Discounting for a moment the state of the local economy and one’s particular socio-political view, the key motivation for any investor to invest offshore should be to have appropriately diversified wealth in pursuit of real capital growth at an acceptable level of risk.
It is estimated that between 65% and 80% of South African investors’ total wealth is exposed directly to the SA economy. Total wealth includes career, business and property interests, in addition to investments such as pensions. With this in mind, we need to recognise that the majority of South African investors have too many eggs in one basket. This is regardless of the economic and political climate in the country, as the same advice would apply to investors in most developing countries, were they in a similar position.
The Afrasia 2019 South Africa Wealth Report shows that South African high net worth individuals (HNWI) hold less than 20% their wealth offshore. These HNWIs have the means to gain access to offshore markets more so than the average South African, which means that offshore exposure will be even less for the average investor.
Apart from the mitigation of risk through diversification, from an investment perspective offshore developed markets offer more depth and breadth relative to the local market. This allows an investor to better diversify risk and to access far more investment opportunities for growth.
Along with risk mitigation through diversification, growth is the key reason for investing abroad. Global investment markets – especially developed markets – present more opportunities to invest in long-term growth sectors such as technology and healthcare. It’s telling to observe that any one of the top five listed companies in the world is greater than the combined market value of all the companies listed on the JSE. For example, the market value of Apple is nearly one and a half times the value of all companies listed on the JSE. Simply put: the world is a big place and one’s wealth needs to be invested to grow with the world.
“Failing to plan is planning to fail.” When devising a global investment strategy, it is essential to consider an investor’s total wealth. To talk about a portfolio of investments in isolation to property, business and career interests would be misguided. Should an investor have adequate provision in South Africa for local income requirements and liabilities – for example through salaries, rental income from fixed properties or distributions from an SA trust – then more liquid assets could be invested offshore for capital growth and capital protection. Such direct offshore allocations are likely to be important to supplement the limited offshore exposure achievable through pension funds. Currently, offshore investments are seen as a subset of total wealth, but it should be the other way around, with the local investment forming a subset of the client’s total global wealth.
Global diversification involves asset location, asset allocation and asset selection. Asset location relates to the tax considerations of where investments are held and the wrong decision in this regard can lead to adverse consequences. Fortunately, there are several viable options available to investors, such as the Old Mutual International platform and/or establishing an offshore trust.
An offshore investment portfolio should be created around a client’s specific needs, but, broadly speaking, a typical equity portfolio would be heavily invested in US multinational companies together with selected UK and European multinationals. These multinationals, when properly selected, will provide an investor with exposure to developed and developing markets. A well-constructed portfolio will provide a good balance between established businesses and growth businesses. Exposure to specialised and fast-growing industries such as bio-tech can be achieved through exchange traded funds without placing large, risky bets on any particular company. Old Mutual Wealth Private Client Securities (PCS) have established a commendable track record as managers of bespoke global portfolios for private clients and trusts.
Political, social and economic risks may be a part of the argument to invest offshore, but these risks are not unique to South Africa. Simply put, if you want to mitigate risk and grow your investments in real terms over the long term, you’ll do well to adopt the mindset of a global investor.