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Offshore investments: Easier said than done

Offshore investments: Easier said than done

“I want to take my money offshore” is probably the most common request we have received the past couple of weeks. There have been a number of articles on this topic in the recent past, and as it should be, not everyone agrees 100% on this topic.

People who follow our asset allocation decisions would know that we have been advocating a significant overweight offshore position for the better part of 9 years now. Due to changes in valuations over time our views are however now changing slightly and we believe it is time to bring some of that money back to SA.

Please understand me correctly…this article is not about sticking our heads in the sand like the proverbial ostrich with regards to the challenges we face in SA, but to question the recommendation from other commentators to move all your liquid assets offshore indiscriminately?

For context, please see the historical growth (15 years) of the 8 main asset classes readily available to investors. Growth is indicated per annum in RAND. Keep in mind that this growth is before any tax, admin- and advice fees. If you achieved this after fees as an investor you would’ve done very well.

Bron: GraySwan Wealth

Where do you invest when take your money offshore?

It is one thing to take your money out of the country, but another to know what such a portfolio should look like. The problem with offshore investments is that the dollar growth in cash and bonds is so low that after you have added platform and advice fees there is no growth left for the client and all you are left with is the massive volatility of the exchange rate.

To counter this, you have to UP risk and invest in equities and property. Even if we assume that these assets provide good value for money (a leap of faith at best from current valuations for shares specifically) a portfolio consisting of only shares and property is way too volatile for the average investor.

Please see graph below. This is often referred to as the efficient frontier and aims to show how risk (volatility) increases in relation to return. A normal risk/return line would move from bottom left (low return but low volatility) to top right (high return, but high volatility).

With the exception of offshore property that appears to be in the right place (top right), the rest of the assets seem to be the wrong way around (sloping from bottom right to top left). The arrows indicate where you would normally expect these asset classes to be.

What this means is that for global cash and bonds you get a whole lot of volatility but very little return. Contrary to this, global equities (offering a high return historically), have done so at very low comparative volatility.

For the glass-half-full guys, the fact that offshore shares offered almost the highest growth over 15 years, but with the lowest volatility, must mean that this is the place to be at NOW. To me this is an indication that this is where you SHOULD HAVE put your money for the past 10 – 15 years, not necessarily from today onwards. I further wonder if this is not an indication of complacency and underestimation of risk currently in this asset class. Something that usually end up in tears.

Back to global bonds and cash: It seems irrational to commit money to an asset class that give you the same long-term return than SA cash but at 16.5% annual volatility.

What is your reason for investing offshore?

If your reason for wanting to invest offshore is higher returns than you achieved locally in recent years or expect to achieve in the next couple of years, you might be disappointed. If you, like me, believe that long term growth is a function of asset valuations at your starting point, then you are going to have a difficult time to convince yourself that you have to increase exposure to global (especially USA) shares considerably. Any index tracking global shares would have a large exposure to the USA.

A lot of people’s motive seem to be hedging themselves against SA political risk rather than getting high returns. If the land-expropriation-without-compensation rhetoric got you to the point where you believe we are following in Zimbabwe’s tracks, and the preservation of capital is the sole priority, then so be it. I can understand this, and if this is truly your situation then you can consider a more conservative offshore portfolio, but you need to manage your expectations with regards to returns (even Rand). It would be wise to consult your financial planner about the impact of this potentially lower return on the executability of your financial plan.

What is your time horizon?

How long will your investment have to stay offshore?  Are these funds that you can leave offshore on a “permanent” basis or do you need to live off the proceeds at some point? If you are taking the money out of SA largely due to security concerns, what must happen in SA for you to feel comfortable to bring it back again?

In summary the following

To clarify: I’m not against allocating a substantial portion of your funds to offshore assets. In my experience, most South Africans are significantly underweight (to what might be prudent) offshore assets. You have to be sure of your motives and expectations of these investments to avoid disappointment.

Talk to your financial planner about the differences, advantages and disadvantages of direct offshore investments vs asset swop investments. The last mentioned might be a more meaningful solution in getting offshore exposure in many instances.

Your offshore exposure should be the outcome of a portfolio construction process and not the result of an emotional reaction to news.

When investment decisions feel right or comfortable, the outcome is usually not good. The nature of investments is in fact such that the biggest opportunities lie where the greatest discomfort was felt in recent past.

Andró Griessel is a certified financial planner and the managing director of ProVérte Wealth & Risk Management. Contact him at info@proverte.co.za. He writes twice a month for Netwerk24.

Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. ProVérte Wealth & Risk Management is an authorised financial service provider with FSP no. 5966.

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