How to build a globally diversified investment portfolio
Offshore holdings offer a broad universe of fast-growing stocks and enable investors to spread their risk
More South Africans are investing and externalising funds offshore as never before as they seek greater country diversification and enhanced returns. It makes sense to match local investments with an offshore portfolio, whether to fund regular overseas trips, a child’s education outside SA, a mortgage on an offshore property or eventual retirement in another country.
The case for offshore diversification
The SA market makes up less than 1% of the global investible universe and is limited in the range of industry sectors available to investors. A domestic-focused investor is missing out on many exciting growth avenues in technology, health and green energy innovations.
Many domestic holdings depend largely on how the economy is performing. While some multinationals, such as Naspers, Richemont and British American Tobacco, provide a rand hedge, there are often better options offshore.
Having a global portfolio gives one access to a broad and diverse universe of attractive, fast-growing stocks, the likes of Microsoft, Facebook, Nike and Visa. The opportunity set is far greater and enables one to cherry-pick the most attractive investments based on a risk-adjusted return basis.
Diversify, not ‘diworsefy’
Not having all your eggs in one basket is sensible but there is a fine balance between too few and too many holdings. In stock-picking, too many holdings can crimp your chances of beating the market.
Owning a lot of names in a portfolio can be classified as diworsefication as the diversification benefit diminishes quickly while your best ideas are diluted by a long list of lower-conviction ones. Peter Lynch, legendary former manager of the Magellan Global Equity Fund, coined the word diworsefication in his 1980s investment book One Up On Wall Street to describe asset managers who spread their time and resources across too many businesses.
The minimum number of stocks to hold in global equity portfolios is not as high as many would imagine. One measure of risk is price volatility. According to modern portfolio theory, diversification can lower portfolio volatility because share prices do not move exactly in tandem with each other. As more stocks are added the overall volatility of a portfolio’s value declines.
More often than not a fund manager’s aim is to make money for clients through the compounding effect of sustainable returns over time. To do so, about 25 to 35 holdings spread across sectors, regions, themes and macro sensitivities (rates, oil price and business cycles) sufficiently covers most eventualities.
Determine asset allocation
The first step in building a global portfolio is assessing your risk tolerance and determining the right asset allocation. Depending on your risk tolerance and circumstances, you can adjust your mix to volatile equities or to more stable bonds and cash.
In the long-run, equities are best positioned to deliver returns in excess of inflation so they are necessary for real growth in assets. But equities come with higher risk.
There is now about $12-trillion in negative yielding debt, according to the Barclays Global Aggregate Negative Yielding Debt index. Investors are paying governments to borrow money from them. In this environment, the outlook for equities remains more attractive than fixed income or cash.
Having a balanced approach serves many investors well. The outcome of an individual’s investment needs analysis and investment objectives will determine the appropriate level of risk for that investor. This will guide the asset allocation decision.
Planning for a global future
As the world becomes smaller, clients have started to look for financial growth in other markets. Investing offshore enables you to spread your investment risks across a variety of economies and regions. Investing globally is an essential part of building a more diversified investment portfolio. Whether you are looking for income, growth, or exposure to a particular region or industry, you can find global investing solutions to suit your goals.
As fund managers we note that global portfolios provide our clients with broader opportunities and diversification to better capture the power of compound growth in most eventualities. Successful investing for long-term savings is a marathon with a clear game plan, it is also paramount to invest responsibly in quality companies that are well run, well capitalised and have defendable business models that can grow profits over the long run.
In these uncertain times it is prudent to provide yourself with the flexibility and options available to a global investor.
• Naidu and Maloney are co-fund managers of the Melville Douglas Global Equity Fund.
Would you like to comment on this article or view other readers' comments?
Register (it’s quick and free) or sign in now.
Please read our Comment Policy before commenting.