Still sensible to invest offshore?

JOHANNESBURG – The depreciation of the rand over the last few years has been a welcome return booster for South Africans with offshore investments.

However, with the currency under severe pressure against the dollar on more than one occasion during the past few weeks, concern has mounted. Some investors have suffered considerable financial setbacks when the rand previously recovered from levels of around R13 to the dollar in the early 2000s and they are worried that history may repeat itself.

But while the current rand exchange rate is a consideration, in the grand scheme of offshore investing it is only a small part of the overall picture, says Sangeeth Sewnath, deputy managing director at Investec Asset Management.

Offshore investing is a long-term journey. According to their research the average investor holds offshore assets for eight years or longer, he says.

Arguing that one should avoid investing offshore due to current currency weakness is similar to a 20-year-old saving for retirement not investing in equities because the asset class is expensive. When investing for the long haul, decisions shouldn’t solely be based on what is happening at a particular point in time, Sewnath says.

As part of a diversified investment portfolio, investors should have offshore exposure. A more important question is what the offshore asset allocation should look like by looking at the returns generated from offshore asset classes in rands.

“So don’t look at the current rand exchange rate but do look at the risk return profile of offshore investments in rands (assuming you are not using this to meet specific offshore costs). This will demonstrate that offshore equities and high equity multi-asset investments provide a better risk/return profile than investing in offshore money funds for South African investors.”

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Source: Investec Asset Management

Sewnath says the current rand exchange rate is often one of the main reasons investors are skittish to invest internationally, but that is not the only factor that should be considered.

The benefits of offshore investing

First and foremost, investing offshore provides diversification benefits, which help to reduce the risk in the investment portfolio, he says.

The South African stock market represents less than 1% of the global stock market. Hence, offshore investments offer an opportunity to diversify and to gain access to other industries like healthcare and technology that aren’t readily available in the local market, Sewnath says.

The South African market is highly concentrated toward mining, industrial and financial stocks and when investing offshore one should make sure to include assets that complement your local portfolio.

Although currency movements can be highly unpredictable in the short term, the rand is still expected to weaken in the long run due to the inflation differential between South Africa and its major trading partners.

Three basic ways to gain offshore exposure

Sewnath says in the unit trust industry a large portion of flows are allocated to funds that invest in a variety of asset classes in the domestic economy as well as international markets (so-called multi-asset funds). While there are various multi-asset funds available in the local market, generally a Regulation 28 compliant fund (a fund allowed to hold pension fund assets) may only have offshore exposure of 25%.

A lot of South African investors choose this option and invest in a local fund with the ability to invest a portion of its assets offshore and leave it to the fund manager to make decisions around asset allocation.

This is arguably the easiest way to gain offshore exposure, but limits the extent of the exposure, he says.

Another way of investing offshore is to choose a domestic unit trust that feeds into an offshore fund. These funds are typically known as rand feeder funds where the local fund invests in another fund offshore.

Sewnath says this is also a very simple way of gaining offshore exposure because the administrative requirements for the individual investor are limited. However, there is typically an additional layer of costs as the manager takes care of all the paperwork and essentially creates a rand-version of an offshore fund.

When the investor finally redeems the money it is paid in South Africa and he typically doesn’t need to use his offshore investment allowance.

The third way of gaining offshore exposure, which is arguably the most administratively burdensome, is to use the offshore investment allowance to choose a fund denominated in an offshore currency, he says.

Currently South Africans can invest R11 million per annum offshore of which R1 million does not require any clearance. For amounts above an additional R4 million tax audits typically have to be conducted. These funds are redeemed outside of South Africa.

Sewnath says it is generally a cheaper option but the investor will have to take care of the administrative requirements.

Typically, the minimum lump sum investment required will be considerably higher if the third option is utilised, but it can vary quite widely (generally between $500 and $3 000).

These funds are fairly easily accessible through platforms (LISPs).

Source: Moneyweb