Offshore portfolios offer diversification
• Global markets give investors access to a broader investment universe
High net worth individuals (HNWI) who retain the bulk of their assets in SA are missing significant opportunities to protect and grow their wealth in real terms.
“Many wealthy South Africans fall prey to home bias. This is either due to necessity, with the bulk of their wealth tied up in illiquid assets or local businesses, or because people prefer to invest in what they know,” says Chris Potgieter, MD of Old Mutual Wealth Private Client Securities. “Consequently, most investors hold a disproportionate percentage of their wealth in the local market, investing only 20%30% of their discretionary investments offshore.”
This offshore allocation is well below the 50%-70% that Potgieter advocates to clients, which is problematic as the South African market represents less than 1% of the global economy.
“This investment strategy transcends issues around local politics or rand volatility. From a pure investment opportunity perspective, expanding portfolios offshore offers numerous diversification benefits,” continues Potgieter.
“But diversification is not just about managing risks —a concept lost on many investors. It also allows investors to access a broader investment universe to participate in upside growth opportunities unavailable in SA’s highly concentrated market. Missing these opportunities is itself a risk.”
However, rising capital outflows from SA suggest more local investors understand the need for offshore exposure.
Mark Kitching, Executive Head: Wealth at Alexander Forbes, says offshore exposure has always formed a key component in the wealth management strategies the firm advocates to its predominantly late pre-retirement and early post-retirement clientele.
“While most clients already had an offshore component in their portfolios, because they understand the long-term benefits, we received more enquiries about moving more wealth offshore following the civil unrest in the country.”
Kitching explains that most clients require advice on how to effectively move capital offshore with the greatest tax and estate planning efficiency.
“Many older clients are thinking about how they can transfer their local wealth to children who have emigrated. They also want greater wealth mobility as the pandemic and the remote working revolution have fuelled a desire to spend more time with family who live overseas. We use regulated approved funds to move capital offshore or endowment products to wrap investments for the tax efficiency and estate planning benefits.”
Wealth clients who invest offshore for different reasons can also consider feeder funds or other forms of asset swaps, such as bespoke portfolios, in addition to physically externalising their wealth.
“Asset swaps leverage an asset manager’s offshore capacity to give South African trusts and companies ineligible for a foreign investment allowance, or individuals who want more offshore exposure as part of their domestic investment solution, indirect access to global markets,” explains Sanah Gumede, Standard Bank’s Head of Wealth and Investment South Africa.
“However, clients should always obtain advice from their wealth manager to consider the most appropriate solution.”
This advice would also relate to the ideal asset class and geographies in which to invest.
“Diversification across regions, asset classes, sectors and asset managers is paramount and the client’s needs, objectives and risk profile should drive these allocation decisions,” she says.
From an asset class perspective, Bryn Hatty, Chief Investment Officer at Stonehage Fleming South Africa, highlights various mediumterm valuation and longer-term structural opportunities in global equity markets.
“From a geographic perspective, the UK falls into the former category. Valuations are depressed due to uncertainties around Brexit. UK equity markets are also trading at the widest discount to the US in over a decade. Therefore, it is unsurprising to see the recent increase in private equity activity. However, we expect the economy will benefit from a successful vaccination rollout.”
In contrast, Hatty considers Asia a regional longer-term structural growth opportunity, while insurance and health care offer sectoral opportunities due to their respective valuation and longer-term global demographic trends.
In addition to health care, Potgieter cites the technology sector as another opportunity for upside growth.
“There are short-term risks regarding valuations, but investors need to look at these opportunities through a longterm lens, and current trends suggest the risk is worth taking.”
Outside of equities, offshore cash and bonds don’t make sense due to the prevailing low interest rate environment, believes Kitching.