Investors who ignore offshore opportunities deny themselves the significant benefit of exposure to a far wider range of stocks, says David Nathanson, portfolio manager at Bellwood Capital.
Purchasing foreign equities is a starting point for long-term investors wishing to unlock the value of investing offshore, in his view.
The South African market is less than 1% of the global market. Allocating a portion of your investments offshore, therefore, provides access to markets, sectors and companies not available on the JSE, says Nathanson.
He provides some simple guidelines to extract maximum value from holding offshore equities:
Beware complexity and costs
Find the most transparent investment solution available when looking at offshore investments.
“Avoid highly opaque, layered structures, with limited flexibility and high costs. These often include complex tax structures, which may or may not add value,” he suggests.
“A common example of layering would be where you invest via a local broker, onto a platform, into a feeder fund, into an international fund of funds with numerous underlying fund managers. Structures like these add layers of fees, reduce flexibility to access or change investments and make it very difficult to know who is actually managing your money and what their process is.”
For him, a direct account held with an international low-cost brokerage firm, allows you to log in via a secure website to view holdings and draw detailed statements. He says it is usually the most transparent and cost-effective solution.
He says to make sure you fully understand the fees you are paying, especially when there are layers involved.
Strive to bring total costs down to 1% a year or less.
Look for hidden agendas
Another red flag you need to watch out for is conflict of interest.
“Make sure that the interests of the people managing your investments and giving you advice align to your best interests. Watch out for 'independent' advisors who receive commissions from product providers when they direct business their way, or earn commissions based on activity,” he says.
Also, be careful of performance fees.
“While performance fees may appear to align interests, they are often one-sided, with you paying more if performance is above a certain target but still paying the management fee if performance is poor. These fees can lead to excessive risk taking on the part of your investment manager and add an extra layer of cost,” he explains.
Don’t underestimate the power of personal service
Investing offshore does not mean you need to deal directly with a company based offshore. South African-based investors are often disappointed with the service they receive from overseas institutions, according to Nathanson, who believes a reputable local operation, which delivers a highly-personalised service and offers direct access to the portfolio manager, is a far better option.
Process is king
Understanding the investment process that will be used to manage your money is very important. Nathanson says process is the foundation for generating returns.
Make sure your investment manager can articulate a clear investment philosophy and demonstrate a strong underlying process.
Also ensure they can adequately cover the available opportunity set, which includes several thousands of companies.
Do your due diligence
Select a creditworthy, properly-regulated institution to manage your offshore investments.
Make sure your partner for investing offshore is a creditworthy institution. Also ensure you are dealing with a properly-regulated institution which, if operating in South Africa, should be regulated by the Financial Sector Conduct Authority (FSCA).
* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER