NOT SURE HOW TO GET STARTED INVESTING OFFSHORE?
Offshore investing always raises a lot of questions. How much? Where? In what? Find out why the most important question you can start with is ‘What do you want to accomplish?’. Below Peter Kempen discusses the ins and outs of investing offshore with Classic Business’ Michael Avery.
The quick take:
- You should always have offshore exposure as part of your long-term investment portfolio.
- The level of exposure will vary depending on your individual financial goals and objectives.
- When deciding between the rand-denominated and direct offshore investments, it’s important to consider where your funds are going to be needed in the future.
- The process of investing in either Coronation’s rand-denominated or dollar-denominated international funds is very similar and has been simplified over the years to allow you easier access.
Q: Do we know why we are investing offshore?
The first thing to remember is that it’s not a question of when. Instead, it’s a matter of always. Always have a balanced portfolio of domestic and international assets, as it’s futile to try and time the markets.
You want to give your investments access to the world’s best growth opportunities, regardless of whether they are developed or emerging markets. And so, the only question that matters when investing offshore is how you go about investing offshore.
Q: So if it’s all about the ‘how’, let’s just clarify what you mean when you say ‘investing offshore’?
I think that’s a very important distinction to make because there are different ways to invest offshore or gain offshore exposure depending on your individual needs. If you are only investing for retirement, you may already have some offshore exposure through your portfolio. For example, if you are invested in one of Coronation’s multi-asset class funds you would have considerable offshore exposure by way of their direct exposure within the funds as well as indirect (or rand hedge) component within local equities. Those being the companies on the JSE that earn most of their revenue outside of South Africa as you mentioned. So there may be an argument that a South African investor’s exposure within a retirement portfolio is probably sufficient. But these investors will remain underexposed to specific economic trends and sectors that they can’t access via the JSE. So just to provide an example, if you want to invest in global tech, you only really have one option on the JSE which would be the Naspers/Prosus listings, whereas globally there are numerous stocks such as Apple, Microsoft, Alphabet and Facebook that you could access. This means that there could be a solid argument to have more offshore exposure from a simple diversification point of view.
Q: Now that we’ve got the reasons down for investing offshore, where does one start?
Once investors realise the importance and the benefits of offshore investing, the most common question that we get is ‘How much should I have offshore?’. There is no silver bullet here, as each investor’s situation is different. The starting point should be to ask ‘What do they actually want to achieve?’ or ‘What are the goals that they are actually investing for?’.
Q: There are many investors who may not be entirely sure what it is that they want to achieve.
Quite right. And it’s often best to address this question when drawing up a comprehensive overall financial plan with a qualified financial adviser. We can provide some general guidelines. As a starting point, all long-term investors, can benefit from offshore exposure within their portfolios. And the minimum strategic allocation is 20%. For those investors that need to fund an income from their portfolios (which would be your retirees, pensioners), they need to be wary of having too much exposure due to the volatility of the currency. So they should probably not have more than 35% offshore exposure in their portfolios.
Q: So minimum 20% and keep the level of offshore exposure moderate if you are drawing an income. When would investors go above that 35% threshold?
For wealthier investors there is much more scope for offshore exposure within their portfolios. But again, this will depend on their individual objectives and risk tolerance.
So once an investor has a better idea of what level of offshore exposure they want in their portfolio, it becomes a question of how to achieve it. And here they need to ask themselves if they are happy to get exposure through rand-denominated funds or do they want to invest it directly in foreign currency.
Q: What’s the difference between investing in rand-denominated funds or investing directly offshore?
When investing in rand-denominated funds, it means you are buying a locally-domiciled unit trust which provides you with exposure to offshore assets. The level of offshore exposure depends on the mandate of the fund. As an investor in rand-denominated funds, you are using the foreign investment allowance of the investment manager. No approval is required and there is no limit to the amount an investor can invest.
Q: The second option is direct offshore investment in a foreign currency. How does that work?
When investing directly offshore, it means that you are first converting your rands into offshore currency, which is then used to buy unit trusts which are domiciled offshore. To do this, individuals use their offshore investment allowance, which is up to a maximum of R11 million per year of which R1 million is discretionary and the remaining R10 million requires SARS approval. An important advantage of investing directly offshore is what we call jurisdictional diversification, because your investment is no longer in South Africa.
Q: How do you know if you need to invest in rands or in foreign currency?
Once again, there is no right or wrong answer. Each investor’s personal financial needs and objectives need to be taken into account. But there are some basic questions that investors can ask such as ‘Where do they want to spend their investments in future?’
Investing in rand-denominated funds are slightly simpler than investing directly offshore. But there may be various reasons why being able to access your investment in a foreign currency is a lot more attractive. For example, investors who have children who are going to study abroad; investors who may end up living abroad; or investors whose children already live abroad. In the case of the latter, it might make more sense for the children to inherit the assets that are already offshore. Even if investors just know that they are going to need money to spend offshore, such as for an overseas holiday. So regardless of the option that an investor selects, the most important thing is to ensure that they have offshore exposure in their investment portfolios in the first place.
Q: So once you, as an investor, have decided to invest offshore, what are the amounts we are talking about when investing in rands or foreign currency?
The rand-denominated funds generally have much lower minimums than the direct offshore funds as well as the added benefit of running a regular debit order. The minimum lump sum into our funds is R5 000, with a minimum monthly debit order of R500. This is often a great starting point which allows investors to build up their capital before investing directly offshore in one of our foreign-currency denominated funds where the minimum is $15 000.
Q: And I do find that, as with anything in life, the more you do it rather than just reading about it or talking about it, the more familiar you become with it and it opens up that world that can seem rather daunting to investors at the outset. Peter can you just sum it all up for us?
Firstly, investors should always have offshore exposure in their portfolios and the level of exposure will vary depending on the individual financial goals and objectives.
Secondly, when deciding between the rand-denominated and direct offshore investments it’s important to look at your personal circumstances - like where the funds are going to be needed in the future.
And the last point, I think it’s important to debunk the myth that investing offshore is complicated. The process of investing in either the rand-denominated or direct offshore funds is very similar and has been simplified over the years to allow easier access for investors.
To find out which of our multi-asset funds may be suited to you, listen to this podcast.