As South African investors increasingly opt for taking money offshore, they are making costly mistakes that could undermine the benefits of investing overseas.
Nick Pitro, a senior manager of Austen Morris Associates, a global independent wealth manager, says many investors rightly feel it is prudent and a sensible hedge to have hard currency assets.
“But sometimes, in the desperate urge to get funds away from South Africa, they don't follow a well-thought-out strategy.”
* A bank account is not enough. In the past two years, there has been a surge in South Africans opening offshore bank accounts. Although this is a good first step, many people's strategy is simply to send money to their offshore accounts every so often. “Sitting in cash in bank accounts in most countries pays next to zero, and certainly less than inflation. This is a losing strategy.”
Pitro says investors should look to quality global equities, because they are likely to do well over the long term and provide excellent JSE diversification benefits.
* A property needs your attention - lots of it. “We've noticed many people have a strong instinct to buy property offshore to create a sense of security, often as part of a second citizenship programme in countries like Grenada, Portugal and Mauritius,” Pitro says. Although this can be a good idea, particularly if you have plans to live in it, managing a rental unit from South Africa can be extremely time consuming - more so if it’s in a country where English is not widely spoken and regulations unfamiliar. “We recommend fully outsourcing property management to a trusted partner.”
* Waiting, waiting, waiting for just the right time. “If you have decided to invest offshore, you should just do it right now,” Pitro says. “South Africans should set a target value on what they want to have offshore and move today to hit it. Waiting for the rand to strengthen, or waiting for the global equity markets to pull back only delays reaching investment goals.”
He says most investors move funds offshore over time and therefore benefit from cost averaging, avoiding buying at market tops.
People who are waiting to move funds offshore often sit with large balances in South African money market funds, sometimes for years. “But interest on this money is taxed as income at your marginal tax rate, up to 45percent. Once your tax has been deducted, your returns will be below inflation, which means you are getting poorer by waiting.”
* Consider the whole menu. “What seems familiar and comforting here is not necessarily what investors should replicate offshore,” Pitro says. “But South African investors tend to go with what they know.” There are so many other options that can give investors greater comfort than, say, buying a flat or giving a fund manager your money and hoping for the best.
* Don’t go it alone. South African investors often feel overwhelmed by the sheer scale of choice, so tend to rely on guesswork.
“Speaking to an independent adviser who is transparent about fees and commissions and can see the big picture of your life is an advisable first step,” Pitro says.