Investors urged to take long-term view
• SA s volatile currency calls for smart moves to help preserve capital more effectively, writes Lynette Dicey
The biggest advantages of investing offshore are the ability to diversify portfolios and spread investment risk across different markets and regions, the latter being particularly important to reduce exposure to emerging market risks and a volatile local currency, to help investors more effectively preserve capital.
While investing offshore was once the preserve of high net worth individuals this is certainly no longer the case, with local investors able to access offshore investments for as little as R500 a month through either a unit trust fund or an index tracking exchange traded fund (ETF).
An investment in a collective investment scheme, also known
as a unit trust fund, which has exposure to offshore investments, is a cost-effective way of gaining access to offshore assets. A Regulation 28 compliant multi-asset or balanced fund is allowed to invest up to 30% in international assets, explains Ninety One sales manager Paul Hutchinson. The benefit of this type of
“fund is a professional money manager who has the time, experience and access to information decides when and how much to invest offshore on their behalf, and into which assets,” he says.
A worldwide flexible fund potentially offers an even more efficient investment solution given that it is not constrained by geographical or asset class limits.
Funds which are limited to only 30% offshore exposure, however, may not be the most efficient solution given that an unconstrained investment mandate improves the return characteristics of a multi-asset portfolio at only marginally higher risk, says Hutchinson. Alternatives therefore include a rand-denominated international unit trust fund which holds only offshore assets. Investors invest in rands and are paid out in rands when they disinvest.
However, while investors benefit from being invested in funds that only hold offshore assets they remain exposed to local political risk, he cautions.
There continues to be a perception that applying for tax and Reserve Bank clearance to invest offshore directly is a complex process which is why many South Africans continue to favour rand-denominated international funds, reveals Hutchinson. However, most investors won t need to apply
’ for clearance given they can invest up to R1m annually in an international fund. It is only when they wish to utilise their foreign capital allowance up
— to R10m per calendar year
— that they will need foreign tax clearance from the South African Revenue Service.
Using either their discretionary offshore or foreign capital allowance, investors can then invest in a foreigndomiciled international unit trust fund registered locally. The benefit of this type of fund is that
when disinvesting, investors will be paid out in the fund s
’ dealing currency.
While there are compelling reasons for investing offshore, these investments should be only one component of an overall investment portfolio, says Hutchinson. Studies have
“
shown that over a shorter time horizon, the exchange rate can have a significant impact on the investment return and the risk in rands,” he says, adding the simple conversion from rands to dollars can add in the region of 16% volatility to a portfolio.
Just as important as the offshore asset class decision is the risk in timing your offshore investment, he cautions. The rationale for this latter point is quite simple: offshore equities and the rand tend to move in opposite directions. What this means is when offshore equity markets perform well, offshore bonds are the losers and the rand typically strengthens, resulting in a currency loss on offshore portfolios. On the other hand, when offshore equities perform poorly, offshore bonds gain and the rand typically weakens, resulting in a currency gain on the offshore portfolio. Rand depreciation adds to the offshore investment s return calculated
’
in rands, and rand appreciation detracts from the overall return.
It is for this reason, he says, investors must take a longerterm view and look past shortterm currency movements.