With the continued weakening of the South African Rand, offshore allocations should be the foundation of any investment strategy for South African investors, according to Windall Bekker, Senior Vice President of PineBridge Investments.

The South African currency recently hit an all-time low against the US Dollar as global markets spiraled downwards on fears of lower economic growth in China.

According to Bekker, it is important for investors not to have a “knee-jerk reaction to currency or market movements”, but rather to view it as part of a long-term diversification strategy.

“Investors need to have clarity on three key decisions. Firstly, what is the investment objective? Secondly, what is the investment strategy to achieve the objective and; thirdly, how will investors implement the investment strategy i.e. what products and investment managers will they use?”

He said offshore allocations could potentially offer better returns at lower risk, because investors can have exposure to more countries, regions, currencies and companies.

“An offshore investment strategy can therefore generate alpha across a bigger opportunity set as it allows investors to change allocations relative to risk and return, rather than being restricted to a single market and limited underlying instruments and asset classes. The complexity lies in having the ability and skill sets to understand the various markets and how the interdependence affects the investment strategy,” he said.

Bekker added that country specific or sovereign risk can be diversified by investing in different regions.

“Currency depreciation can have a negative effect for an investment strategy with seemingly superior local returns being negated through currency depreciation. For example, if your local South African portfolio returned 20% over the past year (Cpi + approx. 15%), the returns in US Dollars are basically flat due to significant currency depreciation over the past 12 months,” he said.

“Investors are therefore getting flat US Dollar returns while taking on the sovereign risk of the local market. By considering offshore markets, investors can also diversify their allocation to markets where valuations could be at very high or record levels to markets with more realistic valuations and better opportunities,” he added.

Bekker said that the local regulators have recognized the benefits of offshore investing and as a result have increased the offshore allocation for retirement funds to 25% in terms of Regulation 28 of the Pension Funds Act, 1956, which also allows for an additional 5% into Africa.