In December 2001 — and again in October 2008 — private investors hastily moved their funds offshore in response to the rapidly weakening rand.
Subsequent rand recoveries proved just how dangerous investment decisions driven by emotions can be. The best time to move funds offshore is when the rand is strong.
South African investors take their funds offshore for two reasons: to diversify and to protect against a rand depreciation. Diversification — a buzzword of modern-day investing — is a strategy to reduce risk by including a wide cross-section of asset classes in one’s investment portfolio.
Taking funds offshore is the ultimate diversification strategy as it insulates investors from local economic and political risks. Trevor Garvin, head of Multi Management at BoE Private Clients, says: ‘Investing in offshore markets such as the United States, western Europe and Asia provides one with a more balanced and diversified portfolio.”
But, you should further diversify offshore investments across asset classes, including bonds, cash, equity and property. ‘Although the exact weighting of offshore investment in a private portfolio will be a function of personal circumstances, research suggests approximately 30% of total investment should be diversified offshore,” says Garvin.
The best time to increase your offshore portfolio is when the rand is strong. The rand has performed well against other currencies in the first three quarters of this year. This strength — coming largely on the back of rising commodity prices — could persist for the next year.
But Ian Anderson, chief investment officer for offshore investment at Grindrod Bank, says that private investors can ‘bank on a steady weakening of the rand in the medium term”. The correct mix of offshore assets will protect you from this devaluation.
Offshore investing protects local investors from the narrow focus of the domestic equity market. ‘South Africa is an emerging economy and our stock market is dominated by companies in the mining industry or those engaged to it,” said Anderson. The result is local investors being ‘overweight” in emerging markets and resources.
Anderson says, by investing a portion of wealth offshore, you can diversify into more developed markets and choose companies that are not well represented in the South African market, for example, the local stock exchange offers few opportunities in energy, pharmaceuticals and biotechnology.
The golden rule of offshore investing is to commit funds after completing a careful assessment of your unique financial requirements. Investing in low-yielding developed markets is not sensible for an individual seeking high levels of current income.
‘If you’re at a point in your life where wealth creation is your primary objective and you don’t need a regular income from your investments, then diversifying into offshore markets would make sense, as long as the investments you choose do not replicate the investments you have in South Africa,” says Anderson.
BoE Private Clients says there are good opportunities at the moment in developed market equities, investment grade bonds and listed property.
Tips for investors
The timing of offshore investment decisions confirms that private investors are guided by emotions and sentiment. They move cash offshore when the rand is weak and sit on their hands when the local currency is at its best. Offshore investment is an essential part of long-term wealth planning.
There are many arguments for including offshore investments in your portfolio. These include diversification (by asset class, currency and geographic location), hedging against future local currency depreciation and to ring-fence your investments from regional, political and economic instability.
There are two main offshore investment strategies.
The first is known as foreign currency denominated investment, in which you buy foreign currency and transfer the funds to an offshore institution. South Africans who are 18 and older can invest up to R2-million using this channel provided they have a valid tax clearance certificate from the South African Revenue Service and, with the assistance of an authorised foreign exchange dealer, Reserve Bank approval.
The second strategy is rand-denominated investment. Under this strategy, you invest in products offered by a number of local financial institutions which then invest offshore on your behalf. There is no upper limit on rand-denominated investments and you benefit from quick and easy access to funds and local regulatory protection.
Examples of these products include Deutsche Bank’s db x-trackers exchange traded funds and various offshore unit trusts.
Offshore investment requires thorough planning. Consult a well-qualified financial planner licensed by the Financial Services Board before investing.
Avoid costly mistakes such as investing in unlisted companies, dealing with unlicensed providers or advisers or falling for promises of unusually high returns.
And — most important — don’t make the common mistake of rushing offshore when the rand weakens. Although currency crises shouldn’t deter you from moving funds offshore, periods of rand strength present ideal opportunities for offshore investment.