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A Fin24 user wants to use the advantage of his age to invest in a more aggressive way and is interested in the benefits of investing offshore. He writes:
I would like to know a few things about investing as an individual in offshore accounts.
I'm a 25-year-old millennial, who is passionate about saving and not living beyond my means.
Instead of saving money in a notice account with my bank (interest rates are too low), I have begun researching investing in offshore funds.
I'm quite aggressive with my money when it comes to investments, but would like some assistance regarding certain issues:
*Is it wise to invest in offshore funds?
* Does the weak rand put me at a disadvantage when investing offshore?
*How much riskier is it to invest offshore?
*What are the advantages and disadvantages in investing in offshore funds?
Marius Fenwick of Mazars responds:
Regarding not saving money in a notice account with your bank and having begun researching investing in offshore funds:
For a long term investment strategy this makes 100% sense.
Apart from interest rates being low, it is all but impossible for bank deposits and even money market investments to provide real returns - that is returns higher than inflation - if tax on interest earned is taken into consideration.
Since the correlation is high between interest rates and inflation, this statement holds true irrespective of what the interest rate is.
Cash should not be considered as a viable investment for any term in excess of one year.
Regarding investing in offshore funds:
As a South African, it makes absolute sense to include offshore investments in your investment portfolio.
The younger you are, the more offshore exposure you can add.
Contrary to this statement, it is also wise to limit your offshore exposure once you become reliant on income from your investment.
The higher the percentage is that you need to draw from your investment, the lower the offshore exposure should be as a result of the higher volatility that you can expect from offshore investments due to currency fluctuations.
Offshore exposure is advisable for various reasons, the main ones being:
- Diversification: SA makes up only about around 0.5% of the world economy. Offshore opportunities are vast and provide access to alternative industry sectors and large global companies;
- Stability: For some, SA's current geopolitical situation is a cause of concern.
There are issues like labour matters, electricity supply concerns, productivity concerns and education concerns.
The developed countries have a more efficient manner in dealing with these issues, posing less of a threat to corporates and company growth and profits, which ultimately lead to share prices;
- Market valuations: Currently offshore equities are considered as offering better value than SA equities;
- Currency depreciation: It is broadly accepted that the SA inflation rate will continue to be higher than that of developed countries and it is accepted, therefore, that the rand will continuously depreciate against the major currencies.
Currency concerns should not be your major driver to invest offshore. The main driver and motivator must be valuations.
Regarding whether the weak rand puts you at a disadvantage when investing offshore:
It is debateable whether the rand currently is weak or not. If it is weak, it is mildly so and an aggressive appreciation is not expected.
The only way the rand can appreciate is if the demand for the unit escalates and increases aggressively. Although this is not impossible, it is unlikely.
In a perfect world one would like to invest offshore when the rand is strong and disinvest when the rand is weak.
Currently, I do not think that you will be at a disadvantage as a result of the rand valuation if you invest offshore.
If your investment term is in excess of five years like it should be if you consider investing offshore, then the chances are very slim that the rand will be stronger than today.
If you invest offshore you want the rand to become weaker over time since this will enhance the rand returns on your investment.
One of the most difficult predictions to make is short-term currency movements and if you are planning to profit from trying to time currency adjustments, you are entering dangerous territory.
Regarding the risk of investing offshore:
There is no reason why investing offshore should carry any more risk than investing in SA. Quite the contrary.
If the assets that you are investing in are at decent valuations, then the offshore market should be less risky than the SA market due to is maturity and size.
Of course there are risky assets and investments as well, but if you apply proper investment principles and invest via or with reputable institutions the risk is minimal.
Your biggest risk will be changing your investment objective and discipline.
If you decide to invest for five years and after two years decide to repurchase your investment because the market has become more volatile, you will crystallise your losses.
Determine and understand what markets do and what the difference is between risk and volatility.
All assets are subjected to volatility. It is important that you match your volatility capacity with that of the investments that you intend to invest in.
Regarding the disadvantages of investing in offshore funds:
The advantages have broadly been covered above.
The one disadvantage is if you invest offshore and the SA stock market carries on with super returns like it has done historically, you will lose potential upside.
Be mindful how you invest offshore.
There is a distinct difference in the capital gains tax calculation when investing directly offshore using your offshore allowance and investing via SA feeder funds.
- Fin24
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