Offshore investing is no longer a luxury reserved for a few. It has become a key financial planning requirement for all investors seeking to protect and grow their wealth. Investors shouldn’t see offshore investing as a separate component but rather within the context of their overall investment portfolio, where it is exposed and what its underlying assets are. Ultimately, it should be about where and how to optimally access different sources of returns.
But how much is enough?
The question of how much to invest offshore has always been difficult to answer, but exchange control also limited the amounts. However, through special allowances and changes in legislation, it is now easier for local investors to take their money offshore.
There is no magic number when it comes to how much one should invest. It’s a very personal question and will differ from investor to investor, depending on their unique circumstances and investment objectives. Expert portfolio managers will take every investor’s personal situation and current portfolio into account when determining that number. There is no one-size-fits-all answer.
We tend to think about ‘local’ versus ‘offshore’, but it is much more complex than that. There are 195 countries outside of South Africa and you can spread your risk much easier than in the past. Although it’s important to think about inside the exchange control net and outside it, for example, if your kids are going to be in Australia or Canada, it could be a different answer for a high-net-worth individual.
Why take money offshore?
There are three reasons to invest offshore:
- It’s an opportunity to spread your risk and have a more diverse investment portfolio.
- You can take advantage of the many opportunities offshore investments afford from an expected return on investment point of view; and
- Because of asset liability matching – where your future responsibilities will lie.
Although the JSE has some exposure to earnings from offshore companies and offshore markets, it still comprises less than 0.5% of the world’s markets. This doesn’t offer investors enough diversification compared to what is available offshore. The JSE is currently experiencing a few delistings with not many new companies entering, which means investment options on the JSE are shrinking. This may change, but highlights the fact that the JSE is typically dominated by a few large companies, often in natural resources, which doesn’t offer private investors much diversification.
Offshore markets, on the other hand, allow investors to access a wider range of industries and regions. It’s important to explore these opportunities, not only from the diversification point of view, but also from the point of view of expected returns.
Economic growth happens at a different pace and in different cycles in different parts of the world. Companies that are exposed to other markets experience different speeds of growth because they are exposed to different opportunities, changes in demographics, innovations and growth circumstances. By restricting themselves to local investments, investors are losing the opportunity to invest in some of the largest, most successful and fastest-growing businesses and markets in the world.
Asset liability matching
We are increasingly seeing investors planning for a world where some of their liabilities (i.e. responsibilities) will be in other jurisdictions or currencies. This has been emerging over the past couple of years and it’s what we call ‘future responsibilities’ or ‘asset liability matching’. This means that, especially in the case of high-income and high-net-worth individuals, future responsibilities are changing and some of those responsibilities may no longer be denominated in rands, e.g. offshore studies, a ‘swallow’ lifestyle between two continents, tertiary education for a child or emigration to settle near children in a foreign country and needing assets that can produce an income. An offshore asset portfolio will offer growth and income better aligned to match these responsibilities, even if you’re only thinking about regular offshore holidays.
It is imperative for every South African investor to have a portion of their assets invested offshore because of diversification and opportunity. The question of how much will depend on where future liabilities lie. Investors who are very exposed to South African expenses shouldn’t take too much offshore, but for investors who only need a small South African income base, growth opportunities in 99% of the world’s economy certainly looks attractive.
Is there an optimal time to invest offshore?
Attempting to time the currency or the market is not only suboptimal, but also consumes valuable mental capacity which could be productively employed elsewhere. Currency movements are impossible to predict over the short term (even 12 months is short term!). However, the long-term trend of depreciation of the rand versus the US dollar and other developed market currencies is firmly in place.
The other important consideration is that if the rand strengthens in the short term, it is typically because global risk appetite is increasing. This means that all risk assets are increasing in value and while you may have a strong rand, you’re buying more expensive global investments. Conversely, when the rand weakens, it is often because of global “risk-off” sentiment. So you may be paying more for hard currencies, but you’re buying less expensive assets with those hard currencies.
It’s important to take a longer-term view and look past short-term currency movements. The focus should rather be on risk management and long asset-liability matching. Buying assets priced in other currencies is not about getting the exchange rate “right” or “wrong”. Rather, it’s about a risk “mitigated” or a need “met”.
Work with specialists
While investing offshore is certainly rewarding, it is also complex as there are numerous nuances that need to be considered. In addition to a vast investment universe, legal and tax implications as well as estate administration factors come into play. Therefore, it is vital for investors to work with reputable specialists who can effectively structure an investment portfolio that is tailored to their unique needs and objectives. Today, these services are much more accessible than in the years of strict capital controls, which also creates more efficiency for investors.
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