Investing Offshore by monkey6


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									Investing Offshore

Investing Offshore: What percentage of one’s assets should be invested offshore?
STANLIB offers a comprehensive range of international portfolios across different sectors, asset classes and risk profiles. These portfolios give investors access to global asset management expertise and the ability to invest in a range of professionally managed investments to match their risk profiles and meet their personal financial goals. Clients are able to access international markets and assets via STANLIB’s range of Rand Denominated and Offshore Allowance portfolios. (Please visit for additional product information).

In order to maximise the benefits of diversification when investing it is advisable that investors hold a portion of their investment offshore. The question is what percentage of an investor’s assets should be invested offshore. STANLIB conducted research to ascertain what the optimal percentage of an investors portfolio should be invested offshore relative to their risk profile.

STANLIB’s research focused on the period from January 1994 to March 2006. The aim of the research was to ascertain what mix of local and offshore assets resulted in the best return per unit of risk. In other words, what was the optimal mix of local and offshore assets over this 12 year period, a period which includes both massive Rand depreciation and massive Rand appreciation.

Understanding Risk and Return The relationship between risk and return is one of the essential concepts to understand when investing - and it is unique for every investor. While some investors may be willing to withstand a higher level of market volatility, others prefer a more conservative approach. What is crucial is undertstanding your risk profile and how it translates into a disciplined approach to investing.

Risk is generally equated with the potential of an investment to generate financial loss. Return is the usual measure of performance. As investments that offer higher potential for total return generally carry a higher potential for risk, informed investors don’t simply seek to maximise returns. Instead, they focus on risk-adjusted returns, that is, the potential returns that correspond to the level of risk with which they are comfortable.

The optimal mix of domestic and offshore assets was determined as follows:

Step 1 The return/risk profile of a typical domestic only portfolio was calculated for the period 1994 to 2006. This portfolio was 60% in equities benchmarked against the All Share Index, 25% in bonds benchmarked against the All Bond Index, 10% in listed property shares benchmarked against the SA Listed Property Index and 5% in cash.



Step 2 The return/risk profile of a pure international portfolio was calculated for the period 1994 to 2006. The asset allocation mix was the same as in scenario one, but with different benchmarks: 60% in equities benchmarked against the MSCI World Index, 25% in offshore bonds benchmarked against the JP Morgan Global Bond Index, 10% in offshore listed property shares benchmarked against the EPRA Nareit Global Property Index and 5% in 3 month dollar cash.


Step 3 An optimal mix of domestic and international assets was calculated using STANLIB’s quantitative asset allocation model, aiming to maximise return per unit of risk. The optimal mix of 69.5% in local investments and 30.5% invested offshore resulted in a return of 17 .3% (a little lower than the domestic portfolio (17 .9%) but much higher than the pure offshore portfolio (15.9%), but most importantly with a risk of only 11.4%, much lower than the domestic portfolio (13.8%) and pure offshore portfolio (17 .6%). From the results of the model, it is clear that the main benefit to holding offshore assets is a reduction in risk through increased diversification.

20 18 16 14 12 10 8

Ave. return 17 .9% Ave. return Risk 13.8% 15.9%

Risk 17 .6%

Ave. return 17 .3%

Risk 11.4%

100% domestic STEP 1

100% offshore STEP 2

70% domestic 30% offshore STEP 3

The optimal mix of assets, assuming a balanced offshore portfolio mandate of 60% in equities, 25% in bonds, 10% in property and 5% in cash, for the different risk profiles has been determined as follows:

RISK PROFILE Conservative Moderately Conservative Moderate Moderately Aggressive Aggressive

DOMESTIC 94% 84% 79% 67% 60%

OFFSHORE 6% 16% 21% 33% 40%

Cadiz Research
It is important to note that research conducted by Cadiz Financial Strategists over a much longer period of 79 years (dating back to 1925 and ending in 2005) produced an almost identical result. The optimal combination of offshore/local assets was 30.9% in offshore assets and 69.1% in domestic assets. More details regarding the Cadiz research are available from STANLIB Retail Investment Marketing.

So the more conservative the SA investor is, the less need there is for offshore investing, at least from a point of view of return per unit of risk.



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