Offshore exposure

2014-03-09 14:00

Investing offshore can offer good returns for SA investors, due in part to the strong performances of various foreign markets and the rand uncertainty

If your portfolio doesn’t already include a few offshore investments, now might be the time to consider investing abroad.

As emerging equity markets underperform and the US sees rising GDP growth, analysts are expecting South African investors to cast their eyes offshore.

Wehmeyer Ferreira, head of db X-trackers, which provides foreign equity-linked exchange-traded funds, says a factor that could drive investors to seek offshore exposure is rand uncertainty.

Paul Hansen, a fund manager from Stanlib, agrees. “People who invested offshore last year are definitely reaping the benefits now. Although offshore markets have had a good run, they still offer value. There is definitely opportunity offshore for investors, particularly with the rand having taken a big knock.”

But he cautions there is the risk of the rand strengthening, which would weaken offshore investments.

Ferreira says: “We see no catalyst that might strengthen the local currency any time soon.”

He adds that the US and the Eurozone have been targets of choice for investors in db X-trackers’ suite of exchange-traded funds.

“Statistics from the unit trust industry show that total assets top R1?trillion, but only R217.6?billion goes into foreign equity markets. That’s only 21.3%, which suggests significant scope for further offshore commitments.”

Richard Carter, head of product development at Allan Gray, agrees that when local assets are not doing well and the rand weakens, the demand for offshore capacity tends to increase, sometimes very rapidly.

“Conversely, when the rand is strong and local assets outperform their offshore equivalents, flows into offshore funds tend to decline,” he says.

The rand is weak at present, which is why an offshore investment may look more attractive. But you should not base your investment decisions on currency movements. This is equivalent to trying to “time the markets”, as you have no certainty about how the rand will move.

Carter cautions that past performance is not a guarantee of future performance and you should make changes to your investment positioning based on your needs and circumstances rather than in response to market moves.

“If you’re looking to diversify your portfolio and protect yourself from rand weakness, then investing offshore might be the right move for you. Allocating a portion of your investment offshore spreads your risk across different economies and geographic regions, and provides the potential to earn returns from a wider set of opportunities.”

Hansen says: “Conservative investors should take less money offshore while aggressive investors can withstand more risk and can invest offshore to a greater degree.”

For example, a pensioner has no time to recoup losses and would be a more cautious investor. If you have a long investment period of about 20 to 30 years ahead of you, Hansen recommends a maximum of 30% of your investment portfolio in offshore investments.

South African residents who are 18 years and older have access to a foreign investment allowance of up to R4?million per calendar year.

Before you invest offshore, obtain a tax clearance certificate from the SA Revenue Service (Sars), get approval from the SA Reserve Bank and convert rands into foreign currency.

An extra R1?million single discretionary allowance is also available annually for investment purposes without having to obtain a Sars tax clearance certificate.

Pros and cons

What you need to know

Ian Beere, a certified financial planner and ­partner at Netto Invest, says some of the ­positives associated with investing offshore ­include:

»?Access to shares and markets not available locally

»?Exposure to returns in foreign currencies, which will protect you from any depreciation in the rand

»?Diversification of your investment portfolio

»?Offshore investments can be paid out anywhere in the world, while trading in the rand is controlled and restricted by the SA Reserve Bank

Just like any other investment, offshore investing also poses some risks:

»?Developed economies may carry a lower risk, but could also grow at a lower rate than South Africa

»?Be prepared to deal with volatility as the value of your investment moves up and down in line with ­exchange rates and the market

»?Monthly debit orders and withdrawals out of ­offshore funds are not easily accessible from your South African bank account

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