BUT NOT WITH­OUT STRAT­EGY

OFF­SHORE EX­PO­SURE ES­SEN­TIAL,

Financial Mail - Investors Monthly - - Feature: Offshore Investing -

While off­shore re­turns for South Africans have his­tor­i­cally been flat to neg­a­tive, this has changed over the past five years, re­sult­ing in both in­di­vid­ual and pro­fes­sional in­vestors in­creas­ing their ex­po­sure to off­shore in­vest­ments.

This is ac­cord­ing to Wayne Sorour, Head Old Mu­tual In­ter­na­tional Sales & Dis­tri­bu­tion, who points out that given the de­cent re­turns pro­duced by off­shore mar­kets over the past few years, even tak­ing into ac­count last year’s cor­rec­tion, as well as diver­si­fi­ca­tion op­por­tu­ni­ties it would be fool­ish not to have off­shore ex­po­sure as a part of any in­vest­ment port­fo­lio. “In­vestors should have at least a 30% ex­po­sure of their in­vestable as­sets off­shore, whether it be di­rect off­shore if they can af­ford it, or via a rand-de­nom­i­nated fund.”

Sorour warns in­vestors, how­ever, against try­ing to time the mar­ket or in­vest­ing heav­ily when the rand starts de­valu­ing. “If, ac­cord­ing to the in­vestor’s in­vest­ment ob­jec­tives, they need to di­ver­sify to off­shore mar­kets, they must take ac­tion to di­ver­sify. Try­ing to time when the rand is at the right level or when mar­kets ap­pear cheap will only lead to de­lay and re­gret.

For in­stance at the mo­ment, the rand has strength­ened against all ma­jor cur­ren­cies, since its low on 6 Sep­tem­ber 2018; by 14.0% to the USD, 12.9% to ster­ling and 15.4% to the euro, at its high in the be­gin­ning of Fe­bru­ary 2019. The rand then fell sharply but has clawed back some gains to end at 8.0% to the USD, 8.7% to the GBP and 11.2% to the euro as of 15 Fe­bru­ary 2019. This gives in­vestors in­sight into the fu­til­ity of try­ing to time the cur­rency, and while do­ing that, miss­ing out on po­ten­tial mar­ket up­sides.

For in­vestors who have never had off­shore ex­po­sure be­fore, Sorour says that the op­tions avail­able to them de­pend on their par­tic­u­lar sit­u­a­tion. “For in­stance, are they still car­ry­ing debt? Are their tax af­fairs up to date and do they have enough cap­i­tal to take money di­rectly off­shore?”

If the sit­u­a­tion al­lows for it, Sorour says that up to R1 mil­lion per year can be di­rectly in­vested into an off­shore for­eign-cur­rency fund with­out the need for tax clear­ance. “In­vestors can ap­ply to SARS and the SARB to in­vest more, in other words, their R10 mil­lion for­eign in­vest­ment al­lowance per per­son per an­num, but this will not be suc­cess­ful if their tax af­fairs are not 100% in or­der. When all re­quire­ments have been met, in­vest­ments can be made in the for­eign cur­rency that the client has se­lected and in­vested in which­ever ju­ris­dic­tion is pre­ferred.”

“Im­por­tantly, from that time on, in­vestors need to value the in­vest­ment in the cur­rency in which they have in­vested. If they’ve cho­sen US dol­lars, then growth needs to be mea­sured in US dol­lars,” he adds. How­ever rand de­val­u­a­tion can be an ad­di­tional bonus.

The sec­ond op­tion he men­tions is to ob­tain off­shore ex­po­sure through a rand­de­nom­i­nated off­shore unit trust or fund. “This re­quires no spe­cial clear­ance from ei­ther SARS or the SARB and the pre­mi­ums are lower and many funds cater for monthly con­tri­bu­tions. How­ever, in­vest­ments will pay out in South African rand and will only be made avail­able here in South Africa.”

Ul­ti­mately, when look­ing at off­shore op­por­tu­ni­ties, in­vestors, to­gether with their fi­nan­cial ad­vis­ers, need to ac­cess mar­kets with real growth po­ten­tial. “In the cur­rent in­ter­na­tional in­vest­ment en­vi­ron­ment, in­ter­est rates re­main low and tra­di­tional de­vel­oped mar­kets look like fair value. The Dow Jones hit a record high, reach­ing 26,743 points on 21 Sep­tem­ber 2018 off its low of 6,626.93 in March 2009 dur­ing the Re­ces­sion, and as at 15 Fe­bru­ary 2019 it’s at 25,757, once again rep­re­sent­ing fair value.”

Sorour urges in­vestors ea­ger to ex­plore their off­shore op­tions to con­sider more than just re­turns. “In ad­di­tion to po­ten­tial re­turns, the var­i­ous in­vest­ment struc­tures avail­able also need to be con­sid­ered, as well as tax im­pli­ca­tions and es­tate plan­ning con­se­quences. All of th­ese fac­tors can im­pact the ul­ti­mate suc­cess of an in­vest­ment.

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