Investing offshore
Investing offshore has become a key talking point on the back of the Covid-19. Although there is no guarantee that investing offshore will yield higher returns than local investments, it is key in achieving a diversified and balanced portfolio. Everyone has heard the saying "Don't keep all your eggs in one basket" - and the same applies to the geographic spread of your investments. South Africa currently represents less than a percent of the world's economy so by only investing locally you may be limiting your investment growth potential and missing out on possible growth opportunities elsewhere.
Diversifying a share portfolio geographically has similar benefits to diversifying across asset classes. Should the JSE see a reduction in growth, your investments in international markets might see higher growth and balance your returns out. By limiting your investments to South Africa, all your risk is concentrated in one location. Should anything negative happen in South Africa, it will be reflected in your returns. Investing offshore might be something you have wanted to do but haven't been able to execute due to the daunting nature of taking money offshore. Questions asked by local investors include, which countries to invest in, which financial assets to select and which currencies to favour. Answering these types of questions can be challenging and put investors off investing offshore before they even start. However, navigating offshore investments can be done and the reward is well worth it. An investor must keep in mind that developed economies such as the USA, UK and Japan might experience slower growth compared to the likes of the JSE during certain economic cycles, but the growth is more consistent and therefore carries lower risk. In rand terms, international markets have performed relatively well during the global shutdown compared to local markets, mainly as a result of the rand depreciation. Investors with geographically diversified portfolios would have been able to counter local pull backs with international growth.
How does one invest offshore?
As a South African there are two clear options.
1. Physically transferring money offshore and buying assets
The first entails a South African going through exchange control and physically transferring their hard currency offshore. This will allow you to move your cash and savings to an international bank account or directly into an investment in your currency of choice. The implications of this method is that the funds are then permanently abroad and never have to return to SA, unless you decide to do so. With this option in mind South African citizens can take a maximum of R10 million a year offshore once SARS has granted a tax clearance certificate.
If this tax clearance certificate has not been issued by SARS, South Africans can still take up to R1 million offshore per year (referred to as your Single Discretionary Allowance). Once the money has cleared, the rands may now be sitting in an international bank account in the currency of the investor's choice. This investor will now have currency exposure, meaning should that currency strengthen against the rand, there will be a rand gain if brought back to local shores. Should that investor then purchase financial assets such as shares in foreign currency, the investor will now have exposure to international markets as well as foreign currency and has hedged himself or herself against slow financial market growth in South Africa and a depreciating rand.
2. Investing in a foreign fund
This entails investing in a rand-denominated unit trusts or an investment fund such as the Ashburton Global Leaders ZAR Equity Feeder Fund. International funds allow South Africans access to offshore exposure through a rand-based local investment. Here the capital is pooled and invested into a balance of investments and savings assets on your behalf. The fund manager is a professional with a wealth of experience in investing offshore. An investor can also purchase an international Exchange Trader Fund (ETF) that will give him or her exposure to certain international indices. The Ashburton Global 1200 for example is an ETF that tracks the performance of the 1 200 largest companies in the world. Similarly, the Coreshares S&P 500 ETF tracks the performance of the S&P 500 index in the US. The investor, however, must decide on which ETF basket to buy, when to buy and when to sell. Unit trusts, foreign funds and ETFs are easy pathways to international exposure.
Access for all
Both options give South African investors access to international exposure. The investor must decide on which is the best option personally and for the goals associated with offshore exposure. International investing should be seriously considered by all South African investors to ensure well diversified and balanced portfolio risk.
