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Offshore investing: Just what your portfolio needs?

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With the ran weakening against the dollar, many South African consumers have been asking if they should be taking money offshore.

Shaun Ruiters, head of strategy and client solutions at Sanlam Investments, believes offshore exposure is necessary for a diversified portfolio.

“As a South African resident, the value of your home, your income and your savings is likely to be heavily exposed to what happens in the South African economy and markets. By sticking to rand-based local investments only, you miss out on the diversity of opportunities across the rest of the globe.”

As South Africa represents less than 1% of the world economy, restricting yourself to domestic assets only means you are foregoing extensive investment opportunities available in global markets.

“International investing will give you access to regions and industries that are not well-represented locally [e.g. IT and electronics],” according to Coronation Fund Managers.

“Research on optimal portfolios suggests an offshore allocation of 20% to 30% for long-term investors requiring a return of inflation plus 4% to 5%.”

Aside from allowing access to a much greater opportunity set which, in turn, should allow you to improve returns, investing offshore allows you to diversify currency exposure, which can help protect your local purchasing power in the long term as many costs are “imported”, and therefore exposed to a weakening of the rand relative to other global currencies, explains Tamryn Lamb, head of Orbis Client Servicing in South Africa (Orbis is Allan Gray’s offshore investment partner).

South African markets offer limited investment opportunities, explains Vaughan Henkel, investment strategist at Stanlib.

“We have high equity concentration in South Africa. Five stocks make up 40% of the JSE All Share Index, whereas five stocks only make up 11% of S&P 500, which gives you significantly lower risk. There are 2?500 investable stocks globally versus effectively 100 stocks in South Africa.”

The most appropriate allocation of your portfolio is to have 50% in offshore assets, Henkel believes.

“Investing locally has its advantages, as evidenced by the past 15 years where the South African equity market has been an excellent equity destination. However, the factors that made our returns so strong in the past 15 years have dissipated and we expect weaker returns going forward.”

Ruiters suggests that there are two ways to go global:

  • Take your money offshore as part of your annual R10m offshore allowance. (You may transfer R1m overseas every year without asking Sars for a tax clearance certificate). “You would need an offshore bank account. Offshore-based funds have a minimum requirement investment amount of at least R100?000.”
  • Invest in a locally domiciled global fund. “You can invest the money from your South African bank account and when you disinvest, the money returns to your South African bank account. The fund manager will invest your money in offshore assets, though. With this type of fund you can invest amounts as small as R5 000.”

However, Graham Lovely, financial adviser at PSG Wealth, says that before deciding to invest abroad, you should contemplate how best to externalise funds together with what the most appropriate investment vehicle or structure might be, and what tax, exchange control and estate duty implications may arise.

While there are many factors that need be considered when investing offshore, it may be one of the best investment decisions that you can make.

“By taking advantage of global investment opportunities, you can share in the growth of the world’s most profitable industries and also benefit from holding investments in other currencies,” Lovely says.

This article originally appeared in the 20 August 2015 edition of finweek. Buy and download the magazine here

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