In the mid-90s, a lot of money was driven offshore by political fear. That trend accelerated in 2001/2 with the currency’s fall to R13,50/dollar. This offshore money was really a bet on the rand. That phase ended abruptly in 2002 when the currency recovered strongly and global markets crashed. Many investors who went offshore in 2001 have not yet recovered their capital. Even today, enthusiasm for offshore investment tends to mirror rand weakness. The hard facts contradict that view: this year the rand is the world’s second-best performing currency.
Local Beats Offshore Hands Down
Over the past 10 years the JSE’s annualised return of 13,8% has beaten the best performing bourse among developed countries: Canada’s 6,9% (measured in US dollars). The Morgan Stanley World Index, the US and UK exchanges all performed worse.
Logic dictates that the best place to have invested has therefore not been offshore at all. But that’s not the full story: the past decade was preceded by a 20-year period, from 1980 through 1999, where the reverse was true and offshore equities significantly outperformed local equities.
Pieter Koekemoer, head of personal investments at Coronation, says: “Recent local market performance benefited from a reasonably benign backdrop marked by higher than average growth and low and relatively stable inflation. This was underpinned by the supportive effect of policy certainty and political stability.
A further factor that contributed to local outperformance was an attractive initial valuation level at the start of the decade.”Gavin Came, CEO of Sasfin Wealth, says this conflicting picture makes offshore investing a hard sell based purely on performance.
The correct motive for investing offshore therefore has to be diversification. Don’t see offshore investing as a currency-based decision, but rather as an opportunity to access asset classes and markets that are simply not available in the largely resource-weighted JSE.
“No-one knows where markets will go in future, and it is especially difficult to predict currency moves. Not only does a currency fluctuate, but the fluctuations of other currencies magnify those moves,” says Came.
How Much to Invest Offshore
Opinions differ hugely as to how much of your total portfolio should be invested offshore: many say 20% to 35%, others as much as 50%.
Armien Tyer, Sanlam Investment Management (SIM) MD favours offshore investments at the moment. Offshore equities have gained about 20% since March this year compared to the JSE’s 40%.
“South African equities remain fair to cheap, but we tend to prefer offshore equities over onshore at the moment, as they are cheaper,” says Tyer.
Three Ways to Invest Offshore
There are three ways to be invested offshore, says Came. In fact, many people are already invested offshore, often without being aware of it through Pension Funds, Retirement Annuities and Endowments. These, and traditional unit trusts, are often permitted by their rules to hold a certain proportion of their capital in offshore investments – no more than 15% or 20%.
Secondly, there are at least 26 global unit trusts available domestically that South Africans can buy using local currency. These are particularly easy to access, with minimum investments of about R5 000 or R500 a month by debit order.
These minimums are broadly the same as ordinary domestic unit trusts, says Came, although the ongoing fees tend to be higher to compensate for the extra administration by the fund manager. It is far easier to go this route than the third option of taking one’s R2 million foreign allowance offshore. This latter involves getting a tax clearance certificate and foreign exchange clearance from the bank.
But There Are Risks
Came warns of the risks associated with taking R2 million offshore. He advises against leaving the R2 million in a bank account, except to park it temporarily.
“Right now many developed countries with virtually zero interest rates have fairly high costs of maintaining a bank account and there is the currency risk – so you may end up losing money in an apparently safe investment.”
There are said to be more than 35 000 offshore collective investment schemes making selection almost impossible. Many of these have different rules to our funds.
For example, some have a 30-day settlement period compared to the normal one-day in South Africa, while many invest in asset classes such as hedge funds that are not usual here.
Note that if you lose your R2 million capital, you don’t get another allowance. “It’s usual for investors to choose a more conservative portfolio than they might do domestically, with the emphasis on capital preservation,” says Came.