Offshore investments: golden guidelines to help diversify your portfolio

Offshore investing is no longer a luxury reserved for a few. It has become a vital financial planning requirement for all investors seeking to protect and grow their wealth.

Investors shouldn’t see offshore investing as a separate component but rather within the context of their overall investment portfolio, where it is exposed and what its underlying assets are. It should be about where and how to optimally access different sources of returns.

How much is enough?

The question of how much to invest offshore has always been difficult to answer, but exchange control also limited the amounts. However, through special allowances and changes in legislation, it is now easier for local investors to take their money offshore.

There is no magic number when it comes to how much one should invest. It’s a personal question and will differ from investor to investor, depending on their circumstances and investment objectives. Expert portfolio managers will take every investor’s personal situation and current portfolio into account when determining that number. There is no one-size-fits-all answer.

We tend to think about local vs offshore, but it is much more complex than that. There are 195 countries outside SA, and you can spread your risk much easier than in the past. Though it’s important to think about inside and outside the exchange control net, for example, if your children are going to be in Australia or Canada, it could be a different answer for a high-net-worth individual.

Why take money offshore?

There are three reasons to invest offshore: 

1. It’s an opportunity to spread your risk and have a more diverse investment portfolio;
2. You can take advantage of the many opportunities offshore investments afford from an expected return on investment point of view; and
3. Because of asset-liability matching — where your future responsibilities will lie. 

Diversification

Though the JSE has some exposure to earnings from offshore companies and offshore markets, it still comprises less than 0.5% of the world’s markets. This doesn’t offer investors enough diversification compared with what is available offshore.

The JSE is experiencing a few delistings with not many new companies entering, which means investment options on the JSE are shrinking. This may change, but it highlights the fact that the JSE is typically dominated by a few large companies, often in natural resources, which doesn’t offer private investors much diversification.

Offshore markets, on the other hand, allow investors to access a wider range of industries and regions. It’s important to explore these opportunities from the diversification  expected returns point of view. 

Opportunity

Economic growth happens at a different pace and in different cycles in various parts of the world. Companies that are exposed to other markets experience different speeds of growth because of the varied opportunities, changes in demographics, innovations and growth circumstances. By restricting themselves to local investments, investors are losing the opportunity to invest in some of the largest, most successful and fastest-growing businesses and markets in the world.

Asset-liability matching

We are increasingly seeing investors planning for a world where some of their liabilities (responsibilities) will be in other jurisdictions or currencies. This has been emerging over the past couple of years and it’s what we call future responsibilities or asset-liability matching. This means that, especially in the case of high-income and high-net-worth individuals, future responsibilities are changing and some of those responsibilities may no longer be denominated in rand.

For example: offshore studies; a swallow lifestyle between two continents; tertiary education for a child; emigration to settle near children in a foreign country; and needing assets that can produce an income. An offshore asset portfolio will offer growth and income better aligned to match these responsibilities, even if you’re only thinking about regular offshore holidays.

It is imperative for every SA investor to have a portion of their assets invested offshore because of diversification and opportunity. The question of how much will depend on where future liabilities lie. Investors who are very exposed to SA expenses shouldn’t take too much offshore, but for investors who only need a small SA income base, growth opportunities in 99% of the world’s economy certainly look attractive.

Is there an optimal time to invest offshore? 

Attempting to time the currency or the market is not only suboptimal, but also consumes valuable mental capacity which could be productively employed elsewhere. Currency movements are impossible to predict over the short term (even 12 months is short term). However, the long-term trend of depreciation of the rand vs the US dollar and other developed market currencies is firmly in place. 

The other important consideration is that if the rand strengthens in the short term, it is typically because global risk appetite is increasing. This means that all risk assets are increasing in value and, while you may have a strong rand, you’re buying more expensive global investments. Conversely, when the rand weakens, it is often because of global risk-off sentiment. So you may be paying more for hard currencies, but you’re buying less expensive assets with those hard currencies.

It’s important to take a longer-term view and look past short-term currency movements. The focus should rather be on risk management and long asset-liability matching. Buying assets priced in other currencies is not about getting the exchange rate right or wrong. It’s about a risk mitigated or a need met.

Work with specialists

While investing offshore is rewarding, it is also complex and nuanced. In addition to a vast investment universe, legal and tax implications and estate administration factors come into play. Therefore, it is vital for investors to work with reputable specialists who can effectively structure an investment portfolio that is tailored to their needs and objectives. Today, these services are more accessible than in the years of strict capital controls, which also creates more efficiency for investors. 

At Old Mutual Wealth Private Client Securities, the investment management philosophy is firmly rooted in wealth preservation and creation, which is all about picking quality companies that are well placed to generate great returns over the long term. In such a vast universe, it’s important to know clients personally and understand their risk profile, specific expectations for income, and changing needs over time. These factors can have a huge impact on the portfolio we build to ensure the desired overall outcome. 

This article was paid for by Old Mutual Wealth Private Client Securities.

SOCIAL MEDIA

FACEBOOK: @OldMutualSA 

Post 1: BL 

It is imperative for every SA investor to have a portion of their assets invested offshore because of diversification and opportunity, writes Old Mutual Wealth Private Client Securities’ Jean Minnaar. 

TWITTER: @OldMutualSA 

Post 1: BL 

SPONSORED | It is vital for investors to work with reputable specialists who can effectively structure an investment portfolio that is tailored to their needs and objectives, writes @OldMutualSA’s Jean Minnaar. 

Post 2: BL 

SPONSORED | With special allowances and changes in legislation, it is easier for local investors to take their money offshore, giving them an opportunity to diversify their investment portfolio, writes @OldMutualSA’s Jean Minnaar.