From your perspective, what makes offshore investing particularly relevant for South Africans right now?
The global market is a $105-trillion world economy, and South Africa makes up less than 0.5%, so it is essential for South African investors to consider investment opportunities outside of our borders:
One, diversify across global markets and currencies. Secondly, to gain protection against rand depreciation and inflation, hedge against local economic and political risks to fund any future international currency expenses you may have. Offshore investing gives you access to potential high-growth sectors and companies that are not listed locally.
For clients who are considering emigration or international expenses, how should they align offshore investments with future financial needs?
According to Stats South Africa, there are around 900 000 South Africans living abroad with approximately 128 000 emigrating in the last five years, and that excludes all the children that have subsequently been born abroad.
When clients have future expenses in another currency, whether for emigration, children studying abroad, buying property internationally or planning to retire abroad, offshore investing is focused on currency matching to reduce risk.
If your future expenditure is in dollars, pounds or euros, you want assets in the same currency to mitigate your exchange rate risk. The time horizon of your expenses should also match. For example, if you have shorter-term expenses, you need to choose shorter-term assets that are more stable and liquid, such as cash or fixed-income assets. Offshore equities are more suited to longer-term expense matching. Any South African-related expenses need to be matched with rand exposure.
With so many offshore funds available, what criteria should advisers use to evaluate fund strategies and risks?
This is a complex topic that requires a more detailed answer, but I will highlight some of the key aspects to consider.
Strategic asset allocation (how assets are allocated across asset classes such as equities, bonds and cash) is the most important decision when you start your fund selection process. Extensive academic and industry research consistently shows that asset allocation, not necessarily the individual funds you select, drives most of a portfolio’s long-term performance. This allocation should be aligned with the client’s investment goals, time horizon, and risk appetite.
Diversification across different funds, sectors, geographies, categories, currencies, local business and offshore to spread risk. Understand the risk of your portfolio, your currency exposure, your sector tilts (growth, value, quality, momentum), your geographical exposure and more.
Track record of fund performance and investment manager selection on a risk-adjusted basis. Risk-adjusted returns are important. Past performance is never an indication of future performance, so the track record is a guideline. The asset manager’s reputation as well as the quality and consistency of the investment and research teams are significant factors.
Pricing is always important. Fees eat away returns; ensure that funds, unit trusts or ETFs have fair pricing. Total Expense Ratios (TER), the charging structure of the fund, safeguards against hidden fees in costs. Determine if there are rebates in the class or if it is a clean price and whether there are profit shares or structures in the funds and the tax implications of any fund structure is very important.
Ensure that funds offer liquidity, if required.
What trends in offshore investing should South African financial planners be preparing for in the short term?
Continue to push for global diversification. South Africans have a home-country bias; few offshore investors invest in our country, but we are partial towards local funds and solutions which are more familiar to us.
Alternatives and private markets, such as private equity, private credit and infrastructure, are gaining popularity, especially for high-net-worth investors, so advisers must understand how to access these markets and instruments.
There is a rise in thematic investing, such as responsible investing or ESG. There is growing demand for local investment in energy and water solutions that are important to clients, especially younger clients who are socially conscious.
Cryptocurrency and tokenised investment solutions are on the rise and expected to gain more and more investor interest in the near future.
How do you see the role of financial advisers evolving as global markets become more interconnected and complex?
Clients increasingly have access to more information and choice. With that comes uncertainty, and fear of making sub-optimal decisions. In my view, advisers excel when they simplify the noise for clients in a credible way and coach clients through volatile markets, uncertainty and, in fact, through all market cycles. I strongly believe in the long-term sustainability of face-to-face financial advice. Advisers must use their human advantage and human connection with clients to give them support by leveraging information.
