Investors keen to look offshore
• Clients increasingly considering whether to build more of their asset base overseas, writes Pedro van Gaalen
Interest in offshore investing has grown over the past 18 months due to the local impact of sociopolitical instability, anaemic economic growth, credit downgrades and subdued domestic investment returns, and the attractiveness of returns in developed economies.
According to Colin Anthony, GM at capital markets and financial services research house Intellidex — publishers of the annual Top Private Banks and Wealth Managers report — SA’s high net worth individuals (HNWI) are concerned about the creeping erosion of value of their local assets due to SA’s distressed economy.
“While there has always been strong interest in offshore investing, wealth managers interviewed for the 2018 report highlighted an uptick in interest from clients during Jacob Zuma’s tenure as president,” he explains.
In this regard, wealth managers continue to assure clients that SA still offers good investment opportunities, and that they should not “panic sell” their South African investments and move their wealth offshore.
Despite this, wealth managers have seen a significant increase in money flowing offshore over the past 18 months, says Vince Boulle, executive head of wealth management at Nedbank Private Wealth.
“Clients, particularly younger high-earning individuals, are increasingly considering whether to build more of their asset base overseas. Diversification is a cornerstone of our advice to clients when constructing portfolios, along with managing the complexities of offshore investing in a considered, relevant manner for each client.”
James Arnold, wealth manager at FNB Wealth and Investments, shares these sentiments. “There is volatility and unpredictability in both local and global markets, and these factors must be considered when shaping investment strategies for wealthier individuals.”
There is, of course, a need for some degree of offshore exposure in any well-balanced and diversified portfolio. “In a world where uncertainty is widespread across regions, portfolio diversification through exposure to various currencies, products and asset classes is imperative,” says Arnold.
However, the investment vehicles selected and the total allocations need to be considered against the specific objectives of the investor, rather than based on knee-jerk reactions to prevailing economic and political factors.
“Investing involves taking decisions about the future under inherent uncertainty. As such, even the best investors make mistakes,” says Dan Brocklebank, a UK director at Orbis, Allan Gray’s offshore investment partner. “That is why investors should always diversify their holdings to spread the risk.”
He says this is particularly relevant for local investors, because the South African stock market makes up less than 1% of the value of world markets. Furthermore, there are more than 8,000 listed companies globally, compared with about 160 South African stocks.
“Investing offshore gives you access to sectors and companies that are simply not available on the local market. South African investors need to explore beyond their borders to access a broader range of attractive opportunities and benefit from trends shaping markets globally,” he says.
But how much offshore exposure is enough? “It’s impossible to state a single number that is appropriate for everyone as the answer depends on, among other things, your risk profile, objectives and investment time horizon,” says Brocklebank. “For example, research on average South African households’ spending habits on imported goods and services, suggests investors should look to hold at least 30% to 40% of their total investment portfolio offshore to protect against an erosion of local purchasing power,”
Mike Wilmot, head of advice at Nedbank Private Wealth, adds that investors must also consider their obligations and financial commitments in SA when deciding how much they should, and can, allocate to offshore investments.
“How an investor’s capital base and liability profile is matched, and how we structure wealth and invest internationally in a seamless way, are all important considerations. The answers to these questions are informed by a client’s objectives, both in SA and abroad. Their wealth, including their offshore investments, must support the attainment of those objective in a sensible way.”
Lesley Stewart, wealth manager at Futurum Financial Group, agrees with the approach of allocating 30% of assets offshore. “However, investors must look at their portfolio holistically when making decisions. There’s no one-size-fits-all approach that applies to everyone.”
Stewart also cautions against investing offshore as a means to speculate on the volatility of the rand. “Misguided attempts to make a quick return should never drive the decision to invest offshore. Instead, taking a long-term view, even if it’s simply to create an asset base in another country in case it’s ever needed, will ensure sound investment decisions are made.”
Arnold adds that a growing number of HNWIs are considering how additional offshore funds in foreign currency can help to cover their children’s education at an international tertiary institution. “It’s an interesting trend that is set to drive the demand for offshore exposure.”