Last Updated on 22/07/2024 by Carl-Peter Lehmann
In today’s dynamic financial landscape, more investors are exploring offshore investing to diversify their portfolios, protect against local economic uncertainties, and leverage global market opportunities. For South African investors, venturing offshore can counter the Rand’s long-term devaluation and capitalize on the strong returns of international markets. This guide will walk you through offshore investing, highlighting its advantages, various choices, and a comparative analysis of local versus international investments. We’ll also delve into some leading offshore investments at the index level, revealing insights that might surprise 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?
5. 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 that 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.
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. Profesionally Managed Unit Trust Funds: 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. Deciding what funds to pick however (from the hundreds out there), usually requires professional guidance.
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.
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.
When Using Offshore Investment Structures Begins to Make Sense
The greater the level of your wealth, the more important the structures you use to house your investments 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.
Further Reading: The benefits of disrectionary trusts as wealth transfer tools.
Top Offshore Investments: Investment Returns Compared
To achieve financial security, investing offshore is crucial. Given our weak economy and depreciating currency, embracing a global perspective is key. A large portion of our wealth should be offshore to ensure financial freedom.
With a significant portion of your assets already tied to South Africa through property and pensions, should your discretionary wealth also remain in Rands? Comparing top offshore investments at an index level (in USD terms) reveals compelling results. Source: Seeking Alpha.
The risks of being over-invested in Rands and the local economy are evident in the following graphs, showing the 10-year performance of various indices in Dollars: South Africa (EZA), the S&P 500 (SPY), the Nasdaq 100 (QQQ), Emerging Markets (EEM), and the Total World Stock Index (VT).
Our currency has depreciated by an average of 5-6% annually over the last 30 years, making real progress difficult. It’s hard to imagine that this trend will improve in the next 30 years – and which is why we favour direct offshore investing over Rand-based offshore investing
South African Share Price Returns in USD: A Stalled Economy and Ever Weakening Currency
In USD terms, investing in the South African stock market over the last 10 years has resulted in a 34% loss. In contrast, the S&P 500 and Nasdaq have gained 178% and 392%, respectively, in the same period. While future returns are uncertain, the challenges of our economy make it hard to achieve real financial security with most of your net worth tied to South Africa and Rand-based assets. This extends to retirement fund assets, which have investment limitations. Therefore, exploring investments beyond traditional retirement planning vehicles is essential. This isn’t a criticism of our country. We believe local is lekker. It’s about being smart, deliberate, and aware of our investment decisions.
The S&P 500 10-Year Price Returns: Technology Titans Take Over the World
With the world’s largest and most profitable companies, the US is likely to remain a key driver of global stock market returns, barring major global disruptions (recession, geopolitical events, black swans). Over the past decade, the S&P 500 has delivered an annual price return of nearly 11% (178% price apprecation), well above its historical average — a very healthy return, thanks to the rise of the global tech titans.
QQQ (Nasdaq) 10-Year Returns: Growth on Steroids
As a benchmark for US technology, especially with the advent of AI, this sector offers exceptional growth potential. With annualized returns of around 17% over the last decade, the performance is phenomenal. However, this also means that during market sell-offs or recessions, the drawdowns can be extreme. Not being scared of volatility comes with the territory here!
Emerging Markets: Trade Wars and a Weaker China
China’s returns (with it’s massive index weighting), especially over the last 5 years, have heavily impacted emerging markets, resulting in a decade of no returns. Contributing factors include trade wars, a weak property sector, and shifts in policy such as the “common prosperity” initiative. Many institutional investors now consider China nearly uninvestable. The emerging market strategy has shifted to using indices excluding China or being more selective, focusing on places like India and Mexico.
How About a Simple Total World Stock Index?
A simple global index covering both developed and emerging markets has delivered steady, if unspectacular, returns of just over 6% per annum over the last 10 years. Factoring in Rand depreciation, the annualized return comfortably reaches double digits.
Conclusion
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 18.30 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.
Carl-Peter Lehmann
Carl-Peter is a Director and Partner at Henceforward. He has spent a large portion of his 20+ year career specialising in offshore investing and working with global investors, including in various international jurisdictions. He is passionate about helping his clients demistify offshore investing and giving them a greater shot of achieving real financial freedom.
