During the second half of 2008 and into early 2009 the global credit crisis caused a massive sell-off in all asset classes. We were reminded again that the past is not a guarantee of the future, as the correlation between all equity markets rose to levels way above historical norms. During such periods of high correlation the benefits of diversification can indeed disappear. Reassuringly, Allan Gray?s Foreign Best View portfolio and Orbis? Optimal funds maintained their very low correlation with South African assets during this crisis.

South Africa, along with all emerging markets, has outperformed world markets meaningfully over the last 10 years. The ALSI has returned 13.7 percent per year in US dollars, but world markets have returned only 1.3 percent per year. Allan Gray?s Foreign Best View portfolio has returned 12.8 percent in US dollars.

Clearly, a diversified portfolio (i.e. including foreign assets) is likely to have underperformed a potentially less diversified local only portfolio. However, given current valuations of shares in South Africa compared with those outside South Africa, we would favour a maximum exposure to foreign assets.

The trick is to select the right combination of foreign assets and asset managers, in order to produce the desired result (i.e. diversification without sacrificing long-term performance).