How to take the price shock out of an overseas education for your child

If you think your young child may one day want to study overseas, the cost is likely to be high and it is best to plan ahead and invest in the foreign currency of the country where you are likely to pay the costs, investment experts say.

Ian Edwards, partner and Africa regional manager of Austen Morris Associates, a global, independent wealth manager, says few South Africans appreciate how pricey an overseas education is.

Many assume they can fund an offshore education out of their monthly salary income, but without hard currency assets producing a good return over a long period, it’s extremely difficult — especially if the rand continues to weaken.

Affording tuition, supplies and living expenses in a foreign currency will be tough going without serious planning, Ray Mhere, regional manager at Allan Gray’s Johannesburg office, says.

The US, Australia and the UK are popular choices for tertiary education, tuition and lifestyle but come with a hefty price tag, Mhere says.

The annual top universities survey for 2018 published by UK education specialist QS shows that Melbourne and London are in the top three best student cities in the world.

According to the University of Melbourne’s website, first-year tuition fees for a Bachelor of Commerce course starting in 2020 for students from overseas will cost about AU$41,000 (about R420,000) vs about R65,000 at the University of Cape Town. International students are generally charged much more than citizens of a country.

“It’s not just tuition costs you have to consider. For example, in the UK, tuition would cost about a minimum £10,000 (R182,000) a year for a decent university but you can add another £20,000 (R364,000) a year for living expenses,” Edwards says.

Mhere says one way to fund these costs is to invest in a local asset manager’s rand-denominated “feeder funds” that invest everything into a single offshore fund, or its funds of funds that invests in more than one underlying offshore fund. You invest and withdraw in rand, but your investment is into foreign assets.

Another option is to invest in foreign currency, either directly with an offshore provider, or through an offshore investment platform into a fund domiciled in the relevant foreign country. While this route can be more administratively intensive in that you may require tax clearance from the SA Revenue Service, it is not difficult, he says.

Edwards says that in dollars SA investors in the JSE would have earned no returns over the past 15 years, a setback if you are trying to grow your savings to fund an expense in an offshore country, and the outlook remains bleak.

Investors should consider the likely better prospects of investing in listed quality global equities, he says.

“We suggest starting a ring-fenced, hard currency investment or savings account for children well in advance of when they’ll need it,” Edwards says.

The effect of exchange rates on your investments

Hardi Swart, the 2019 financial planner of the year and MD of Autus Private Clients, agrees that you should start investing early in a foreign currency in an offshore account or into an offshore feeder fund.

This way you will eliminate the exchange-rate risk associated with the rand because your investment will grow in dollar terms, he says.

If you are paying tuition fees in dollars and the rand drops 10% against the dollar overnight, your fee bill will be 10% heftier in rand, Mhere says.

A well-diversified offshore investment portfolio can help protect you against these fluctuations, he says.

When you live in SA and purchase a US share, each dollar is costing you about R15. Over the time you hold the investment, the rand may weaken against the dollar, and you would get back more rand for each dollar you invest assuming the price of the US share remains the same.

Alternatively, the rand could strengthen, so that you would get back fewer rand for each dollar you put in. In both scenarios, the exchange rate affects the value of your investment in rand only, but not in dollars.

Having exposure, for instance, to US assets means that your purchasing power is better protected in dollars, regardless of the exchange rate movement, Mhere says.

It is impossible to accurately and consistently forecast the movements of the rand. There are just too many factors at play that we can’t control — the mood and actions of local politicians, foreign investor sentiment and the daily noise in global markets, Mhere says.

A better strategy, he says, is to figure out how much of your investment portfolio you want to place offshore and what you are trying to achieve, and then formulate a plan to invest as regularly as possible in carefully selected assets.

“It is more important to spend your time identifying which global assets you want to invest in for the long term, rather than determining the exact perfect entry,” Mhere says.

As to which offshore funds or accounts you should consider, Swart says it depends on the age of your child and how much time you have to invest.

If your child is two years old, you have time on your side and you should consider an aggressive investment such as an offshore equity fund. If your child is already in high school you will need to be more conservative and should think about a cash-type of fund that doesn’t carry too much risk.

But, he says, bear in mind that interest rates in cash investments offshore are only about 2% a year and there is a danger that you will not be able to grow the investment by much. To save enough money you will have to invest a substantial amount.

If you invest in SA with interest rates at 7%-8.5%, you face the danger that the exchange rate can decimate your returns should the rand weaken against the currency that you will need for your child’s education.

You, as an investor, need consistent inflation-beating, hard currency, offshore investments for the long term and should stop trying to time the rand correctly, Edwards says.

Tips for savings for your child’s offshore education 

Investing offshore should never be a knee-jerk reaction to events in SA, but rather a considered decision. You can improve your chances of success by following this advice from Allan Gray’s Ray Mhere:

• Make sure your portfolio is well diversified.
• Take a long-term view of your investments rather than making one-off investment decisions or trying to time the rand.
• Adopt a regular approach to investing offshore.
• Choose an offshore manager whose investment philosophy you believe is sustainable and that it has proven it can implement.
• Seek advice from a reputable financial adviser to help you navigate the greater complexity that inevitably arises from the huge number of funds available globally. It can otherwise be overwhelming.

The Financial Sector Conduct Authority allows offshore managers to market in SA if they have suitable investments for local investors.

Using one of these managers means you will invest in a jurisdiction where regulation is similar to that in SA.

In addition, these managers have to have a representative in SA, making it easier for you to contact them.