Given recent events and the uncertainty around the world, queries about offshore investing are at an all-time high. Although COVID-19 certainly has a role to play, questions and discussions around investing offshore are always extremely topical amongst South Africans. This topic evokes emotion and brings up many questions, which if answered correctly, will enable you to make sound financial decisions in keeping with your long-term financial plan.
Why Should I invest offshore? Well, as South Africans, having exposure to offshore assets is essential for the following reasons: it provides protection against inherent risks in South Africa and the depreciation of the Rand; it helps to diversify investments, and it allows access to a greater range of opportunities to invest in.
There are two ways in which you can invest offshore. The first is taking a direct route, which means that you physically buy offshore currency, for example, US Dollars. Once the money is in offshore currency, you can invest those US Dollars in various offshore investments.
The second is through asset swops or feeder funds. By investing via asset swops or feeder funds, your money never has to change from Rands to an offshore currency. It is the chosen investments of underlying funds that you choose that gives you the exposure to offshore assets.
Your Financial Plan
The big question is, does investing offshore make sense in terms of your Financial Plan? Direct versus asset swop offshore investing often has a different place in investors’ portfolios, and we often forget that many of us already have offshore exposure.
At Chartered, we separate clients investments into Retirement Assets and Surplus Assets.
With clients Retirement Assets, we aim to have the right balance between local and offshore exposure. This is based on expected future growth and the need to beat inflation in South Africa. This would be done via asset swops, because this money is needed to fund future expenses, and therefore needs to be flexible and liquid. Often bringing money back from overseas is costly and impractical.
With Surplus Assets, we tend to invest this money directly offshore. This allows us to buy foreign currency which will be held offshore and doesn’t need to come back to Rands. This route of investing is often seen as a kind of “insurance policy” for South Africans. In some circumstances, depending on the amount, you may need to apply for clearance.
Investing directly offshore is generally warranted with larger amounts given currency fees and the costs of investing offshore. Making use of asset swops can be a great opportunity to gain offshore exposure with smaller amounts.
Is now a good time to invest offshore? It is a gamble to try and time currency because the Rand is volatile. We forget that the Rand went to more than R16 to the Dollar in 2016.
At the time, this seemed impossible. In 2020 we have gone from R14 to over R19 and all the way back to around R16.50 in a matter of a few weeks. At the time of writing, the Rand is back up to R17.20.
If we stay true to the long-term nature mentioned for Surplus Assets or Assets that are not needed over 10+ years, then what we pay for our US Dollars is less important.
Global markets are still trying to make sense of the virus, the impact on economies and the effect of all the stimulus packages seen around the globe.
With such uncertainty, both globally and locally, any investing should be done with extreme caution and in line with your Financial Plan. The decision should not be an emotional one. Now more than ever, professional advice is crucial to making the right decision for your long-term wealth.
For a more in-depth discussion on this topic, listen to our podcast.