Research, advice and speculation on how much one should ideally invest offshore are in no short supply. Marana Brand tries to see the wood for the trees.
“I believe there’s no magic number when it comes to how much one should invest offshore or whether it is too much or too little. It’s a very personal question and will differ from investor to investor, depending on each person’s circumstances and investment objectives,” says Jéan Minnaar, managing director at Old Mutual Wealth Private Client Securities.
“Expert portfolio managers will take every investor’s personal situation and current portfolio into account when determining that number. There is no one-size-fits-all answer,” he adds. The question of how much to invest offshore has always been difficult to answer, but exchange control also limited the amounts – until recently. However, through special allowances and an increase in prudential limits, it is now easier to take money offshore.
“South Africans invested too much of their money in the local market, but going offshore was also something that was rarely talked about because of exchange control. Now we have more opportunities and the question about how much to take offshore requires careful consideration of personal circumstances. We tend to think about ‘local’ vs ‘offshore’, but it is much more complex than that. There are 195 countries outside South Africa and you can spread your risk much more easily than in the past. Yes, it’s important to think about inside the exchange control net and outside it, but if your kids are going to be in Australia or Canada, for a high-net-worth individual it could be a different answer.”
It’s clear that offshore investing is not a luxury reserved for a few but has become a key financial planning requirement for all investors seeking to protect and grow their wealth. “Investors shouldn’t view offshore investing as a separate component but rather within the context of their overall investment portfolio, where it is exposed and what its underlying assets are. Ultimately, it should be about where and how best to access different sources of returns,” Jéan explains.
Why take money offshore
Jéan believes there are three reasons to invest offshore:
- To spread risk and have a more diverse investment portfolio;
- To take advantage of the many opportunities offshore investments afford from an expected return on investment point of view; and
- Because of asset liability matching – where your future responsibilities will lie.
#1: Diversification
“Although the JSE has some exposure to earnings from offshore companies and offshore
markets, it’s still less than 0.5% of the world’s market. This doesn’t offer investors enough diversification compared to what is available offshore. The JSE is currently experiencing a few delistings and we’re not seeing many new companies entering, which means your options on the JSE are shrinking. This may change, but it highlights the fact that the JSE is typically dominated by a few large companies, often in natural resources, which doesn’t offer private investors much diversification,” he says.
Offshore markets, on the other hand, allow investors to access a wider range of industries and regions. “It’s important to explore these opportunities, not only from the diversification point of view, but also from the point of view of expected returns,” he advises.
#2: Opportunity
“Economic growth happens at a different pace and in different cycles in different parts of the world,” Jéan points out. “Companies that are exposed to other markets experience different speeds of growth because they are exposed to different opportunities, changes in demographics, innovations and growth circumstances. It therefore stands to reason that by restricting themselves to local investments, investors are losing the opportunity to invest in some of the largest, most successful and fastest-growing businesses and markets in the world.”
#3: Asset liability matching
“We are increasingly seeing clients planning for a world where some of their liabilities (i.e. responsibilities) will be in other jurisdictions or currencies. This has been emerging over the past couple of years and it’s what I call ‘future responsibilities’ or ‘asset liability matching’. What we’re seeing here, especially in the case of high-income and high-net-worth individuals, is that their future responsibilities are changing and some of those responsibilities may no longer be denominated in rands. I’m talking about offshore studies, a ‘swallow’ lifestyle between two continents, tertiary education for a child or emigration to settle near children in a foreign country and needing assets that can produce an income. An offshore asset portfolio will offer growth and income better aligned to match these responsibilities, even if you’re only thinking about regular offshore holidays,” Jéan advises.
“I think every South African investor should have a portion of their assets invested offshore because of diversification and opportunity. The question of how much will depend on where your future liabilities lie. If you’re very exposed to South African expenses, you shouldn’t take too much offshore, but if you only need a small South African income base, growth opportunities in 99% of the world’s economy certainly looks attractive.”
Where to now?
Working with professionals like advisers and portfolio managers can help you to understand your personal circumstances and to analyse your liabilities and your future dreams and goals, which in turn will help you determine what is the right number for you. “We have a lot of skill and knowledge in investment planning as well as financial planning from the point of view of asset liability matching, but one of our key competencies is also advice. I believe offshore investment planning needs both – and managing people’s emotions is even more important.”
For example, currently some people are anxious about circumstances in South Africa and the rest of the world and some want to convert all their investments into cash. “A good portfolio manager will advise you to keep your offshore money in big companies like, say, Apple, Microsoft and the semiconductor industry – these companies have consistently shown that they are better at deploying your cash by investing in high-return projects. Yes, they may go down a bit, but in the long run, this is the better capital allocation decision. A similar situation exists in South Africa. If you look at companies we buy into, yes, they are influenced by events like unrest or load shedding, but the good businesses have adapted and plan accordingly. The same goes for currencies. It is these emotions that cloud investors’ judgement when they make decisions based on news instead of information. News is only a small part of the tools we can use to analyse the potential outcomes. We have access to a full universe of instruments that help us understand the trends and we can advise you with the long term in mind.”
Expert advice also helps investors to navigate the complexities of foreign laws, tax regulations and estate administration factors when taking money offshore. This might need some careful planning to avoid nasty surprises or unexpected costs investors often don’t consider.
Tailor-made advice for unique circumstances
“Our investment management philosophy is firmly rooted in wealth preservation and creation, which is all about picking quality companies that are well placed to generate great returns over the long term. In such a vast universe, it’s important for us to know the client personally and understand their risk profile, their specific expectations for income and their changing needs over time, as this can have a huge impact on the portfolio we put together to ensure the desired overall outcome.
“The three factors I mentioned above may help in determining the right offshore number for you, but it’s different for everyone. That’s where experts come in,” Jéan concludes.
About Private Client Securities
Private Client Securities (PCS) is a capability within Old Mutual Wealth, an elite service offering brought to you by several licensed Financial Services Providers in the Old Mutual Group. PCS specialises in bespoke investment management for high-net-worth investors. Whether your goal is to grow your wealth, generate income or preserve capital, we select the best and most suitable investments based on your investment strategy and our extensive research and collective insight. We craft tailored share portfolios, investing directly in high-quality companies, both locally and globally.
Contact us at on 021 524 4670 or email pcs@omwealth.co.za.
Jéan Minnaar is the managing director of Old Mutual Wealth Private Client Securities.