Heading offshore? Here’s how to keep your head

Simon Brown, founder and director of JustOneLap.com.
Simon Brown, founder and director of JustOneLap.com.
Going offshore has to be one of the major themes of the past year or so. In fact, it was probably on many investors’ minds since we had three finance ministers over four days back in December 2015. 


Rand strength since then has taken a lot of shine off any returns. But that’s a story for another day. For now, I want to focus on what to do with any money that might be invested overseas.

The first question is why we should move rands offshore in the first place. If we live, earn and spend in rand, why hold any foreign currency at all? There are two reasons. The first is that you might be planning to leave South Africa.

In that case, starting the process of moving money offshore early is not a bad idea. However, as always, remember to transfer funds when the rand is strong rather than panic when it weakens suddenly.

The other reason for doing this is to buy assets we simply can’t access locally. On the JSE we have a wide range of global companies earning foreign currencies, as well as a number of exchange-traded funds (ETFs) that track different offshore markets. But maybe you want something else.

Herein lies the challenge – once your money goes offshore, a whole new world of some 100 000 shares lies before you: everything, from Apple to Tencent, Coca-Cola and more. For me personally the JSE with some 400 shares is a large enough universe to be an expert on.

Tracking and keeping up with this very modest number of shares takes up most of my waking hours. I simply do not have more time to study the 99 600 additional shares available to offshore investors.

But there is one huge advantage to offshore investing, and that is the range of ETFs that is available. In the US alone there are over 1 000 ETFs tracking everything from biotech, India, junk bonds and more.  

However, there are a few things to keep in mind when investing in US ETFs.  

First, while they have the same name, there are some significant differences between JSE-listed ETFs and US ETFs. The first is that there is seldom a market-maker in US ETFs.

Locally, the ETF issuer ensures that there are always buy and sell orders in the market at either side of the ETF’s fair value. This means when you’re buying, you pay a small premium above fair value.

And when selling, you pay a small discount below the fair value amount. In the US supply and demand drives prices, and ETFs often trade at significant discount or premium to actual fair value.  

The second issue is that locally, ETF issuers hold the underlying shares, so investors are protected in the event that the issuer runs into trouble. In the US, ETF issuers do not have to hold the underlying shares.

Most would, as it removes any risk for the issuers, but this means making sure you only buy from the larger reputable issuers.

With these two warnings out of the way, a last word of caution. The temptation is to use your offshore money to buy the most niche and speculative ETF – something like an Outer Mongolia Biotech Fund (if such a thing exists) and then to add a Russian orange juice ETF for good measure.

Rather keep it simple, as always. Maybe you want some global banking or US residential property exposure. These are two sectors that we can’t get exposure to locally and that are not likely to suddenly explode, leaving us with nothing. 

In other words, keep your wits about you, and still invest sensibly just as you would with a local stock or ETF. Don’t let the large range entice you to invest off into corners that, while they might sound exciting and may deliver returns, are extremely high risk and more likely to result in failure.

This article originally appeared in the 21 September edition of finweek. Buy and download the magazine here

ZAR/USD
16.96
(+0.42)
ZAR/GBP
21.16
(+0.38)
ZAR/EUR
19.07
(+0.58)
ZAR/AUD
11.74
(+0.36)
ZAR/JPY
0.16
(+0.63)
Gold
1777.36
(+0.56)
Silver
18.04
(+0.38)
Platinum
808.01
(-1.22)
Brent Crude
42.09
(+1.84)
Palladium
1903.00
(+0.34)
All Share
54617.19
(+1.54)
Top 40
50309.77
(+1.49)
Financial 15
10214.89
(+2.12)
Industrial 25
76156.33
(+1.23)
Resource 10
50768.18
(+1.58)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
Results
I'm not really directly affected
18% - 1538 votes
I am taking a hit, but should be able to recover in the next year
23% - 2001 votes
My finances have been devastated
34% - 3003 votes
It's still too early to know what the full effect will be
25% - 2183 votes
Vote