Solve for Investing: The Offshore Edition

“Humility [showed] me the need for worldwide diversification to reduce risk.” – Sir John Templeton

Offshore investing should form a part of most investors’ portfolios. This is especially the case for investors based in “small” economies, such as South Africa. As the chart below shows, South Africa makes up just 0.44% of the world’s $80 trillion economy. By taking part of your portfolio offshore, you are able to gain at least three investment advantages, including (i) hedging against home currency weakness; (ii) moderating portfolio risk through diversification; and (iii) gaining exposure to a wider investment universe than the home market, which increases your opportunity to generate returns in industries and sectors that are not represented locally, such as bio-technology, micro-processing, vehicle manufacturing, advertising or football team ownership, to name a few cases for South African investors.

World
Source: howmuch.net, 2017

Whilst global markets offer the above mentioned positives, recent uncertainty has translated into price weakness within capital markets that has created pockets of opportunity for investors looking for global exposure. Equity valuations, measured by headline price-to-earnings (P/E) ratios, are now at or below their longer-term averages. This suggests that now is a good time to buy. That said, the underlying causes of this volatility – including Trump’s trade tensions, the scaling back of quantitative easing and Brexit worries – also pose real threats to world economic growth and corporate earnings.

In recent years, quantitative easing has set an unprecedented pace for bond purchases by governments. The effect of governments’ purchases of bonds is that liquidity enters the market. Initially, this helps to restore market confidence. But, if overdone, quantitative easing leads to inflated asset prices as “too much money chases too few assets”. However, the effect of this is uneven across asset classes and within asset classes. For instance, large, liquid asset classes – such as companies making up the S&P500 – will attract more interest than other asset classes; and illiquid assets – such as art or real estate – can easily be “spiked”. Similarly, within asset classes, investments with higher weightings in passive solutions are impacted more than others. This is because most passive products are size-weighted, holding a representative portion of the market.

At the same time, escalating trade tensions and tariff hikes have injected much volatility into global markets, in some instances driving up prices and in others threatening to disrupt global supply chains. Again, the effect has been uneven across industries and geographies; with even the threat of tariffs impacting share prices. In such an environment, it is crucial to cherry pick the right investments. Cases in point might be companies which will be largely unaffected by trade tariffs, such as healthcare or utilities; or other cases could be those that are mispriced due to the misperceived impacts on their business, the agriculture and automobile industries stand out.

In this setting, to create a risk-adjusted offshore portfolio, investors need to start with asset allocation, and then turn attention to the task of buy the right assets at a good price within asset classes. Diversification across currencies, industries and geography is instrumental in weathering – and harnessing – global volatility.

Global Growth Bundle: A Strategic Approach to Passive Investing

Cannon Asset Managers’ Global Growth Bundle, available on Easy Equities, offers an innovative, low-cost multi-asset global investment solution that strategically blends passive solutions – exchange traded funds (ETFs) and exchange traded notes (ETNs) – to take advantage of shifting global trends and deliver strong, long-term investment results.

Through Cannon Asset Managers’ Global Growth bundle, investors can gain exposure to attractive developed markets such as Germany and Japan, as well as emerging markets such India and China, which are building industrially strong companies with growing international competitiveness.

By actively managing asset class exposure through the use of ETFs and ETNs, we aim to minimise the impact of fees while offering investors the benefit of some protection against changing political, economic and industrial circumstances, smoothing out the “bumpiness” of returns.

Significantly, with an annual asset management fee of less than 1.0%, investible in rands and with no minimum investment amount, Cannon Asset Managers’ Global Growth bundle offers all investors an affordable and accessible solution for investing offshore.

Asset class exposure
Source: Cannon Asset Managers, 2019

Global Champions: Private Client Portfolio

Cannon Asset Managers’ Global Champions Portfolio is well suited to investors who want direct offshore investments, and who have the appetite to own specific investment ideas with a long-term horizon. A minimum investment of $70,000 or equivalent is required.

As a portfolio of our best global ideas, Global Champions offers local investors hard currency exposure to global equities, and aims to produce better-than market returns, and outperform industry peers with lower-than-market volatility. The portfolio invests in select leading companies that operate across all industries and in different environments, including fast-growing emerging markets and the developed markets of North America, Europe and Asia.

Performance Since Inception

Global champs performance
Source: Cannon Asset Managers, 2019

A high-conviction portfolio, Cannon Asset Managers’ Global Champions holds around 30 positions that are effectively diversified across countries, currencies and industries; and includes such companies as:

  • Amadeus IT Group: A Spanish-based global IT solutions provider for the international travel and tourism industries; it is an innovative 30-year-old enterprise and industry leader.
  • Avery Dennison: A Fortune 500 company based in New York that manufactures and distributes various products from specialty medical supplies to apparel labels and tags.
  • BMW: A German multinational automobile and motorcycle manufacturer, well-diversified across luxury and electrical vehicles, with strong growth in the Chinese market.
  • Stryker Corporation: A Michigan-based Fortune 500 medical technologies firm with products across orthopaedics, medical and surgical, and neurosurgery and spine, and which are used in over 100 countries.

Conclusion

While global equity markets experienced an average decline of 7.2% in 2018, our Global Champions portfolio held up well, beating the market by 8.0% to extend a long and successful track record. What is more, last year’s sell-off in equities has resulted in some particularly attractive valuations at the market level, making a strong case for the portfolio.