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01 Sep 2009

International Investing - Making It Through The Ware Zone (And Why Local Can Be Lekker)

The South African investment environment is already fraught with complexity and costs. Conceivably, the international investment arena is costlier and even more complex.

It is frustrating to see investors who pour considerable time and effort into their local investment decisions ignore their own best practices when considering their offshore investments.

This state of affairs must therefore beg the following questions:

1.  Why should South African investors consider offshore or international investments?

2.  How should South African investors invest internationally?

First, what is the role of international investments for a South African investor?

The Afro-pessimist school of thought would have you believe that international investing is the cornerstone of your investment philosophy only because Africa is a basket case and because the local currency is a one way bet.  This is not correct on many levels, not the least of which is that it is devoid of any thought of portfolio theory.

For the South African investor, international investing should not be about an exclusive currency bet.  The exchange control paradigm that exists in South Africa has tended to be a catalyst to investor fixation on currency movements and on obtaining exposure to international assets at any price.  Furthermore, too many South African investors have included international assets in their portfolios on this premise and often to their resulting detriment: the panic and herd mentality that sets in when the local currency depreciates rapidly leads many to invest when international assets are effectively overpriced.  This can only result in the decision being lamented later and also in a subsequently unjustified aversion to international investing.

International assets are nothing more than an additional asset class available to South African investors.  When combined astutely, local equities, bonds, property and cash can produce a suitable return whilst simultaneously diversifying away some risk.  International assets add another arrow to that quiver, bringing the potential for earning similar (possibly even better) returns on one’s existing local portfolio, whilst reducing the aggregate volatility and risk of loss.

The reduction of volatility occurs because of possible low or negative correlation between the movements in the returns from international and local investments.  Stated rather simplistically, a local asset may tend to move up when the international one moves down (and vice versa), so creating a compensating effect.

Of even more importance, in our view, is the oft-neglected minimization of the risk of loss.  The risk of loss arises in many situations, but most often when investors buy high and sell low thus realizing a permanent loss of their capital. In many instances, South African investors have omitted this important principle, investing when the Rand is weak and volatile.  Consequently, such investors may have a jaundiced view of international investing by virtue of their prior injudicious decisions.

However, by considering international assets, investors provide themselves with additional opportunities to deploy their funds into asset classes that may, from time to time, offer more compelling return potential with lower downside risk when similar local opportunities appear to be few and far between.

When viewed from this more appropriate (and, indeed, correct) perspective, international investing can be examined without the emotive impediments to its proper implementation.

If international investments are only another asset class at the disposal of South African investors, why do those investors seem to compromise the processes that they dutifully follow when selecting investments and investment managers locally?

There is no good reason why international investing should be any more complicated or costly than investing locally.  There is no sound basis for choosing to invest your funds with a manager of whom you have never heard, and whose track record you cannot interrogate.  It is unjustifiable to accept higher costs on international investments because you have been (mistakenly) convinced that the overheads involved in managing such funds are necessarily higher.  It is simply not sensible to believe that the more complex an international investment is, the better or safer it is.

These are outcomes that any sane investor would consider anathema when investing locally; the only logical conclusion is that some investors must be temporarily insane when investing in expensive complicated “black box” investments overseas.

So how is it that a South African investor should invest offshore?  Accepting the constraints of exchange control, investors should apply the same due diligence process to their international investments that they do to the local ones.  The cynics might argue that conducting such a proper due diligence is particularly difficult from the southern tip of Africa.  However, the cynics should take heed of the local investment houses who have made a success of investing internationally.  Those successes have been built on tried and trusted philosophies and processes to produce track records that are comparable with their already excellent local performance, and which offer compelling alternatives to the much-lauded international investment houses.

Perhaps it is time to realize that local really is lekker, even when investing internationally.


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