Offshore investing is no longer a luxury reserved for a few, but has become a key financial planning requirement for all investors seeking to protect and grow their wealth.
Investors shouldn’t see offshore investing as a separate component, but rather within the context of their overall investment portfolio. Ultimately, it should be about where and how to optimally access different sources of returns.
The question of how much to invest offshore has always been difficult to answer, but exchange control also limited the amounts. However, through special allowances and changes in legislation, it is now easier for local investors to take their money offshore.
There is no magical number when it comes to how much one should invest offshore. It’s a very personal question and will differ from investor to investor, depending on their unique circumstances and investment objectives. Expert portfolio managers will take every investor’s personal situation and current portfolio into account when determining the amount to invest.
We tend to think about ‘local’ versus ‘offshore’, but it is far more complex than that. There are 195 countries outside of South Africa, and you can spread your risk much easier than in the past.
Why take money offshore?
It’s an opportunity to spread your risk and have a more diverse investment portfolio; You can take advantage of the many opportunities offshore investments afford from an expected return on investment point of view; and
Because of asset-liability matching, you can put your money where your future responsibilities will lie.
Although the JSE has some exposure to earnings from offshore companies and offshore markets, it still comprises less than 0,5% of the world’s markets. This doesn’t offer investors enough diversification compared with what is available offshore.
The JSE is typically dominated by a few large companies, often in natural resources, which don’t offer private investors much diversification.
Offshore markets, on the other hand, allow investors to access a wider range of industries and regions. It’s important to explore these opportunities not only from the diversification point of view, but also with an eye on expected returns.
Economic growth happens at a different pace and in different cycles in different parts of the world. Companies that are exposed to other markets experience different speeds of growth because they are exposed to different opportunities, changes in demographics, innovations and growth circumstances.
By restricting themselves to local investments, investors are losing the opportunity to invest in some of the largest, most successful and fastest-growing businesses and markets in the world.
Asset liability matching
We are increasingly seeing investors planning for a world where some of their liabilities (that is, responsibilities) will be in other jurisdictions or currencies. This has been emerging over the past couple of years and it’s what we call ‘future responsibilities’ or ‘asset-liability matching’.
Especially in the case of high-income and high-net-worth individuals, future responsibilities are changing and some of those may no longer be denominated in rands.
Examples include offshore studies, a ‘swallow’ lifestyle between two continents, tertiary education for a child, or emigration to settle near children in a foreign country and needing assets that can produce an income. An offshore asset portfolio will offer growth and income better aligned to match these responsibilities, even if you’re only thinking about regular offshore holidays.
It is imperative for every South African investor to have a portion of their assets invested offshore because of diversification and opportunity.
The question of how much to invest will depend on where future liabilities lie. Investors who are very exposed to South African expenses shouldn’t take too much offshore, but for investors who only need a small South African income base, growth opportunities in 99% of the world’s economy certainly look attractive.
An optimal time to invest?
Attempting to time a currency or the market is not only suboptimal, but also consumes valuable mental capacity that could be productively employed elsewhere. Currency movements are impossible to predict over the short term. (Even 12 months is too short!)
However, the long-term trend of depreciation of the rand versus the US dollar and other developed market currencies is firmly in place.
Work with specialists
While investing offshore is certainly rewarding, it is also complex as there are numerous nuances that need to be considered. In addition to a vast investment universe, legal and tax implications as well as estate administration factors come into play.
Therefore, it is vital for investors to work with reputable specialists who can effectively structure an investment portfolio that is tailored to their unique needs and objectives.
At Old Mutual Wealth Private Client Securities, our investment management philosophy is firmly rooted in wealth preservation and creation, which is all about picking quality companies that are well-placed to generate great returns over the long term.