Asset allocation matters when investing in offshore ETFs

David Case, Director, Magwitch
David Case, Director, Magwitch

By: David Case, Director, Magwitch

Often when we talk to financial advisors about their clients who have recently taken money offshore, we hear of two distinct mindsets:
• The client is happy to leave their offshore holding in cash as their main concern was about country risk and they are just happy to have their funds out of South Africa, or
• The client wants to allocate the full portfolio to equities as they have externalised excess funds and they can “in theory” afford to risk that capital and any losses there would not impact their livelihoods.

Both strategies unfortunately do not always deliver the results that the client initially hopes for. In the current low-interest rate environment, we all know the pitfalls of holding cash, especially if there are any fees to be covered by the meagre returns. Unpacking why wholly holding equities is slightly more complex.

The rationale for holding equities is very sound. We invest in equities to participate in the growth and ingenuity of human beings and enterprises over time. In doing so we expect that we will earn a return that exceeds inflation. The higher return generated by equities is compensation for the higher risk experienced when investing in equities, evidenced by higher volatility and higher drawdowns. If equities never went down, there would be no reason to hold anything else. Unfortunately, many investors abandon their equity holdings at the first sign of trouble as they want the long-term returns of equities but have a very low-risk appetite and would prefer the volatility of the more conservative asset classes.

At Magwitch Offshore we believe that asset allocation is your biggest decision when constructing an investment portfolio for your clients. One needs to generate the highest possible risk-adjusted return for your client’s risk appetite. We offer a complete range of Balanced ETF models where we utilise both equity and fixed income ETFs in our models. The equity component is the engine that provides the growth whilst the fixed income component provides the brakes during any negative market movements.

Fixed income provides protection because it is not driven by the same factors as equities. Fixed income is driven by interest rates as opposed to earnings growth and multiples. As we have seen in the last two market crashes when equities are under pressure Central Banks lower interest rates which has a positive impact on fixed income capital values. When equities underperform, bonds tend to outperform.

Our Magwitch Offshore Global Balanced ETF portfolios are structured to provide the appropriate asset allocation for investors to reach their goals most effectively. Our Global Cautious models have a low equity weighting of 25% to provide downside capital protection as its primary focus, whilst our Global Growth models hold 75% equity to allow investors to enjoy decent growth with some capital protection. The models are available in the three major trading currencies of USD, EUR & GBP.

Magwitch Offshore is a leading provider of Global Balanced ETF portfolios with products in all major currencies. Magwitch utilises an advisor distribution model and their portfolios are available through offshore endowment structures provided by some of the larger Insurers.

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