If you’re serious about your investing then a portion of your long-term savings should be held outside South Africa. Exposure to international markets is essential in building a balanced investment portfolio.
The main reason for taking funds offshore is to achieve diversification, by using currency trends and variances in equity valuations as tools to maximise your long-term returns. Going offshore demands a certain discipline from investors.
You have to understand you’re not taking money overseas as a bet against rand devaluation. This notion has been sold to local investors by so many professionals — and over so much time — it’s become a belief.
Cobus Kruger, the head of products and investments at Glacier International, a part of Glacier by Sanlam, says: “One of the main reasons our clients get disillusioned with their international investments is they’re making the investment with the expectation they’re going to make money on rand depreciation.”
They quickly lose sight of the diversification goal and become obsessed with daily currency crosses. He suggests clients should measure their offshore portfolio performance against the reference currency only.
Assuming you’ve completed a thorough financial planning process, the first hurdle is to decide how much of your portfolio you want to take offshore. Fund managers typically talk about taking 25% to 30% of a portfolio offshore, but there’s no hard and fast rule to cover every investor.
Kruger believes funds in a properly structured discretionary investment portfolio should be directed towards short-term, medium-term and long-term objectives. An investor should take as much as 50% of the long-term portion of the available discretionary funds offshore.
You might split R1-million into R100 000 short-term emergency cash (held locally in money market or similar funds), R250 000 into medium-term local investment (such as local unit trusts or equities) and funnel the remaining R650 000 in equal parts to local and offshore growth assets.
“It’s impossible to generalise about the portion of assets to be held offshore,” says Tony Barrett, the head of BJM Wealth, “because the offshore portion can only be determined after a holistic review of an investor’s needs, risk tolerance and investment objectives.”
Lara Warburton, the managing director of Imara’s South African asset management business, agrees. She says investor decisions might be influenced by whether or not investors have children abroad, where they intend retiring and the extent of their local liabilities.
“I would usually advise people to go through the hassle of using their allowances and investing directly offshore if they think there is a chance they may end up living there or incurring expenses there.”
The second big question is whether to make hard currency investments offshore or to invest in locally available rand-denominated offshore funds. This decision has become more important since the treasury’s recent relaxation of foreign exchange regulations.
Pravin Gordhan, the finance minister, upped the R4-million a citizen in a lifetime stipulation to R4-million an investor a year. “Government has recognised that, in order for investors to grow their savings effectively, they should diversify their exposure out of the domestic market,” says Mike King, the director for Africa at Franklin Templeton.
In the past local investors had no choice but to make use of creative asset-swap funds for foreign currency exposure. Franklin Templeton has always favoured the hard currency option. “If you want true diversification there’s no sense in diluting your portfolio by going into a rand-denominated fund,” says King.
The local option remains sensible for investors who have used up their offshore allocation (the super rich) and those investors seeking offshore diversification with small amounts of capital.
Step three is to decide which offshore fund meets your specific long-term investment objective. The private investor is easily overwhelmed by the sheer volume of vehicles available to invest offshore.
Coronation Asset Managers offers four offshore unit trusts that can be bought locally or offshore. Their Emerging Market Fund, World Equity Fund, Global Managed Fund and Latitude Fund offer differing equity exposures to suit a variety of risk profiles.
“We offer the Imara Global Fund that has performed incredibly well through the crisis, with returns way in excess of the MSCI World Index,its benchmark”, says Warburton.
The group is also the perfect staging post for an investor looking for emerging market opportunities in Africa. Funds include the flagship Imara African Opportunities Fund, the Imara African Resources Fund, the Imara Nigeria Fund, the Imara East Africa Fund and the Imara Zimbabwe Fund.
King says investors are very keen on the group’s Templeton Asian Growth Fund, and are also showing an appetite for funds with exposure to China and India. The group’s Japan Fund hasn’t been doing too well of late, but may offer value over the longer term.
Krige acknowledges investing through Glacier International can be incredibly daunting. “We offer global regional balanced funds, specialist equity funds, hedge funds of funds and a whole host of different scenarios,” he says.
The group lists collective investment schemes (unit trusts) from international providers including the likes of Investec, Blackrock and Sarasin — 24 asset managers with 380 fund choices.
To make life easier for advisers and clients Glacier has created multi-manager portfolios (comprising bond, cash, commodity, equity, hedge fund and property assets) that are risk-profiled for cautious, moderate and aggressive investors and available in dollar, sterling and Euro. Barrett says high net-worth individuals get a kick out of direct participation in the shares of leading multinational companies directly through offshore stock markets.
You can now buy counters such as Coca Cola, General Electric and Intel and benefit from their cash flows, strong balance sheets, fantastic earnings prospects and general market dominance. The complexity of product offered by the handful of managers we spoke to is replicated across the industry.
If you’re ready to go offshore then you’d best consult an experienced financial adviser to assist with structuring a portfolio to match your needs and risk profile with a suitable basket of overseas investment products.