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Advice on Investing Offshore -- June 2007
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Investing Offshore for South Africans
Many South Africans are in a “local is lekker” investment mood at the moment. Who can blame them? Investing offshore is less attractive when our share market has been performing far better than the big overseas share markets, and the rand has strengthened significantly since late 2001. A strengthening rand means your offshore investment becomes less valuable in rand terms.
So does it make sense to invest offshore at the moment? Most definitely, provided it is done for the right reasons and forms part of a long-term financial plan.
An offshore investment should not be a short-term bet on the future direction of the rand. It should be undertaken mainly for reasons of investment diversification. South Africans tend to forget that we make up only 1% of the world economy.
We are primarily a resource based economy. This has been working in our favour in recent years, but it could change.
There are also great companies in industries such as pharmaceuticals and biotechnology that are not readily available to local investors.
The investment universe is also much bigger in the industries that we can invest in, in SA.
There may be secondary reasons for investing offshore. If your children are likely to emigrate one day, and you can afford to leave them an inheritance, then it would make sense to base that inheritance in the currency of their likely end destination.
If you are an Afro-pessimist, then you may feel more secure about investing offshore. This would be an emotional reason, and emotions should generally be eliminated when investing.
How much should you invest overseas? There have been studies over the years that seem to indicate that the optimal offshore allocation is in the region of 30%. This is not a hard-and-fast rule, however. It will vary from person to person, depending on their circumstances.
A young investor who has a business and property in SA may decide on a higher offshore investment weighting. A retired investor should generally have a lower weighting, as they will need to draw on their capital at some stage, and may not want to take an additional investment risk (currency risk). Currencies can move in cycles over many years, so offshore investments should be undertaken with a minimum time horizon of seven years.
There are different ways of investing offshore. Every South African can apply to take R2m out of SA. The Reserve Bank and the South African Revenue Service will need to grant approval, but if your tax affairs are in order this should not be a problem.
An easier way to obtain offshore investment exposure is via an “asset swap” investment. You invest your rands with a local asset manager or institution that has already been granted offshore capacity by the Reserve Bank. Your money is invested overseas, and the investment performance is dependent on offshore market and currency movements.
Offshore investments can be done as lump sums or monthly debit order. They can be housed within investment vehicles such as unit trusts, endowments or pension funds, although there are restrictions and limits within some of these vehicles.
You have many options on offshore investments, but they can be daunting, so my advice is to engage an independent, fee-based certified financial planner who is focused on your best interests and can provide impartial advice.
If you do not have a certified financial planner, visit the website of the Financial Planning Institute on www.fpi.co.za to select one.
Debbie Netto-Jonker, CFP™, is founder of Netto Financial Services and was Financial Planner of the Year in 2001.
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