Five key ques­tions you should ask when in­vest­ing off­shore

How much money you should in­vest off­shore de­pends on your in­vest­ment hori­zon and whether you will draw an in­come in rands. re­ports

Pretoria News Weekend - - OPINION -

IT’S likely you are partly in­vested in off­shore as­sets with­out be­ing aware of it. How­ever, if you are ac­tively in­vest­ing off­shore, or are con­sid­er­ing do­ing so, there are sev­eral fac­tors you need to take into ac­count. What you should not do is move as­sets off­shore on im­pulse; the de­ci­sion should be a care­fully con­sid­ered one.

There are es­sen­tially five ques­tions you need to ask your­self when in­vest­ing off­shore (“off­shore” in the con­text of this ar­ti­cle means global, in any coun­try other than South Africa): • Why should I in­vest off­shore? • When should I in­vest? • Where should I in­vest? • What in­vest­ment in­stru­ments should I use?

• Per­haps most im­por­tantly, how much of my port­fo­lio should be off­shore?

But first, check to what ex­tent your ex­ist­ing in­vest­ments hold off­shore as­sets. It may be dif­fi­cult to find out how much of your re­tire­ment fund is in­vested off­shore (un­der reg­u­la­tion 28 of the Pen­sion Funds Act, it can be up to 25%). But for your dis­cre­tionary in­vest­ments at least, such as unit trusts, you can get a good idea by con­sult­ing the fund fact sheets. You may be sur­prised: South African gen­eral eq­uity funds, for ex­am­ple, can in­vest 25% in for­eign equities and a fur­ther 5% in African coun­tries other than South Africa.

Also re­mem­ber that a num­ber of com­pa­nies on the JSE earn a large por­tion of their rev­enue off­shore. Tam­ryn Lamb, the head of client ser­vic­ing for Or­bis, Al­lan Gray’s off­shore in­vest­ment part­ner, says: “South African in­vestors do have a per­cent­age of their port­fo­lio ef­fec­tively earn­ing off­shore rev­enue through ex­po­sure to top JSE-listed com­pa­nies, with about half of the earn­ings of the Top 40 listed com­pa­nies, rep­re­sent­ing more than 80% of the mar­ket, gen­er­ated out­side of South Africa’s bor­ders.”

Com­monly known as the JSE’s “rand-hedge shares”, which means they of­fer pro­tec­tion against a weak rand, they in­clude Naspers, Richemont and Stein­hoff.


There are good rea­sons for hav­ing a por­tion of your in­vest­ments in for­eign as­sets. Rush­ing off­shore when the rand weak­ens is not one of them.

Pi­eter Hugo, the man­ag­ing di­rec­tor of Pru­den­tial Unit Trusts, says: “Un­for­tu­nately, South Africans have a his­tory of pan­ick­ing when the rand weak­ens sharply and re­spond­ing by tak­ing money off­shore. Be­cause the rand is a highly emo­tive sub­ject, dom­i­nat­ing the news head­lines, in­vestors’ im­me­di­ate fo­cus is of­ten solely on the level of the rand, and not whether the South African as­sets they are sell­ing and the for­eign as­sets they are buy­ing at the time are cheap or ex­pen­sive (see ‘Share val­u­a­tions’, above). They also tend to dis­miss the ques­tion of whether they ac­tu­ally need to add off­shore ex­po­sure based on their long-term in­vest­ment goals.”

Di­ver­si­fi­ca­tion across coun­tries, in­dus­tries and com­pa­nies, as well as as­set classes and cur­ren­cies, is the pri­mary ben­e­fit of in­vest­ing off­shore, Hugo says. It re­duces the risk of a port­fo­lio for the same ex­pected rate of re­turn. At the same time, Hugo says, off­shore equities help to off­set the risk in­her­ent in the lo­cal eq­uity mar­ket, which is among the world’s most con­cen­trated.

“Off­shore as­sets also pro­vide ex­po­sure to growth op­por­tu­ni­ties, and to world-class com­pa­nies and in­dus­tries not avail­able in South Africa. Apart from this, hav­ing a por­tion of an in­vest­ment port­fo­lio off­shore acts as a safe-haven, help­ing ease in­vestors’ wor­ries about lo­cal mar­kets and mak­ing them more likely to stay in­vested for the longer term,” Hugo says.

So di­ver­si­fi­ca­tion is the prime rea­son. An­other is that you may need money off­shore be­cause of per­sonal rea­sons, such as be­ing out of South Africa for long pe­ri­ods or ed­u­cat­ing your child abroad.


It is not ad­vis­able to time the mar­ket, but if you are en­ter­ing the mar­ket, the best time is when the rand is strong (as is cur­rently the case) and when off­shore as­sets of­fer good value (which may not be the case at present in cer­tain re­gions).

Philipp Wörz, an eq­uity an­a­lyst and fund man­ager at PSG As­set Man­age­ment, notes that global equities have been in a bull mar­ket since the 2007/8 fi­nan­cial cri­sis.

“With both the MSCI World In­dex and the S&P 500 (the main United States in­dex) trad­ing at over 20 times earn­ings, they are well above long-term av­er­ages. The case for cheap off­shore eq­uity val­u­a­tions – and cor­re­spond­ing op­por­tu­ni­ties for strong long-term re­turns – is be­com­ing weaker by the day,” Wörz says.

De­pend­ing in what you are in­vested, you may have a high de­gree of ex­po­sure to US stocks. Even if you don’t, a cor­rec­tion in the US stock mar­ket will af­fect mar­kets around the world.

To have a truly di­ver­si­fied port­fo­lio, your off­shore al­lo­ca­tion needs to re­flect that di­ver­sity, and it should in­clude ex­po­sure to both de­vel­oped mar­kets and emerg­ing mar­kets.

Cur­rently, Wörz says, there are still at­trac­tive op­por­tu­ni­ties to be found across the globe de­spite the rise in over­all val­u­a­tions.

“In many cases, these op­por­tu­ni­ties will not leave the av­er­age in­vestor feel­ing ‘warm and fuzzy’ – many of them are in unloved parts of the mar­ket that of­fer a greater chance of mis­pric­ing. In ad­di­tion to emerg­ing mar­kets such as South Africa, there are great op­por­tu­ni­ties in ar­eas such as agri­cul­tural com­modi­ties, US re­tail and UK do­mes­tic in­dus­tri­als,” Wörz says.

Should geopo­lit­i­cal fac­tors in­flu­ence your de­ci­sion? They shouldn’t, the ex­perts say, if you are in­vested for the long term.


This de­pends very much on your long-term in­vest­ment goals, on how far away you are from re­tire­ment, and whether you will be re­tir­ing in South Africa or over­seas.

If you are close to re­tire­ment and in­tend draw­ing an in­come in rands, you need to be very cau­tious about hav­ing too much of your sav­ings off­shore sim­ply be­cause of the volatile na­ture of the rand.

Hugo says: “Gen­er­ally, the off­shore por­tion of your port­fo­lio will be larger the higher your tar­geted in­vest­ment re­turn (and there­fore the higher the risk re­quired).

“For ex­am­ple, if you have an ag­gres­sive re­turn tar­get of in­fla­tion plus 7%, you would tend to need be­tween 35% to 40% off­shore. A re­turn tar­get of in­fla­tion plus 6% is more in line with a typ­i­cal ‘bal­anced’ fund, with around 30% off­shore. Fi­nally, a more con­ser­va­tive tar­get of in­fla­tion plus 2% or plus 3% would gen­er­ally dic­tate off­shore ex­po­sure of only 10% to 20%. These are guide­lines, how­ever; the ex­act ex­po­sure an in­di­vid­ual needs should be de­ter­mined with the help of a fi­nan­cial ad­viser.”


For in­vestors want­ing di­rect ac­cess to the full global listed eq­uity uni­verse that is not avail­able on the JSE, there are three main routes to in­vest­ing off­shore:

• Through a lo­cal unit trust that is man­dated to in­vest a por­tion of its as­sets off­shore;

• Through a rand-de­nom­i­nated unit trust that in­vests en­tirely off­shore; or

• In a fund from an off­shore provider that is de­nom­i­nated in a for­eign cur­rency such as dol­lars.

Each op­tion has its own tax im­pli­ca­tions, and if you are in­vest­ing in an off­shore fund, for­eign ex­change reg­u­la­tions will ap­ply.

Lamb says: “The sim­plest choice is to in­vest in a rand-de­nom­i­nated unit trust. These are of­fered by lo­cally based as­set man­agers, who of­fer ‘feeder funds’ di­rectly linked to an off­shore unit trust. You in­vest and with­draw in rands, but your in­vest­ment is into for­eign com­pa­nies. The other route is to in­vest in for­eign cur­rency, ei­ther di­rectly with an off­shore provider, or through an South African based off­shore in­vest­ment plat­form. The at­trac­tion of this op­tion is that you are in­vested in for­eign cur­rency. While go­ing this route is a bit more ad­min­is­tra­tion-in­ten­sive, it is not dif­fi­cult.”


Lamb says all your choices must be made in the con­text of your fi­nan­cial plan.

“In­vest­ing off­shore should never be a knee-jerk re­ac­tion to events, but rather a de­ci­sion taken as part of an over­all fi­nan­cial plan. Your per­sonal cir­cum­stances and risk tol­er­ance should gov­ern how much of your port­fo­lio you should take off­shore and into which as­set class.

“Seek ad­vice from a rep­utable fi­nan­cial ad­viser to help you nav­i­gate the greater com­plex­ity that in­evitably arises from the huge num­ber of funds avail­able glob­ally. It can oth­er­wise be over­whelm­ing.”


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