BUT NOT WITHOUT STRATEGY
OFFSHORE EXPOSURE ESSENTIAL,
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.