Investing offshore is a question of how, not when

Finance minister Tito Mboweni, in his recent medium-term budget policy statement, provided a difficult outlook for investors over the short and medium term, but investors need to be measured in their reaction to the worse-than-expected economic outlook delivered by the minister when making investment decisions.

This is the view of Pieter Koekemoer, head of Coronation Fund Managers’ personal investments business. 

A qualified chartered financial analyst, he joined Coronation two decades ago, and has participated in its fund development throughout.

He explains that the debate about the appropriate fund allocation to international assets is closely associated with weak domestic confidence. 

“With much better returns from global markets, especially US equities, over the past decade, you often hear the argument that you should sell all your local investments and only invest offshore,” says Koekemoer. 

“This is a sentiment-driven view that assumes that the future will play out exactly as the most recent past. A more reasoned response would be to implement a well-considered, long-term investment programme, informed by your own circumstances, that appropriately diversifies your risks across jurisdictions, geographies, sectors and companies.”

Coronation understands that many local investors may feel unsettled at present. 

Yet, he says, it’s not a question of when to invest offshore, but rather how.

“International assets make your portfolio better by diversifying economic, jurisdictional, currency, industry and company-specific risks without necessarily reducing expected long-term returns,” says Koekemoer. 

“The more than 5 000 investible shares in the global universe allow access to growth opportunities, industries and geographies not available in the local market.”

The flipside, he warns, is that no specific or geographic-specific assets win all the time. 

“While it’s true that global markets have performed better than local markets over the past decade, this has not always been the case,” says Koekemoer. 

“Over the past 20 years, local markets materially outperformed global markets, as the outcomes through most of the 2000s were very different to more recent performances. And there is no guarantee that any specific outcome will be repeated over the next decade.”

In Coronation’s context, you already have considerable international exposure if you’re invested in one of its multi-asset class funds, he says. 

This allocation consists of direct and indirect offshore exposure, with the effective rand-hedge exposure of their long-term growth-oriented Balanced Plus and Market Plus funds typically being more than 50% of the portfolio. 

For the more conservative Capital Plus and Balanced Defensive funds, this allocation is somewhat lower, at 30% to 40%. 

Each of these funds provide the easiest way to gain hassle-free international exposure, as the client mandates to Coronation the scope of international allocation on his or her behalf.

In addition, says Koekemoer, it’s easy to top up your investment or to draw an income from these funds, as they are accessible with low minimum investment requirements, and can be used in tax-efficient investment vehicles such as retirement annuities and tax-free investments.

But if you want more international exposure, you can also invest in rand-denominated international funds, according to him. 

“You may want to do this with your discretionary (non-retirement) savings in order to further diversify your risk,” Koekemoer says. 

“The reality is that by living, working and owning a home in SA, you already have significant country-specific risk, suggesting perhaps that you ought to have additional international exposure.”

This can be achieved by investing in, for example, the Coronation Global Managed and Coronation Optimum Growth funds. 

Their top stocks include, among others, Google’s owner, Alphabet Inc., British American Tobacco, Charter Communications, The Blackstone Group, Airbus SE and Citigroup Inc.

Koekemoer says that while these funds provide economic diversification, they still operate under the laws of South Africa and therefore do not diversify jurisdictional risk, such as exchange controls which limit the amount that asset managers can invest outside of SA on behalf of clients.

“If you have a substantial amount to invest offshore, you can externalise your rands and invest in a fund incorporated in another country, most often in the EU,” says Koekemoer. 

“In this case, the laws of the country of incorporation govern your investment.”

Coronation offers a range of funds incorporated in Ireland with the same economic exposure as their rand-denominated international funds, but with the added benefit of jurisdictional diversification. 

These offshore- domiciled funds have a minimum investment amount of $15 000. 

The downside of investing through this route is more complex administrative requirements due to cross-border banking, and you must apply for South African Revenue Service clearance if you want to invest more than the R1m annual offshore allowance for individuals. 

This article originally appeared in the Fund Focus supplement in the 21 November edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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