Illustration: Bethuel Mangena

It's likely you are partly invested in offshore assets without being aware of it. However, if you are actively investing offshore, or are thinking of doing so, there are several factors you need to take into account. What you should not do is move assets offshore on impulse; the decision should be a carefully considered one.

There are essentially five questions you need to ask yourself when investing offshore (“offshore” in the context of this article means global, in any country other than South Africa): 

• Why should I invest offshore?

• When should I invest?

• Where should I invest?

• What investment instruments should I use?

• Perhaps most importantly, how much of my portfolio should be offshore?

But first, check to what extent your existing investments hold offshore assets. It may be difficult to find out how much of your retirement fund is invested offshore (under regulation 28 of the Pension Funds Act, it can be up to 25%). But for your discretionary investments at least, such as unit trusts, you can get a good idea by consulting the fund fact sheets. You may be surprised: South African general equity funds, for example, can invest 25% in foreign equities and a further 5% in African countries other than South Africa. 

Also remember that a number of companies on the JSE earn a large portion of their revenue offshore. Tamryn Lamb, the head of client servicing for Orbis, Allan Gray’s offshore investment partner, says: “South African investors do have a percentage of their portfolio effectively earning offshore revenue through exposure to top JSE-listed companies, with about half of the earnings of the Top 40 listed companies, representing more than 80% of the market, generated outside of South Africa’s borders.”

Commonly known as the JSE’s “rand-hedge shares”, which means they offer protection against a weak rand, they include Naspers, Richemont and Steinhoff.

Why should I invest offshore?

There are good reasons for having a portion of your investments in foreign assets. Rushing offshore when the rand weakens is not one of them. 

Pieter Hugo, the managing director of Prudential Unit Trusts, says: “Unfortunately, South Africans have a history of panicking when the rand weakens sharply and responding by taking money offshore. Because the rand is a highly emotive subject, dominating the news headlines, investors’ immediate focus is often solely on the level of the rand, and not whether the South African assets they are selling and the foreign assets they are buying at the time are cheap or expensive. They also tend to dismiss the question of whether they actually need to add offshore exposure based on their long-term investment goals.”  

Diversification across countries, industries and companies, as well as asset classes and currencies, is the primary benefit of investing offshore, Hugo says. It reduces the risk of a portfolio for the same expected rate of return. At the same time, Hugo says, offshore equities help to offset the risk inherent in the local equity market, which is among the world’s most concentrated.

“Offshore assets also provide exposure to growth opportunities, and to world-class companies and industries not available in South Africa. Apart from this, having a portion of an investment portfolio offshore acts as a safe-haven, helping ease investors’ worries about local markets and making them more likely to stay invested for the longer term,” Hugo says.

So diversification is the prime reason. Another is that you may need money offshore because of personal reasons, such as being out of South Africa for long periods or educating your child abroad. 

When and where should I invest offshore?

It is not advisable to time the market, but if you are entering the market, the best time is when the rand is strong (as is currently the case) and when offshore assets offer good value (which may not be the case at present in certain regions).

Philipp Wörz, an equity analyst and fund manager at PSG Asset Management, notes that global equities have been in a bull market since the 2007/8 financial crisis.

“With both the MSCI World Index and the S&P 500 (the main United States index) trading at over 20 times earnings, they are well above long-term averages. The case for cheap offshore equity valuations – and corresponding opportunities for strong long-term returns – is becoming weaker by the day,” Wörz says.

Depending in what you are invested, you may have a high degree of exposure to US stocks. Even if you don’t, a correction in the US stock market will affect markets around the world. 

To have a truly diversified portfolio, your offshore allocation needs to reflect that diversity, and it should include exposure to both developed markets and emerging markets. 

Currently, Wörz says, there are still attractive opportunities to be found across the globe despite the rise in overall valuations.

“In many cases, these opportunities will not leave the average investor feeling ‘warm and fuzzy’ – many of them are in unloved parts of the market that offer a greater chance of mis-pricing. In addition to emerging markets such as South Africa, there are great opportunities in areas such as agricultural commodities, US retail and UK domestic industrials,” Wörz says.

Should geopolitical factors influence your decision? They shouldn’t, the experts say, if you are invested for the long term.

How much should I invest offshore? 

This depends very much on your long-term investment goals, on how far away you are from retirement, and whether you will be retiring in South Africa or overseas. 

If you are close to retirement and intend drawing an income in rands, you need to be very cautious about having too much of your savings offshore simply because of the volatile nature of the rand.

Hugo says: “Generally, the offshore portion of your portfolio will be larger the higher your targeted investment return (and therefore the higher the risk required).

“For example, if you have an aggressive return target of inflation plus 7%, you would tend to need between 35% to 40% offshore. A return target of inflation plus 6% is more in line with a typical ‘balanced’ fund, with around 30% offshore. Finally, a more conservative target of inflation plus 2% or plus 3% would generally dictate offshore exposure of only 10% to 20%. These are guidelines, however; the exact exposure an individual needs should be determined with the help of a financial adviser.”  

What instruments should I use? 

For investors wanting direct access to the full global listed equity universe that is not available on the JSE, there are three main routes to investing offshore:

• Through a local unit trust that is mandated to invest a portion of its assets offshore;

• Through a rand-denominated unit trust that invests entirely offshore; or

• In a fund from an offshore provider that is denominated in a foreign currency such as dollars. 

Each option has its own tax implications, and if you are investing in an offshore fund, foreign exchange regulations will apply.

Lamb says: “The simplest choice is to invest in a rand-denominated unit trust. These are offered by locally based asset managers, who offer ‘feeder funds’ directly linked to an offshore unit trust. You invest and withdraw in rands, but your investment is into foreign companies. The other route is to invest in foreign currency, either directly with an offshore provider, or through an South African based offshore investment platform. The attraction of this option is that you are invested in foreign currency. While going this route is a bit more administration-intensive, it is not difficult.”

Conclusion

Lamb says all your choices must be made in the context of your financial plan. 

“Investing offshore should never be a knee-jerk reaction to events, but rather a decision taken as part of an overall financial plan. Your personal circumstances and risk tolerance should govern how much of your portfolio you should take offshore and into which asset class. 

“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.”


FINDING VALUE AND QUALITY IN GLOBAL EQUITIES

At the Allan Gray Investment Summit in Sandton this week, global investment experts tended to take a bottom-up approach to stock-picking – in other words, looking at the prospects of specific companies rather than concerning themselves with macro-economic and geopolitical issues.

Kevin Murphy, the co-head of the global value team at international investment manager Schroders, said you can’t have a stock that both attracts good news and is cheap: the more people like a company, the more its share price goes up. He said an investor or fund manager needs to be patient when searching for good companies that other people aren’t looking at.

Mark Laurence, the founding partner of the United Kingdom-based asset manager Fundsmith, said only a small fraction of all the shares in the global market pass his firm’s screening criteria.

He said that to find good-quality companies, you often need to look beyond the numbers. For example, United States bio-technology company Stryker produces high-quality artificial joints for hip and knee replacements. The demand for Stryker’s products is expected to rise in line with the ageing populations in developed countries. 

Another example, Laurence said, is elevator company Kone. Kone manufactures lifts for high-rise buildings, but most of its profits are in the form of a steady income stream from servicing and maintaining those lifts.

Murphy said Schroders first looks for value before looking at other factors, and these shares may be in countries with high geopolitical risk. He said these risks should be priced into a share, and an investor would need to see enough upside in a share to offset the risks associated with it. 

He said this approach requires that you embrace risk through diversification – with smaller investments spread across many different countries, rather than bigger investments in fewer countries. 

Murphy said that what matters is the specific company you buy and the price at which you buy it. He cited South Korean car-maker Kia, which provided a 100% return on investment within a year.

Dan Brocklebank, the head of Allan Gray’s offshore arm, Orbis Investments in the UK, sounded a warning about companies whose shares are priced off the high dividends the companies pay to shareholders. This means that profits are going to shareholders rather than towards organic growth, which means there could be “nasty surprises” for investors down the line, he said.

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