For many South Africans the notion of taking money offshore is fraught with danger. At its mere mention, horror stories of watching assets lose significant value as the rand strengthened completely out of the blue, or of stocks that seemed to be sure bets in countries as far away as India collapsing suddenly, come tumbling out.
As a result, many South Africans are reluctant to go offshore, especially now that the rest of the world seems to be going through a tough time. However, experts argue that there are good reasons to take money offshore now.
The first of these, according to investment managers Ashburton, is that the past 10 years have marked one of the worst decades of stock performance in the United States. But by historical standards stocks are trading at values not seen since the Eighties.
Tristan Hanson, Asset Allocation And Strategy manager, says: “You are basically now buying US stocks at 1997 prices but while valuations have dropped significantly dividend yields have doubled.”
That said, making a quick buck on the carnage seen in developed markets such as Europe and the US is not now one of the good reasons.
According to Rudi Schmidt, managing director of SEI South Africa, the big problem for many South African investors going offshore is the expectation that they will make more money going offshore.
“Taking money offshore, particularly to developed markets, won’t improve your returns; it will, however, lower your risk,” he says.
He says lowering the risk in your portfolio by diversifying it, and investing some of your assets in other countries, enables you to take more risk in other places and in areas where you will achieve the best returns.
Omigsa portfolio manager Denzel Burger agrees that the main reason to take money offshore is to diversify your risk, because if you look at the performance of the MSCI world index, which measures the performance of the global equity market, in rand terms investors have hardly beaten cash in the past 10 years.
So, how do you go about it?
According to Paulo Santore of RMB Private Bank, the first important consideration is to ensure that your local liabilities are covered by local assets. “You want to avoid having to worry continually about currency fluctuations,” he says.
“Once you have ensured you are covering your costs, you should look to put about one-third of your remaining assets offshore,” he says.
The next thing to remember, says Schmidt, is that you are moving from an emerging market which has high interest rates and a higher level of risk than many other countries, to countries such as the US and the United Kingdom, where interest rates are barely above 0% and the risks are considered lower.
This means that your returns are unlikely to be the same, especially in the money market.
Conrad Amm, head of business development at Blue Ink Investments, agrees that it is important to ensure that your offshore investment strategy is not to remain invested in cash for too long because the costs incurred will potentially outweigh all your returns.
“In South Africa you can leave your money in the bank and earn about 8% to 10% per annum with little risk. Once people take money offshore they will be at present earning less than 1% per annum on short-term deposits in the major currencies. So it clearly doesn’t make sense, you are merely playing a currency game,” he says.
The third thing to bear in mind is the sheer number of options.
Steve Mills, a portfolio manager at Sanlam private investments, says the big attraction of going offshore is the range of products available becomes so much bigger.
“It is not just at an equity level that your choice widens, there are whole asset classes that do not exist in South Africa that you can now consider.” But, he warns, as a result of this vast array of options going it alone is probably an unwise move.
“For many people the best way to go is to find a good balanced unit trust that gives you exposure to a wide range of geographies and asset classes as this provides the best ability to diversify.”
While anywhere from 20% to 50% offshore exposure is considered best practice, Ashburton’s Adam Benzimra says not everyone should have offshore exposure. Mills agrees, saying that for many people in the capital protection part of their investing lives, the fluctuations to be found in the currency market are often too volatile to be relied on for income.
According to Schmidt, the key is to have a plan and to stick to it, especially if your plan involves offshore assets. “If you are running offshore to chase returns, you are going to be a sad person,” he says.