The offshore investment conversation between investors and advisors has been more prevalent over the past few years - and with good reason.
Local equity markets have struggled to provide investors with very little in the form of real returns and this has led people to look to international investments as an alternative.
I always try keep on the optimistic side of the fence. I am a loyal South African and I love this country. This piece is therefore not focused on our stressed economy, or the challenges that face us over the next few years. In fact, I think it’s important to remember that our international friends have many concerns of their own. This article is about offshore investing.
Over the past decade, the opportunity-set for offshore investment has become increasingly attractive with a variety of choices on offer that provide investors with flexibility, transparency, accessibility, and cost efficacy.
At Nedgroup Investments, we have worked hard to equip advisors with a quality offshore range, offering investment options across the risk spectrum and across the globe and enabling access to expert fund managers from the US, London, & Australia to mention a few. As with our local range of funds, the international fund managers are selected based on our Best of Breed™ investment philosophy. Testament to this approach - Nedgroup Investments was again named Offshore Management Company of the Year at the annual Raging Bull Awards. This was the fifth consecutive year that we have held the top spot in this category.
As always, but particularly in uncertain times, investors need to stay the course when it comes to their long-term goals. This means avoiding emotional short-term decisions that could compromise their financial plan. However, sensible diversification is also crucial. History has shown, and recent events have confirmed, that offshore investments should play a significant part in achieving one’s long-term investment objectives.
This sentiment stands, regardless of what investors current portfolio looks like and it’s a great time now to check in with your financial advisor to review your investment strategy to make sure you are on track.
So, what are the benefits of investing offshore?
• Diversification: South Africa represents less than 1% of world economic activity
• Access industries that don’t exist in our local market
• Access a much wider pool of fund management talent
• Reduce currency risk: Our currency is extremely volatile, and often influenced by factors which have nothing to do with the local economy
• Reduce exposure to currency and political risk bets
Many investors feel intimidated by the process of investing offshore and fail to commit as a result – but the good news is that this is a problem of the past. Times have changed and in this modern digital era, it is easier than ever to gain access to offshore opportunities.
Let us talk about the three routes to offshore exposure:
1. Investing in a feeder fund:
A feeder fund is ZAR-priced and is a South African-based unit trust that ‘feeds’ into an offshore version of that fund. An example of this is the Nedgroup Global Equity Fund which has direct offshore (need foreign currency to invest) and feeder versions (need ZAR to invest). Albeit through a South African vehicle, these investments give you exposure to foreign investments, in the denominated underlying currency, and strategies like cash, bonds, property equity, or combinations thereof depending on what fund/s you have chosen.
2. Using your foreign investment allowance:
Taxpayers over the age of 18 can invest directly offshore via two allowances:
• Single Discretionary Allowance - up to R1 million per annum; and
• Foreign Discretionary Allowance - up to R10 million per annum to be accompanied by a tax clearance certificate for foreign investments. So long as your tax is in order the application is largely a formality, although it does require some supporting documentation.
Investing in either or both these allowances opens the opportunity to invest offshore where your money is physically externalised, and you retain your funds offshore if/when you redeem your investment. Foreign investment allowances provide the most diverse set of investment choices.
3. An asset swap:
Trusts and corporates do not have the option to invest via allowances. However, certain local financial institutions are granted permission to invest a percentage of their assets offshore. When they do not need their full allowance, they sometimes sell it on. This is called an asset swap. This type of offshore investment has characteristics of both a feeder fund and a foreign investment allowance investment. It is important to note that while the money is physically offshore, it will have to be repatriated to South Africa upon redemption. Remember, individuals can also use asset swaps.
If this all sounds a bit technical and confusing, then don’t worry, your advisor is here for you! It’s simply good practice to ensure clients are diversified and astute financial advisors will be able to offer their clients offshore options for inclusion in their investment portfolios that will help them achieve their long-term investing objectives. The important thing is to do your research and make sure you invest with a reputable asset manager with a proven long-term track-record.