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Tuesday, November 29, 2011
Investing offshore for added diversification
DIVERSIFICATION is an investment principle that seeks to reduce risks
by investing in a wide range of investments and asset classes.
article, we show how unit trust investors can diversify their investments with
offshore equity funds as part of their portfolios.
The principle of
diversification is not to put all your eggs in one basket. In investment terms,
this refers to a method of reducing risk through spreading your investments
across several markets, sectors or asset classes.
Offshore investing is
an effective strategy for investors to protect their portfolios from the
potential downside of a single market as well as a means to enhance their
Diversifying into foreign equities can help
to reduce portfolio risk because different markets and economies move in
Therefore, by investing in various markets instead of
a single market, investors can reduce the impact of country- or region-specific
This is particularly true in the case of regional markets which
comprise a spectrum of fast growing emerging countries and developed countries.
Benefits of investing in offshore markets
The main benefit
of investing in offshore markets is that investors will be able to capitalise on
the growth potential of offshore markets.
In addition, investors will
have access to a wider universe of quality companies to invest in. These
companies range from well-established regional companies which have strong
market shares in their respective markets as well as emerging companies which
have strong growth potential.
Due to the comparatively large market
capitalisations of many internationally listed companies, investing in offshore
markets also enables investors to benefit from higher levels of liquidity when
trading in securities.
Given that stock market cycles of different
markets are generally volatile and unpredictable, unit trust investors are
advised to diversify across a number of markets which offer a wide universe of
The full benefits of diversification are achieved when the
movements of different markets are not perfectly correlated with one another.
However, before considering the type of offshore funds to invest in,
unit trust investors should determine their appropriate asset allocation based
on their respective risk profiles, investment objectives and financial needs.
Be aware of the risks
Investors who venture into offshore
funds should be aware of the various risks which their investment may be exposed
to. These risks include the following:
* Market risks
purchase of equities represents a risk since the prices of stocks underlying the
NAV of the fund fluctuate in response to many factors, such as the activities of
individual companies and general market or economic conditions.
Liquidity risk is defined as the ease with which a
security can be sold at or near its fair value depending on the volume traded on
the market. If a unit trust fund has a large portfolio of securities that are
less liquid or difficult to sell, the securities may be sold at a discount to
its fair value, hence affecting the value of the unit trust fund.
Where a percentage of the value of a fund is invested in
foreign currency or assets denominated in foreign currency, the value may be
exposed to currency fluctuation risks.
Fluctuations in foreign exchange
rates will affect the value of the fund's foreign investments upon conversion to
local currency and subsequently impact the value of the unitholders'
* Country risk
Overseas investment of the fund may
be affected by changes in the political and economic conditions of the country
in which investments are made. Such political and economic factors may influence
the growth and development of business enterprises and impact the stock prices
of listed companies.
Offshore funds help to diversify your
In general, a diversified investment portfolio comprising
investments in local and regional markets can achieve potentially higher returns
than a portfolio that is concentrated in a single market. This is because
markets do not move together due to differences in liquidity conditions,
economic structure and corporate earnings prospects.
diversified portfolio comprising local and regional equities can also lead to
enhanced returns as markets with stronger growth prospects are overweighted and
markets with slower growth potential are
Diversification into offshore
markets provides the opportunity to participate in the long-term growth
prospects of regional markets.
However, it is imperative that you
understand the risks involved before you spread your investments
Investing for the long term and applying ringgit-cost
averaging for your investments may help investors to mitigate some of the risks
of investing in offshore markets.
This article is contributed by
Public Mutual Berhad @ Business Time