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Building your offshore portfolio

May 11 2017 09:35
Mariam Isa

Sustained strength in the rand is presenting South Africans with an opportune time to invest offshore, but the step should be taken as part of an overall strategy rather than a mad dash to escape political uncertainty at any cost, financial planners and fund managers say.

There has been a rush to take money out of the country since President Jacob Zuma unexpectedly axed former finance minister Pravin Gordhan at the end of March, triggering two credit rating downgrades that undermined fragile business confidence.  

The rand has withstood the shock well, supported by capital inflows into emerging markets, which offer investors better yields than those in developed economies, in addition to what is described as a “risk-on” global environment.

At levels of around R13.60 to the dollar, buying foreign currency is far less costly for South Africans than it was a year ago, when the rand was trading at around R16 to the dollar. There is a chance it could strengthen further, but possible shifts in economic policy and further credit rating downgrades make that scenario unlikely.  

“Now, as it stands because of what South Africans are experiencing in the political sphere, people are taking much more offshore,” says Desiree Raghubir, a certified financial planner at BDO Wealth Advisers.

“From an exchange rate point of view now is a good time, but if there is that panic setting in, we would encourage clients to look at their portfolio without emotion,” she adds.

Stick to strategy

Clients often do not know their full offshore exposure because many of the top JSE- listed shares were already rand hedges, she notes. Raghubir adds that it is important to encourage them to look at their goals in a holistic context – such as where they intend to retire, or if they want to send their children to foreign universities. 

Says Wayne Sorour, head of Old Mutual International SA: “People are looking to increase their offshore allocations but I don’t think a knee-jerk reaction is a good thing.  

“People shouldn’t react and change their overall objectives or main strategy.”

Industry experts say the most important reason to invest offshore is to diversify – for better yields, or simply to take account of the fact that SA makes up less than 1% of the global economy.  

Growth is another important consideration. South African economic output is expected to expand by just 0.8% this year, after increasing by 0.3% in 2016.
Those forecasts point to bleak earnings outlooks for many domestic companies, particularly those in the retail and banking sectors.  

By comparison, the global economy is expected to grow by 3.5% this year, and emerging markets overall by 4.5%, according to forecasts from the International Monetary Fund published last month.  

The big question is: what portion of their investments should South Africans invest offshore? The most common answer is between 25% and 30%, although some fund managers think it should be closer ?to 50%. Much will depend on the amount of money individuals have available to spend – those with more funds at their disposal can afford to take more offshore, they say.  

The next big decision is where to invest. Conventional wisdom says that as South Africa is still a developing economy with a higher level of risk, developed markets like the US, the UK and Europe are the best option.

The future remains uncertain everywhere

But the big political events of last year – President Donald Trump’s election in the US, Brexit in the UK, and the rise of right-wing populism in Europe – have made the future of all those countries far less certain, and more volatile.

“I think you would be hard-pressed to find an example of an investment process that has been consistently successful in forecasting economic and political events,” says Adrian Saville, chief strategist at Citadel and chief investment officer at Cannon Asset Managers.

“There is always risk – all that varies is the level of anxiety. Our ability to forecast what is coming at us is spectacularly low, and that has always been the case.”  

Unsurprisingly, Saville sees value in emerging markets, even for South African investors. The Chilean and South Korean economies offer “fantastic” opportunities, while Poland and the former East Germany are also attractive, he says. “I would want to find a good asset at a good price.”  

Financial planners do not think now is a good time to buy US equities as the market there looks expensive following an unprecedented bull run after the election of Trump last November.  

Opinion is divided on the merits of the UK and Europe. Many believe that the UK will “come right” after Brexit negotiations are over – but it is clear now that the EU wants to punish the country for opting out.  

The UK could face a Brexit bill of up to €100bn and there are reports circulating that UK Prime Minister Theresa May will not be allowed to negotiate directly
with her European counterparts.  

Rhynhardt Roodt, fund manager at Investec Asset Management, recommends Europe as an investment destination, saying that once the politics have “washed away”, it presents a value opportunity – the economic cycle there is less mature and corporate balance sheets are in better shape.  

“With a bit of a tailwind Europe would be a much more interesting and compelling destination,” he maintains.  

Saville thinks otherwise. A “collective sigh of relief” breathed after populist candidates lose this year’s elections could be short-lived as they will still pose a risk at polls in a few years’ time, he warns.  

Move money offshore

Amid all the volatility and uncertainty, Raghubir says a good strategy is simply to move money offshore and let it sit there for six months or a year while options are weighed up. “Now is a good time to take cash offshore but it is not necessary to ?lock it into certain investments. There is ?no rush, it’s a long-term investment strategy,” she adds.

For South Africans whose tax affairs are in order, the process is straightforward – they must apply for foreign allowance clearance and get approval from the Reserve Bank. It can all be done online and the process can be completed within 24 to 48 hours, although the transaction has to be placed through an authorised dealer.  

Caps on the amount of money which can be taken offshore are of little concern to most South Africans – individuals can move R11m each year and of that sum, R1m is a “discretionary” allowance which does not require any approval or tax clearance.     

Once the funds are offshore, an individual can make a considered decision on where to allocate it – preferably with the guidance of a fund manager who has the perspective and expertise to monitor the investment on an ongoing basis.  

To make a foreign currency investment an individual should have at least $10 000 at their disposal, which is the minimum for a unit trust proposal, Raghubir says. To access a share portfolio is far more costly – the minimum amount is normally around £75?000 to £100 000 or the dollar equivalent.  

Asset-swap route and offshore life wrappers

But there is a much easier route that allows individuals to invest offshore using local currency with as little as R500 a month, Raghubir points out. The money can be invested in a rand-denominated asset-swap fund – a unit trust which uses the company’s capacity to invest offshore.  

There is no need for foreign exchange allowance clearance or Reserve Bank approval and no limits to the money which can be invested offshore – but it must be repatriated to SA in the future, and will be paid out in rand.  

For those who want direct offshore exposure, there are a number of considerations which need to be taken into account, says Andrew Brotchie, managing director of Glacier International, a division of Glacier by Sanlam, which makes global funds available to local investors.  

In a published note to financial planners in March, he suggests using an offshore life wrapper, or endowment structure, issued by a South African life company.

This means that an investor doesn’t have to create an offshore estate, which would require an offshore will and the appointment of an international representative to help wind up their offshore estate – a costly and time consuming process.  

It would also ensure that an investor’s estate is not subject to foreign inheritance tax, which can be as high as 40%.  

“Investors in a life wrapper can simply nominate a beneficiary or beneficiaries – either for the plan to continue to be invested in the beneficiary’s name or for the investment to be paid out, in which case the proceeds will be paid directly to the beneficiary and not be dependent on the estate being finalised. The proceeds will also not attract any executor’s fees,” he wrote.  

Investing through a life wrapper means that the South African life company is responsible for the calculation, collection and administration of any tax due. This means that the investor has no additional personal tax liability or administration. Also, the tax paid by the life company could be less than they would pay in their personal capacity. 

Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.

This is a shortened version of our cover story on offshore investing, which is brought to you by Investec. It originally appeared in the 18 May edition of finweek. For the rest of this story, you can buy and download the magazine here.

investing  |  offshore investment  |  dollars

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