Offshore investing sounds like a daunting experience to many investors. On top of what you need to understand about a local investment, there are many more aspects to offshore investing. In some of the more extreme cases you may even have to think of an offshore trust.
By James Klempster, director of Momentum Global Investment Management
When it comes to money and investing, we tend to let our emotions cloud our decisions. In the case of investing offshore, one of our prejudices is a so-called home equity bias.
A home equity bias is the tendency to invest the majority of our assets where we feel “safe”, in domestic assets. It’s easier to ignore the benefits of spreading our eggs across the different baskets of foreign markets. We forego the advantages of investing offshore to stick to the things we know.
But is investing offshore always daunting? We believe with a little extra knowledge and by simplifying your choices for you, it doesn’t have to be. Thus, if you have an investment need to invest offshore, here is why you should consider going abroad with your money, and how to do it.
Benefit from more opportunities
Diversification is a key principle in reducing investment risk. By investing in international markets, you gain access to countries with different currencies and economic cycles to ours, as well as asset classes and industries that are not available locally.
Reduce emerging market risk
As an emerging market South Africa often feels the pain of how whimsical international investors can be. They are more likely to invest in emerging markets around the world while the good news lasts, and to disinvest when investment sentiment sours. This rapid change in demand and supply for our shares and bonds brings about greater volatility in emerging markets such as ours.
Counter the effect of the weakening rand
Even though it doesn’t always hold, economic theory suggests that compared to our major trading partners, South Africa’s currency should depreciate in the long run. This is because our inflation rate is higher than the rates of most of our trading partners. In the short to medium term, the rand can depreciate significantly on the back of unpleasant financial markets or political news. The fact that we import lots of goods and services with a weak rand, adds to the inflation rate we experience. To offset the increased cost of living, you need an offshore investment that can grow (in rand terms) due to rand depreciation.
Hedge geographic and political risk
Governments everywhere do and don’t do things that citizens and investors agree with. Investment returns can invariably suffer when governments make unpopular decisions. In the same way, disasters such as earthquakes can cause havoc. These risks can be reduced through international diversification.
Plan ahead for being overseas
If you are considering living abroad for a while or permanently, or that your children may study there, it’s safer to have your money there already. The growth on your local investments may not be enough to make up for a depreciating rand. Rather maintain your offshore currency spending power by having offshore investments.
How to invest offshore
There are various ways to do offshore investments. You can invest rand into offshore funds denominated in rand, rand into funds denominated in foreign currency, or foreign currency into funds denominated in foreign currency. Any of these routes will do.
It you want to go for the third option, the truest type of offshore investment, you have to convert rand to foreign currency such as the US dollar, and use your offshore allowance. For the first two options, you won’t use your offshore allowance.
Government prescribes what this allowance can be, and South Africans older than 18 may convert a certain amount of rand to foreign currency every year[i].
This foreign currency can be invested through either of our investment platforms: the Momentum Wealth local platform (when using the Flexible Investment Option), or Momentum Wealth International (MWI) based in Guernsey