Anyone who has invested offshore in the past 10 years must be questioning the rationale for doing so. What is of concern is that the average global equity fund has failed to outperform cash since 1990.
Local investments have performed far better and any rational investor must be questioning whether offshore investments have been over-hyped and whether he or she would not be better off cashing it all in and investing locally.
The answer to these questions lies in the motivation for making the initial investment. If it is about searching for higher returns, you need to be far more strategic about the investment. Different asset classes and different markets provide better or worse returns depending on economic cycles.
The decision to invest offshore for most South Africans is usually about diversifying risk. South Africa represents less than 1% of the world’s economic output, so it would make sense to diversify out of a small emerging market with a high-risk profile to lower the overall risk to your portfolio.
An analogy would be investing all your money in one share. If that share outperformed the market, then with hindsight you would have wanted to have all your eggs in that basket, but without hindsight, the risk is clearly too high that you may have invested in the worst-performing share on the JSE.
If you decide to lower the risk of your overall portfolio, it is important to remember that risk and return are correlated.
If you take a higher risk, you expect to earn a higher return. Therefore local South African assets should outperform offshore investments in developed economies. This is the reason offshore funds invest in South Africa. They invest their high-risk portfolios in emerging markets in the hope of earning a higher return. Conversely, South Africans would invest abroad to lower their overall investment risk.
But you want to invest when the market conditions are more beneficial. At the moment the rand is relatively strong and many fund managers argue that offshore equities offer more value than local shares. South Africa’s economic cycle has lagged the global collapse by about a year so the country is still some way behind the global recovery that seems under way.
Most analysts believe that future growth will come from emerging markets, so a decision to invest offshore should not be a bet against South Africa’s prospects.
Your offshore investment options
You can invest either with rands or apply for a R2-million foreign investment allowance.
- Investing with rands: if you do not require money offshore and are confident about your future in South Africa, your decision to invest offshore is purely to diversify your risk.
The most cost-effective way of obtaining offshore exposure is to buy into an exchange-traded fund on the JSE. This is the cost of a share transaction and these funds track the major global indices.
The funds listed on the JSE track the MSCI World Index (a stock market index of 1 500 international stocks) as well as the largest companies in major markets such as the United States, United Kingdom, Japan and Europe.
You can also invest in rand denominated unit trusts which then invest in global portfolios. These can provide further diversification by investing across different asset classes such as cash, bonds and equities.
- R2-million foreign investment allowance: consider investing with a company that has a local presence so that the tax statements are in line with South African requirements because you will be paying capital gains tax and tax on dividends and interest.
If you do select a managed fund, look carefully at performance and costs. Most active managers have not managed to outperform the indices.
When selecting a fund, look at its performance over the past 10 years to see if it has outperformed after costs. Some funds offer protection in more volatile markets.