have a broader geographical diversification (i.e. not all assets are US-based).

Our aim is to provide real returns (i.e. above inflation) for our investors over the long-term. We do not favour one-way bets, where we could be either heroes or villains. We recommend that our clients invest with regular monthly debit order investments, rather than large one-off investments. This is the best way to ride out the fluctuations and volatility of markets.

We currently still favour a cautious approach both locally as well as offshore. We have taken opportunities based on our assessment of value to acquire certain assets or to move more money offshore. Similarly, we have sold certain assets if our assessment was that they were overvalued.  As an example, in the recent strengthening of the Rand against the Dollar, we took another tranche of funds offshore, to bring our offshore assets to 58% of the portfolio. We have also taken a small position in offshore emerging markets.

See our Fund Fact Sheet for additional information on the performance of the Lunar BCI Worldwide Flexible Fund, our asset allocation, top holdings and our fee structure.