Cut in offshore red tape increases options

For many years we have waited for Finance Minister Trevor Manuel to announce further investment exchange control relaxation in the annual national budget, only to have our hopes dashed.

Thabo Khojane, MD of Investec Asset Management in South Africa, says: “This went on for so long that by the time we had finally stopped specu­lating that this was going to be the year, Trevor and his team had quietly announced fairly material changes to the exchange control investment regulations both in terms of limits as well as procedure.”

The facts are that retirement funds will now be able to increase their offshore component from 15% to 20%, and unit trusts from 20% to 30%. But it is no longer necessary to go through the cumbersome asset swap mechanism to expatriate funds or to wade through red tape in pre-applying to the Reserve Bank for approval before sending money offshore.

Khojane says this move ties in with research at Investec Asset Management, backed up by a number of independent studies, which suggests that an optimal offshore allocation is in the region of 25% to 30%.

So what does this all actually mean for investors? Khojane says: “You should expect that over time your investment manager will move to the maximum offshore allocation.

“Such an allocation would result in the best risk and return trade-off, and in an entirely unrestricted world would represent a good long-term strategic offshore allocation.

“As a result, although still not ideal, a move to 20% offshore brings one relatively close to where you want to be in a perfect world. For that we should be grateful.

“We need to also remind ourselves of why we make such a fuss about investing offshore.

“Offshore markets are not perfectly correlated with South African financial markets, so the volatility of your total portfolio is likely to be lower without necessarily sacrificing any return,” says Khojane.

The primary benefit of offshore investment is as a hedge against rand weakness. Over the past 10 years the rand has weakened against the US dollar by about 3,4% a year and by 7,5% a year over the longer term.

However, this level of return in itself does not make a compelling argument for investing offshore.

“Also remember that investing for rand depreciation is not a one-way bet. The massive losses suffered by many people who panic-invested offshore in 2001 and 2002 at R13 and more to the dollar are still fresh and painful wounds to many people,” he says.

“A key benefit of the new rules is that because it is now so easy to get the money offshore without the delaying red tape, there is no reason why one should not periodically bring money back to South Africa if your view is that the rand is temporarily undervalued or that the investment opportunities at home are more compelling.

“At Investec we are not Afro-sceptics, nor at present overly bearish on the rand. If the platinum price holds at anything like current levels then the much feared current account deficit will soon get solid relief. There is every chance that at appropriate times in the future we will repatriate dollars back into South Africa to maximise returns for our clients,” adds Khojane.

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Eamonn Ryan
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