Financial Mail - Investors Monthly
BEYOND BORDERS
Offshore investing is not a question of ‘if’ but rather ‘how’ and ‘where’
Astute investors understand the importance of offshore investing; it protects their wealth from the corrosive impact of SA’s weak economy and delivers growth.
Bernard Drotschie, chief investment officer at Standard Bank Group subsidiary Melville Douglas, says SA has had significant outflows into international markets in recent years. “This trend has been a function of political factors leading to a low-growth environment, and the concentrated local market, which offers investors fewer opportunities.”
Drotschie adds that, like other emerging markets, SA’s consumption-focused economy makes it vulnerable to events that erode consumer confidence and spending power, like the Covid-19 pandemic.
Offshore investing is not a question of “if” but rather “how” and “where”.
Kondi Nkosi, country head at Schroders, says: “Investors can utilise their annual foreign investment allowance in their personal capacities to invest up to R11m per person per year directly offshore.”
Drotschie adds: “Investors can also use domestic global feeder funds via asset swaps to maximise their exposure.”
PJ Botha, director at Bovest Wealth Management, says investors who have maxed out their regulation 28 pension fund offshore allocation and direct foreign investment allowances can still boost their global exposure. “The top 40 biggest shares on the JSE receive more than half of their earnings from outside the country.”
Investing via the JSE into companies that earn the bulk of their earnings offshore offers additional diversification to hedge against domestic risks and rand weakness.
Drotschie recommends larger exposures to growth assets.
“Our preference remains shares in quality companies with strong balance sheets, low gearing, significant pricing power and sector dominance.”
He says unit trusts are an effective investment vehicle due to the cost efficiencies and situs and capital gains tax implications. “Unit trusts also offer a more efficient way to gain market access, and clients benefit from a house view.”
Diversification beyond equities is also prudent. “This is especially relevant in the current global environment, where investors are looking for wealth preservation,” says Lisa Bathurst, property expert and founder of Hurst & Wills.
Nkosi says: “The less diversified an investment programme is across asset classes, geographies, sectors and even investment managers, the more investor fortunes are tied to the successes or failures of just a few factors.
“Structuring an offshore investment programme should be driven by the investor’s objectives, constraints, risk tolerance and other factors that are important to them. These are all elements that a good financial adviser can help inexperienced investors articulate.”
Investors with shorter horizons should focus on lowerrisk investments to protect against market volatility and uncertainty. “While US fixed income won’t give you great returns in bull markets, it will help SA investors manage risk exposure and bring down their portfolio’s volatility,” says Botha.
“Cash, bonds or gold also offer safer options,” adds Drotschie. “However, clients with longer investment horizons can take on more risk to realise returns, but they must be ready for higher volatility.”
Options for investors who can take a longer-term view include debt, private equity and private market fixed income, but they must consider the liquidity implications.
“Structured notes offer another option for investors looking to participate in some of the upside. They would, however, need to determine how much of the downside they are willing to stomach,” says Drotschie.
Bathurst adds that bricks and mortar outperform most asset classes over time, especially in times of uncertainty. “There are opportunities to leverage low interest rates and benefit from tax breaks, particularly in offshore property markets.”
While investors often worry about liquidity and guarantees when investing in fixed assets, these investments tend to offset these constraints with robust returns.
Bathurst says: “In the 2008 recession, for example, student accommodation was one of the few asset classes to see robust returns. Today, many student accommodation projects have lower price entry points — beneath discretionary allowance limits — with guaranteed yields of 8% for five years, and a decent exit strategy. Some regions in the UK property market have also delivered positive growth of up to 3.9% during the pandemic.”
Drotschie says: “Ideally, investors would use all of these assets to diversify their portfolio, provided the underlying asset has the right value, rather than focus on one over another. However, the right mix is ultimately based on individual client requirements.” ●