Investing offshore has a certain romance to it. It is something that is often talked about as if it is not within the reach of normal South Africans. This mystique leads to many questions that we are asked by investors. So, what is important to consider when putting together an offshore strategy? When is investing offshore a good idea? And what should an investor expect?
The best time to take money offshore is dependent largely on currency volatility. The South African rand is one of the more volatile currencies and currency fluctuations can hit investors hard. The rand versus the US Dollar is currently trading around R14.08, in February 2016 it was at R15.87. If inflation is entirely disregarded, the rand has shown a deterioration of 5.81% per annum against the USD over a 5-year period, 7.35% per annum over a period of 7 years and 6.92% per annum over the last 10 years, as depicted in the table below.
As long as you are not caught up in the extremes of currency volatility it is an appropriate time to invest offshore. You want a fair value for your rand. The view going forward is that this trend could continue.
When putting together an offshore strategy, it is very important to take a long-term view. In investing terms, you could say you should have a long investment horizon. The reason for this is that there are exchange controls and red tape that need to be navigated.
In South Africa, if you are investing locally, chances are your unit trust will have exposure to Naspers, as well as other well-known companies such as MTN, Sasol, FirstRand. If local funds are all investing in these companies, then surely that means that there are opportunities in not investing in these companies? By investing offshore, you are opening your portfolio to the tens of thousands of companies that may have absolutely zero contact with South Africa. The opportunities that are available in many ways dwarf the somewhat limited options locally. Keep in mind the South Africa’s GDP is less than 1% of Global GDP, so by not considering overseas options you are limiting your investments to less than 1% of what the world is producing.
It does need to be said that the desire to invest offshore should not be the deciding factor in taking money overseas. Potential investors need to look at where they are in their life stage, what their financial goals are, and what their appetite for risk is. Everyone is unique, and as such, every investment plan needs to be unique. Offshore investing needs to be structured and diverse and needs to be structured into a long-term view.
If you look at the underlying asset allocation of portfolios that make up your retirement annuity or your pension fund, you may see that there is an amount allocated to offshore, or global assets. According to Regulation 28 which governs such funds you may only have 30% exposed offshore and this should be taken full advantage of in full.
Other advantages to investing offshore are:
- It protects local purchasing power (in SA 1/3rd of goods are imported, so cars, technology, clothes etc. are overpriced to rand users)
- Gaining more exposure to themes and geographies not available to SA investors
- Investing in joint names can reduce Estate Duty
- Having access to accumulation funds that roll up your dividend, therefore more tax effective.
Offshore investing cannot be excluded from diversification point of view and it would be unwise to exclude it from your investment portfolio regardless of what happens locally in SA.
* Brenthurst Wealth has a comprehensive offering for offshore investing. Read more here: Offshore Investing