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‘Let’s take our money and run’

Offshore exposure is part of diversification but a knee-jerk reaction can be costly.
A diversified portfolio would include an offshore component, but the exposure should be determined by personal circumstances. Picture: Shutterstock

Amid significant political turmoil, declining economic growth and uncertainty over the past three years, it would have been easy for South African investors to argue: this place is falling apart, let’s take our money and run.

But Dave Mohr, chief investment strategist at Old Mutual Wealth, said he was opposed to such a knee-jerk reaction.

“Having started out in financial markets in April 1980, I’ve seen those scenarios too many times in South Africa and how often it would have been the wrong decision – against all odds – to have done that.”

He recalled how people ran offshore in the Eighties at great cost – investing and hiding money in bank accounts in the English Channel Islands.

“It was completely the wrong thing to have done at that point.”

But although fear is not a good offshore investment strategy, Mohr still believes it is prudent to invest money offshore, even on top of the roughly 50% exposure a typical local balanced fund would already have to the economic performance of the world.

Investors have to recognise that the offshore exposure through locally-listed companies like Naspers, Richemont and a few mining firms is very concentrated, he told a small audience hosted by Financial Mail and Old Mutual Wealth on Tuesday.

“So from a diversification point of view – absolutely – there is still a very strong argument to supplement anything that you have got in your pension fund-type environment in South Africa with offshore investments,” he said.

Regulation 28 of the Pension Funds Act (which caps the level of offshore exposure) has been criticised for trapping people’s money in South Africa, Francois le Roux, 2017 Finalist for Financial Planner of the Year, added.

“I think that argument has been put to bed. That is not true.”

The average local balanced fund, which would house most people’s retirement funds, only had an exposure of about 20% to the South African economy, Le Roux said.

Investors often want to know whether they have to invest directly offshore and if so, how much they have to invest. Most people probably want to invest between 20% and 40% directly offshore, but it would depend on their personal circumstances, he said.

“It would ultimately also depend on where a person intends to retire. Is it going to be local or overseas? If you are not going to retire there, do you intend spending a lot of time there? Do you want to educate your kids there? Tertiary education? Are you going to send them to school there?”

Le Roux said financial advisors have to leave clients in a position where their assets match their liabilities. Liabilities beyond retirement would refer to making capital available for whatever their needs might be, but specifically related to providing an income.

“It is pointless to take everything directly offshore and then be left with no capital that can provide an income here because if you are going to go through the trouble of diversifying offshore and going through the channels and taking your money out you would probably want to leave the bulk of that there for the longer term as opposed to start repatriating those funds soon after that.”

Nesan Nair, senior portfolio manager at Sasfin Securities, said they have seen a big shift in funds offshore due to the fear and greed factor.

During 2017, they had primarily done offshore investments. There were good reasons for it – including South Africa’s low economic growth rate, he added.

Nair said the reason South Africa is experiencing such low growth is a lack of consumer confidence. If that changed, which could happen quite quickly, the country could easily see growth of around 3% to 3.5%. Investors have to ensure that they use an investment vehicle that allows enough flexibility should things change for the better, but at the moment the US and Europe offers better growth rates than South Africa.

While Naspers is essentially a technology company through its stake in Tencent, it only provides investors with exposure to China. If investors believe that technology is going to be an investment theme going forward, they would want to have exposure to companies like Facebook, Google and Amazon by investing offshore, he said.

“You are doing an offshore investment, not necessarily because you are bearish about what is taking place in South Africa at the moment, but because you want to have access to a growing sector of the global economy. Digital is a growing sector. You can’t get that sort of exposure here in a very diversified way.”

Nair said the significant pullback in fixed investment formation in South Africa over the last three years basically implied that even if the country managed to grow the economy on the consumption side, it would hit a ceiling in terms of how many goods and services it could provide. This could constrain growth and returns.

There were also structural factors that could affect South Africa.

He warned that issues similar to the previous electricity supply challenges could affect other areas of the economy like water and roads. 

Investors have to be careful, he said. Especially long-term investors wanting to invest in companies that have good visibility of earnings, plenty of runway and opportunities, and a growing customer and product base.

“Right now those opportunities are much more clearer offshore than they are in South Africa.”

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“He recalled how people ran offshore in the Eighties at great cost – investing and hiding money in bank accounts in the English Channel Islands” – just remind me – wasn’t that when ONE rand equalled ONE US? certainly was the case when we arrived in aussie in ’86. certainly with hindsight that was the time to move yourself and your funds off shore. that was when emigration was a piece of cake. now – well even NZ has had enough of immigrants – that’s why they got a new government. no like MH and moi have said “get your money off shore while you can”. the ’80’s was when housing was still reasonable in uk, aus and nz – gone are those days. BTW I have shares in amazon and ali baba BUT not tencent. its not listed in America.

Yes Robert, the Rand took a beating when you left, because you add so much value to any country.

Shame, leave the guy, he is missing South Africa.

Oh my goodness, a complete lack of understanding of how currencies work. The Rand is a higher inflation currency than the dollar. The difference in inflation is reflected in the slow “weakening” of the rand against the dollar. This is by design and is not a bad thing. What is important is the purchasing power, not the exchange rate.

I’d take the lower inflation currency thanks. Inflation is incredibly deceptive – because it pushes you into higher risk assets whereas in a country that has 0 inflation you can realistically hold cash as a saving vehicle.
Secondly higher inflation means you pay higher CGT rates on the same real return.
Lastly, management fees for investments, property fees for selling, buying, transferring, rental, are all calculated on the nominal, not real return, so in all of these you’ll pay a greater amount than in countries with low inflation.
You should come out the same between the countries, but there are nuances that cause more leakage on a higher inflation rate.

True MoneyChief, maybe in Ozz their currency works differently to the rest of the world!?? But don’t be too hard on Bob; he knows no better and has to justify why he left SA.
Also, he hasn’t realised we don’t give a rats arse where he currently invested his Ozz Dollars – he doesn’t seem to have much faith in assets in his home country, mind you, but then we couldn’t care less!!???

Otherwise, just ignore him; he is bored down under!??

@jblack: Be careful what you wish for. A low inflation and interest rate environment causes asset prices and lending to boom out of control which creates a pyramid scheme. For example people who bought houses a long time ago make all the gains and the younger people can never afford a house.

Good old Bobby the Financial Whiz – who think we really worry about his view, his experiences, his wise investments, his mate Heystek!

Must be tough to be one of those Mohr refers to – who ran and now regret it. Having had a middle class job and life in SAfrica and now a pleb living in a little hovel in a city full of racists and SAfrican haters.

If you care about the country please give positive comments or suggestions – not your same old same old….

Very important point made in the article: invest offshore by all means – as part of a well-planned strategy. Not because your emotions are all over the place as a result of the latest piece of bad news. Taking investment decisions based on emotion is not a great idea.

My rule is to do the exact opposite that Old Mutual advises. Old Mutual makes Mugabe look like Mother Theresa when it comes to fleecing the general population.

“Simplicity is the mother of clarity” Albert Einstein

It is quite normal for a capitalist to experience a socialist country as a very hostile place. South Africa may be the best place to live, but it is not the best place for your capital.

Money flows to jurisdictions where the compensation justifies the risks. Capital goes to the place where it is respected and protected by law. It flees from jurisdictions where it is abused(WMC), confiscated by stealth(BEE), stolen(SOE’s and corruption), threatened(Land grabs) and disrespected(general ANC policies).

It is not as if we are voluntarily taking our capital offshore. The criminal socialist regime forces us to do so, by creating an extremely toxic environment for a capitalist to live in.

We have got the best financial system in the world with one of the most corrupt and incompetent governments in the world. Luthuli House is like a chimp behind the wheel of a Maserati. Change the regime and the capital will return.

I’m no expert, but I’ve done some maths and find the following:

R1 invested in the JSE in 1980 would be worth R6351 today (actually 31/12/16)
The same R1 externalised and invested in the Dow would be worth just R317.94 to December 2016. Extraordinary. I’d love someone to do the calculation themselves.

I used the JSE ALSI of 50653 to 31 December 2016. I couldn’t find the index going back to 1980 but I found an excel spreadsheet online showing the annual growth and backsolved to a derived index of 7.9756 in 1980. I then checked it forward (as it seemed too low) and it worked out correctly. It implies a CAGR of 26.7% pa over 38 years. The Dow returned 9.4% (index of 838.74 growing to 23526)/

The rand was stronger than the dollar in 1980 – I used an exchange rate of 0.81.

That is interesting but I’m not so sure it means much for the future. You can’t drive a car forward by looking in the rear view mirror etc.

Wow – – interesting, if true (and I am not doubting your calculations)

End of comments.

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