MORE EXPOSURE OFFSHORE

I have South African investments to the value of about R16 million (properties worth R10m, local shares and unit trusts worth about R3m, and a retirement fund of about R3m). Offshore, I have about R1.5m in a global equity fund. I am 42 and would like to increase my offshore investment exposure. I have a few questions in this regard: 

• How much should I increase it to, and which local investments should I sell to make this up? 

• How should I invest? Should I use a local company that offers offshore funds, as I’ve been doing, or should I use a dedicated international company? I have been approached by one that seems like it might be a scam. What are my options for direct investments overseas? 

Name withheld

Braam Fouché, a financial adviser at PSG Wealth in Umhlanga Rocks, responds:  “How much is enough?” is one of the most common questions we encounter in financial planning. In the context of offshore exposure, the debate has been fierce at times, particularly for those who favour “a mass exodus” offshore, while on the flip side South African assets have significantly outperformed comparative global assets over certain periods. Over the years, I have warned investors that we, as South Africans, know and understand our market best, while the vast global investment universe is a harder riddle to solve. As in any financial planning exercise, the answer lies in assessing your individual circumstances, including your goals and appetite for risk. 

At PSG Wealth Financial Planning, we follow a process of splitting capital in accordance with your short-, medium- and long-term needs. As a general guideline, we recommend 40% to 50% exposure to global assets for investors with long-term goals. That is, if you are comfortable with the impact of a varying global economy, political risks, fluctuating currencies, low interest rates, additional taxes and additional estate planning. 

Your investor profile “ticks all the boxes” for increased diversification. In deciding how to implement this, you need to choose investments that match your profile. Since the sub-prime crisis in 2009, global asset allocation has been significantly hampered by low interest rates in developed markets, and the default allocation has almost entirely been weighted towards long-term growth assets, such as property and equity. Historically, these are regarded as higher- risk assets with higher volatility.  

Once you have decided to what extent you want to increase your global diversification, you can structure your portfolio through a number of options. You are allowed an annual transfer of up to R10m for offshore investments, as well as an unrestricted R1m discretionary allowance, which enables you to obtain direct offshore accounts in your own name. In general, the same investment vehicles you are accustomed to in South Africa are available in developed economies, and an experienced investor needs to undertake minimal research to ascertain the details of each one. 

You can also obtain offshore exposure indirectly through rand-denominated global structures, which are built on the foreign investment allowances of eligible local institutions, which offer the investment vehicles to the public. These options are built into South African investment products, such as unit trusts, life company funds and structured products. 

In addition, many South African-registered companies operate globally and generate foreign earnings for local investors. There are quality companies that can be considered within your local share portfolio, but be cautious of those that frantically rushed offshore in recent years and whose long-term global earnings potential may be dubious. 

Liquidating your property portfolio to fund your offshore investments may be expensive and time-consuming. Your local unit trusts and shares are the most liquid and unencumbered assets in your portfolio, but they may already offer reasonable exposure to global assets and earnings. If you decide to liquidate any of these discretionary assets, the impact of capital gains tax should be considered, and only the balance of the capital can be transferred offshore. 

A direct foreign investment account in your name will have foreign tax and estate planning implications.

When considering global investment partners, my view is that, for the most part, “local is lekker”. Many South African financial institutions are as good as their global counterparts. A number of local investment companies have a global footprint and manage capital for foreign institutions in global markets. 

Local financial institutions offer an array of investment vehicles and platforms from which direct or indirect global exposure can be obtained, while the administration, tax and estate planning consequences may be simpler. Corporate and capital risk are reduced, as you already know these institutions. In most cases, you also retain the oversight of the South African regulatory authorities. 

Your retirement fund cannot be liquidated easily. Foreign exposure within the portfolio is governed by regulation 28 of the Pension Funds Act, which limits exposure to rand-denominated foreign investments to 30% and an additional 10% in respect of investments in Africa. The maximum risk asset allocation is 75%. In practice, we use our portfolio blending tools to structure portfolios within these parameters.    

Developed-market return expectations across all asset classes are lower than what you’ve been accustomed to in South Africa. Global inflation and interest rates are at historic lows, which indirectly influence long-term returns, while the combined impact of currency and market volatility makes for a rougher ride. 

Taking all the uncertainties into account, I often remind investors that global diversification should be regarded as an “insurance policy” against the possibility of a failing South African economy.


DREAD DISEASE COVER DECLINED

My husband and I recently obtained advice from a financial adviser who works for one of the major banks. On her advice, we increased our life cover. We cashed in our 20-year money-back policies, which had 10 years to go until maturity, and took out life policies of R600 000 each. My policy includes cover for dread disease and disability. My husband was declined dread disease and disability cover. He has a resting tremor, and we think this is why he was declined cover.

We are in our mid-fifties, and both of us need dread disease and disability cover. Do we have other insurance options, or must we save furiously in case something happens? 

Name withheld

Riaan Strydom, a financial adviser at PSG Wealth in Port Elizabeth, responds: It is unclear from your question whether your previous policies included risk benefits (death, disability or dread disease). As a rule, you should not cancel a risk policy until the new application has been approved on acceptable terms. As you have found out, you run the risk of your premium being loaded or being declined benefits for health reasons, leaving you without cover when you are most at risk.  

The life assurer should provide the medical grounds on which your husband’s benefits were declined, because you might not be aware of the condition, which may require treatment. If your doctor believes the condition can be treated easily and is under control, you should ask the assurer to review the decision. You will have to present further medical reports from the treating physician. The assurer could also request specialist medical investigations. You will probably have to pay for these reports and diagnostic investigations.

An alternative is to apply for cover with other assurers, because they may come to a different conclusion.

If all else fails, you will have to self-insure by saving in an appropriate vehicle. Your financial planner should advise you of your options in this regard.


SHOULD I CASH IN MY ENDOWMENT?

I have a linked endowment policy, which I bought three years ago. I’m about to buy a house. I can’t withdraw from the policy for another two years without incurring a penalty. Should I terminate the policy, incur the penalty, and use the proceeds as a deposit for the house, or should I wait for the policy to mature and take the proceeds to pay off part of the home loan?

Name withheld

Lizé Visser, a financial adviser at PSG Wealth in East Rand, Johannesburg, responds: Linked endowments have an initial restriction of five years, but you should have options if you require liquidity. Normally, you can make one loan without being charged interest, and you can make one withdrawal without having to pay it back. The value of your loan or withdrawal cannot be more than the money you invested plus 5% compound growth a year.

I recommend that you contact your product provider and find out which option is available, because not all linked endowment providers offer both options. If the provider does not offer either option, you can use your endowment policy as security for a loan from a bank or another credit provider, but you should calculate the difference between the cost of the loan and the capital lost as a result of the penalty. 


Email your queries to [email protected] or fax them to 021 488 4119. This feature is sponsored by PSG Wealth.