A practical guide to global investing

You’ve no doubt heard the statistic that South Africa’s gross domestic product (GDP) contributes less than 1% to that of the world. 

This implies there is a lot more growth, larger markets and a diversity of industries elsewhere. 

As a consequence, all South Africans need some global exposure in their portfolios. 

Maintaining all your assets locally disqualifies you from a plethora of good investment opportunities abroad and uncorrelated returns. 

Knowing you need to invest globally, and implementing this in your portfolio, requires some application. 

First, you’ll need to understand your current portfolio positioning. 

Combining this with your unique financial requirements will help you decide how much and where to invest. 

A good starting point is to look at your personal balance sheet. 

Collate all your assets (house, pension fund, investments, etc) and liabilities (home loans, car payments, school fees, etc). 

Detail is important. 

Construct your portfolio on a see-through basis to determine actual asset class exposures both locally and internationally, i.e. equities, cash, property etc. 

The size of your debt should also be noted as this is a hindrance to building wealth anywhere. 

How much is to be externalised necessitates answering questions like these: 

- How much time do you have to build this portfolio and let value unlock? 

Time and capital available must be balanced. 

The less time you have, the more important some of the other questions below become. -Is your retirement saving on track to meet your needs? This is your most important need in any investment strategy. 

If you can’t answer yes to this question, then focus only on this until the answer is yes. 

Remember that Regulation 28 allows for 30% of your pension fund to be invested offshore. 

- Where will you retire? Many South Africans can’t answer this question just yet. 

Keeping your options open is therefore a strategic necessity. 

Thus, global exposure may become an important tactic.

- Do you plan to emigrate? When? And where to?

- Do you have sufficient ‘extra’ voluntary savings to invest offshore? 

- In which currency are your liabilities priced? 

German cars, American/Korean technology, international education and travelling to visit children overseas are all hard currency liabilities. 

The rule of thumb is largely the following: If you have sufficient retirement savings; low or no debt; adequate voluntary savings (allowing you to take money offshore without impacting your lifestyle) – then the portfolio percentage to externalise could range between 30% and 50%, depending on whom you speak to. 

This isn’t an exact science, though. 

The goal is to have sufficient capital invested globally to meet whatever your needs are and diversify your portfolio. 

Going global

When deciding where to invest globally, remember that your appetite for risk doesn’t change just because you are investing in another jurisdiction. 

If you’re a moderate local investor, then you are still a moderate global investor maintaining a keen eye on your portfolio’s total asset allocation wherever the investment is. 

With this backdrop, building a well-diversified portfolio that has a low correlation to all your SA assets becomes prudent. 

And it is not only about the rand. South Africans tend to price offshore investments in rands. 

Rand deprecation then becomes paramount and the actual real return of the underlying asset gets forgotten. 

This is no good. 

Your portfolio must grow in real terms in the currency it is held in, and in line with your needs and asset-allocation decisions. 

Another decision to explore is currency and country exposure. 

Multinational companies span borders these days, but as a rule remember that most of your current exposure is to the emerging market you live in, so unless you are intentionally taking bets in other emerging markets, you may want to add a good portion of developed market exposure to your portfolio. 

If your plan is to emigrate or you know where you’re going to be spending a lot of time due to educational needs or family commitments, then choose to invest in the currency where those liabilities are going to be. 

What are the options?

Broadly, there are two to consider. 

Which option you choose depends on your circumstances.

OPTION 1: Physically taking your money offshore. 

Therefore going, for example, through the exchange control process, opening up an offshore bank account and sending rands overseas into a currency of your choice.

An individual is allowed to take a maximum of R10m a year offshore subject to South African Revenue Service (Sars) tax clearance and a maximum of R1m without tax clearance. 

Once the money is offshore (most banks can do this exchange for you), you may do with it as you please, i.e. leave it in a bank account in your name or invest it in unit trust funds, stocks, property etc. 

Offshore investments still fall into your estate and are therefore liable for estate duty in the jurisdiction in which you invest. 

Certain SA investment providers do offer offshore endowments that negate the need for probate or an offshore executor. 

You may also nominate beneficiaries, which means that at your death the investment can either continue offshore or be paid out in foreign currency to the beneficiaries.

Global endowments have attractive tax advantages and tax is calculated using the offshore currency and not rands. 

All tax administration is taken care of in the endowment.

This type of investment (as with all stock market investments) requires a long-term mindset as there is a five-year lock-in. 

There is some flexibility with respect to additions and withdrawals but there are limits too.

Note that while these products do save on executor’s fees and paperwork on death, they require quite large lump-sum minimums (approx. $20 000 to $25 000) and there are no debit order facilities.

OPTION 2: Investing in rand-denominated investment options. 

Your investment and currency exposure is foreign, but you invest in rands and get paid out in rands. 

Your money does not physically leave SA.

These unit trust funds are priced in rands, but your capital is invested offshore giving you the global diversification and foreign currency exposure you’re after. 

There are many different investment mandates available catering for all risk profiles and time horizons. 

There is no need for Sars tax clearance as your investment is made in rands and paid out in rands on disinvestment in SA. 

You are able to set up debit orders and the lump-sum minimums are a lot lower than in option 1 above.

Another consideration is rand-denominated offshore exchange-traded funds (ETFs). 

If you have a stock broking account, you can simply redirect some of your capital to ETFs that invest offshore. 

Again, you are investing in rands and will be paid out in rands.

Remember that your pension fund may very well have offshore exposure through your underlying investment choices. 

Regulation 28, which governs how pension funds are invested, allows a maximum of 30% offshore exposure.

While investing offshore should primarily be about global diversification, accessing different industries, interest rate and inflation regimes and stronger economies, for South Africans it is always about much more. 

If political risk is your primary concern, you should consider option 1 and actually move your capital offshore. 

Investing this way means you never have to repatriate or convert the investment back into rands unless this is your choice.

If you don’t have a large lump sum, but still want a rand-hedge investment option, then option 2 is the way to go. 

You can always save in this vehicle until you reach the minimums for option 1 and then move the capital offshore.

Whatever your concern, as a South African serious about your financial wellbeing and sound portfolio exposure, you need to have global exposure in a well-structured, diversified portfolio where local and global assets complement one another. 

If this seems like a daunting task, don’t ignore it but rather find a professional to assist you. 

It is that important. 

Candice Paine is an independent financial adviser.

This article originally appeared in the Collective Insight supplement in the 21 February edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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