In the ever-evolving world of finance, offshore investing has become an increasingly popular option for investors looking to diversify their portfolios, hedge against local economic risks, and tap into the global market’s potential. As a South African investor, offshore investing offers you an opportunity to mitigate the long-term devaluation of the Rand and benefit from the robust performance of international markets. This piece will guide you through the process of investing offshore, discussing the benefits, available options, and comparing the performance of investing locally against investing internationally. We even examine some of the top offshore investments at an index level and how they compare to investing locally. The results may shock you.
The Benefits of Offshore Investing
1. Diversification: Offshore investing allows you to spread your investments across different economies and sectors, reducing the risk associated with having all your investments in one market. We all know the South African economy is tiny relative to the global economy, and even though many of the companies that drive the returns of the JSE generate their revenues and profits outside our borders, being exposed to a larger investment universe just makes sense.
2. Hedging Against Currency Devaluation: The South African Rand has experienced long-term devaluation. Nothing new there! But the scale of it is actually quite shocking. From an exchange rate of about R3,50:1.00 against the USD in 1993 to the almost 19:1 we sit at today, that’s an average devaluation of about 5%-6% p.a. In global or real terms, we’re getting poorer at a rate of knots! By investing offshore, you can start to preserve and grow your wealth, not get poorer over time.
3. Access to Larger Markets: Offshore investing opens up opportunities to invest in larger and more established markets like the US, UK, Europe, and Asia, which have a wider range of investment options and exposure to sectors that are drivers of the future – like technology, life sciences, healthcare and automation – which you just don’t really get by investing locally, outside of one or two names.
4. Potential for Higher Returns: Many will argue the historic returns of the JSE have outperformed many of the major international indices. But that’s the problem with looking backwards. The drivers then were very different to what they are today. And if the main reason to invest locally is that we’re cheap – that’s a dangerous benchmark to use. Things are often cheap for a reason. What companies, sectors and regions offer growth potential in future? And what are the catalysts for that growth?
4. We’re all global citizens now. The world has shrunk. Opportunities for work, travel and exploration now mean many of us want to be flexible around what we do and where we do it from. Investing money offshore and having a portion of your wealth grow in ‘hard currency’, makes it far easier and more efficient to do all those things when you’re using money you already have in USD or whatever your currency of choice – instead of having to convert Rands all the time. Spending almost R100 on a coffee or R150 for a beer when you’re in Europe isn’t fun. The other point is you may want to move abroad or emigrate – much easier to do when a large portion of your wealth is already offshore.
The Ease of Offshore Investing
In the past, offshore investing was a complex process reserved for wealthy individuals and large corporations. However, technological advancements and regulatory changes have made it easier than ever for individual investors to invest offshore. Today, as a South African investor – you can invest offshore through various platforms and products – more on that below. Use your R1 million annual allowance to convert your Rands into hard currency on a regular basis (without needing tax clearance). You can use one of the various currency exchange firms – or do it yourself via your local bank – like via the FNB Global Account, which is easy to do.
Use opportunities where the Rand is ‘relatively strong’ to do regular conversions. And then once you have some money accumulated in USD for example, begin looking to invest it. Of course if you have the means and can use the R10 million annual offshore investment allowance (subject to your tax affairs being in order), that’s the way to go. Our preferred foreign exchange currency firm, is currency partners, for whom we can negotiate special rates for our clients.
Offshore Investment Products
There are a number of ways to invest offshore and offshore investment products to choose from. Whether you prefer DIY, or want someone to give you a helping hand, the options are endless. And it’s far easier than you probably think and realise.
1. DIY Brokerage Accounts: For investors comfortable with managing their own investments, DIY brokerage accounts offer the most flexibility. You can buy your own shares, ETFs and other instruments like options if that’s your thing. There are a lot of options to choose from today, but our favourite is Interactive Brokers because they’re an established international brand and their costs are lower than anyone else based on our research. DIY is definitely the cheapest way to go and you can start with small amounts. But of course, it’s not for everybody!
2. Unit Trusts: For those who prefer a hands-off approach, managed funds are an excellent option. There are a number of good offshore unit trusts funds available from the various offshore investment platforms – whether it be Ninety One, Allan Gray, Momentum International or Glacier International. We don’t have a ‘favourite’ necessarily – we tend to look at it on case-case basis and what a person needs.
Options are endless
Some providers now even cater to monthly debit orders where they covert your Rands into Dollars automatically and invest that into the funds you’ve chosen. You need about R10,000 per month to invest for this to work. Picking funds though is a tough job because there are so many to choose from and many come in and out of favour. So, using a discretionary managed approach where an asset consultant puts together a combination of funds according to different risk profiles is a good option to consider because they have the research capability to assess the options out there. They will often also use ETFs in their models to manage costs and in that way give you exposure to different international markets.
3. Direct Share Portfolios: Once you have a decent sum of money to invest, typically upwards of about USD 250,000, you can invest directly with a portfolio manager via a share portfolio that will give you direct access to different companies across the globe in a portfolio customised to your needs and risk appetite. Having this level of access and relationship with the person actually investing your money is quite rare, but if you like to be involved and have the means, it’s a great choice. We like to work with 3-4 different companies in this space, depending on each client and what they are looking for.
Offshore Investment Structures
The greater the level of your wealth, the more important the structures you use to house your assets become. Structuring your investments to minimise taxes, avoid foreign probate, save on executor’s fees and facilitate the intergenerational transfer of wealth are some of the advantages. Using an offshore endowment or life ‘wrapper’ starts to make sense from about USD 100K and above because it ticks most of those boxes, and once you get over USD 1 million, you might want to start thinking about using an offshore trust.
Read Next: The benefits of disrectionary trusts as wealth transfer tools.
Top Offshore Investments: Investment Returns Compared
The reality is that if you’re serious about achieving financial security, you have to invest offshore. With a weak economy and depreciating currency, if we really think of ourselves as global citizens and want to be financially free in every way, the majority of our wealth should probably be invested offshore. With a large portion of our asset base already tied to South Africa via our property and pension assets, the majority of our discretionary wealth should probably also not be in Rands. Looking at top offshore investments at an index level and comparing them, produces interesting results.
The dangers of being over-invested in Rands and the local economy is very clearly illustrated in the following graphs where we compare the 10-year performance of various indices in USD Terms – namely South Africa (EZA), the S&P 500 (SPX), the Nasdaq 100 (QQQ), Emerging Markets (EEM) and the Total World Stock Index (VT). With a currency that has depreciated on average of 5-6% per annum over the best part of the last 30 years, it becomes very difficult to move forward in real terms. And there is nothing to suggest that this situation will improve over the next 30 years.
In USD terms, you have lost about 23% in value by investing in the South African stock market over the last 10 years. Contrast that to the 163% and 402% that the S&P500 and Nasdaq have gained over the same time frame. Of course, that doesn’t mean the S&P 500 and Nasdaq are going to deliver similar returns over the next decade, but with the relative size of our economy (and all its challenges), it’s difficult to imagine how you achieve real financial security by having most of your net worth tied to South African and Rand-based assets. And of course the impact of that extends to our retirement fund assets, with their investment limitations, so you need to be exploring investing beyond just the traditional retirement planning vehicles available.
*This is also not a criticism of our country. We think local is lekker. It’s simply about being smart and being more deliberate and aware of our investment decisions.
In 1993, the exchange rate between the United States Dollar (USD) and the South African Rand (ZAR) was approximately 3.55 ZAR to 1 USD. As of today, the exchange rate is approximately 18.50 ZAR to 1 USD. This represents a depreciation of the Rand by approximately 422% over the course of 30 years. This means that every year, on average, the value of the Rand against the Dollar has decreased by about 5.9%. Sure, the Rand may go back to 15.00 ZAR to the USD in the short-term – but what matters here is the long-term trend. Offshore investing offers you as a South African investor a wealth of opportunities to diversify your portfolio, protect against currency devaluation, and potentially achieve higher returns. But what it really boils down to is financial security. And if you’re serious about achieving that, offshore has to be a cornerstone of your investment portfolio.
Disclaimer: As with any investment, it’s important to do your research and consider seeking investment advice from a professional to ensure your offshore investments align with your financial goals and risk tolerance.