The bulk of the recent expansion of South African companies is offshore rather than in South Africa. They are doing this to have diverse sources of revenue and profits, and because of the limited investment opportunities and heightened political and economic risks in South Africa.
For private investors, the reasons to invest offshore are exactly the same.
Since Nhlanhla Nene was kicked out as finance minister at the end of last year, the pace of offshore investment has increased. Experts say that despite the devaluation
of the rand, which makes offshore investment more expensive than, say, a year ago, private investors continue to increase their offshore exposure and this is still a good time to be investing offshore.
Why invest offshore?
One of the most commonly cited reasons for investing offshore is that SA contributes less than 1% to global GDP and it is therefore silly to have all your money invested here.
Another is that the rand has continued to depreciate against developed market – or “hard” – currencies at a rate of 6% a year, so an offshore investment is a hedge against rand depreciation.
Last year’s 30% depreciation of the rand made the decision to invest offshore problematic as, while this proved the point that you should be invested offshore, it also meant that conversion of your rands to hard currency would have left you with significantly less dollars or euros than a year before, making people wonder if it was still worthwhile.
Increasingly, people are moving their investments offshore to hedge against political and economic risk in SA.
According to Wayne Sorour, head of Old Mutual International South Africa, this has been evident in investment flows, which have increased by 20% to 25% since the Nene incident.
If you have a long-term time horizon and are willing to accept some currency risk, being offshore is a good place, says Rafiq Taylor, portfolio manager at Sanlam Multi Manager International. “That is not to say you won’t do well from South African equities,” he says, adding that 60% to 65% of revenue from South African stocks comes from Europe, the UK, the rest of Africa and elsewhere offshore.
There is a low-growth environment in SA and there are opportunities offshore where you would be hard-pressed to find the same opportunities in SA, Taylor says.
How to invest offshore
There are two basic ways to invest offshore:
1. Physically taking your money offshore
You can take up to R10m a year offshore subject to tax clearance, and up to R1m without tax clearance.
You can then leave the money in a foreign bank or invest it in any number of investment vehicles which would contain, for instance, direct shares, unit trust funds and exchange-traded funds (ETFs).
2. A rand-denominated investment
You do not need tax clearance to invest in rands in companies listed on the JSE which have offshore exposure, offshore ETFs and offshore unit trusts and receive interest, dividends and payouts in rands.
If you have a pension fund or retirement annuity, up to 25% of your capital could already be invested offshore, as 25% is the upper limit in terms of the prudent investment guidelines for pension funds.
Sorour says any diversified portfolio should have an offshore element, but how you invest offshore depends on your financial objectives.
“From an investment return perspective, asset swaps or investment in South African shares with offshore exposure or offshore listings are the easier options as these investment vehicles are accessible and liquid.
“If it is purely from a return on investment perspective, this offers ease of investing without having to get Reserve Bank approval or tax clearance, and it is easy to get that money back again.”
If you are investing for children to study overseas, for overseas holidays or for political hedging, you need to measure returns in hard currency and this is where it may be preferable to take your money offshore, Sorour says.
“We mainly deal with South African residents who are externalising their money for various reasons – kids living abroad or emigrating, people who say ‘I have enough in SA and can retire comfortably and have other money I want to invest elsewhere’, clients who inherited money abroad or South Africans who worked abroad and were paid there.”
Sorour says direct investment is preferable. “There is no reason not to – you are getting the same benefits but it provides an extra element of having money abroad. The investment may be the same, for example, investing in a fund manager which offers the same investment in rands and in dollars. But the one would be taxed in rand.”
Does the exchange rate matter?
The big question is whether it is opportune to invest offshore now that the rand has devalued so much over the past few years. The experts say this should not be a factor.
Taylor says you have to look at the actual investment opportunity – the valuation and opportunity sets relative to South Africa and relative to the asset class you are investing in.
He says it is difficult to call where the currency is going to go, and the decision should be based on the investment rather than the currency.
The rand is nevertheless a depreciating currency, he says. It will always weaken but there are swings and roundabouts.
“Our bias is towards investment opportunity rather than exchange rate, but one must be cognisant of where the rand is.”
No matter what the reason you go directly offshore is, structuring your
investment is critical.
Sorour says there are a wide range of possibilities, from investing directly into ETFs, unit trust funds or direct shares. Or putting your investment in an investment vehicle such as life wrappers or via a linked investment service provider (LISP) platform, or trusts.
Decisions on what to invest in are critical as there are tax and other implications, depending on the investment.
“We are finding out clients prefer various things – direct funds, or ETFs, which are popular at the moment, and direct share portfolios.”
Wealthier investors tend to prefer share portfolios, while smaller investors will go into funds and ETFs.
Who manages that portfolio is up to the investor. “Some go to a stock broker with an execution only mandate and they manage the portfolio themselves, but predominantly, most clients need somebody to manage portfolios for them in terms of investment objectives. International investment is a broad market with so much choice, South African investors can give investment professionals a mandate. What is important is your risk tolerance and it is important to make sure the person managing the money is staying within the mandate. But the choice of asset classes, percentage allocation to regions and other details should be left to the discretionary manager.”
Sorour says having someone manage your offshore investment is not only about the investment and the return. It is important to be in the best investment.
This article originally appeared in the 29 September edition of finweek. Buy and download the magazine here.