Offshore investing 101 – how much should you invest?

A key element in a balanced financial portfolio, offshore investing has significant advantages. We explore how to invest offshore and what it takes to secure great portfolio performance.

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Eggs, baskets, and benefits

The Standard Bank website points out two advantages to investing offshore – capitalising on what’s happening outside your own country, and achieving diversification that will provide a more solid return (that is, not putting all your eggs in one basket).

According to Kyle Wales, global portfolio manager at Flagship Asset Management, there are two ways to go about this.

“The first is to buy South African-registered unit trusts that invest in global assets, while the second involves expatriating funds using your foreign capital allowance (R10 million per annum) or annual discretionary allowance (R1 million per annum), and investing directly in offshore global assets.”

Traci Porter, financial advisor at Efficient Wealth, says that although South Africans can take R10 million offshore each year, “any amount over R1 million requires a tax clearance certificate from SARS.”

What percentage is best?

Wales cautions that our local economy makes up less than 1% of global gross domestic product (GDP) – the financial value of goods and services – and the Johannesburg Stock Exchange (JSE) has recently suffered a wave of delistings.

“South Africans are already exposed to the local market as they live and work here, and because Regulation 28 (of the Pension Funds Act) requires a substantial portion of their retirement savings to be invested domestically,” he points out. “To achieve optimal diversification, ideally more than 20% should be invested globally.”

Farrell Mitchell, wealth manager and director at Capta Wealth, adds that although a portfolio of liquid assets is easily achievable offshore, exchange rate movements could affect the rand value of those funds. This may leave an investor short of emergency funds.

“If you’re investing for the longer term, look at moving anything from 20-50% of your portfolio offshore. But always conduct a full financial analysis before you go ahead,” he cautions.

The threat of inflation

The effects of Russia’s war on Ukraine are being felt far beyond those countries, says Wales.

“Russia and Ukraine are important producers of a wide range of commodities, and attempts to exclude them from global commodity markets are driving up prices,” he says. “As a result, inflation is reaching levels last seen in the 1970s. This is bad for the inflation-adjusted disposable incomes of consumers, and may have a negative effect on global economic growth as central banks counter this by increasing interest rates.”

The real risk is a “wage-price” spiral, he adds. "This sees workers seeking higher pay to compensate for astronomical inflation, which employers then seek to pass on to consumers through higher prices. It is tricky to bring inflation under control when this happens,” he points out.   

Mitchell agrees, noting that the war has had major effects on global markets – not only share markets, but commodity markets such as oil and wheat, debt markets, and exchange-rate movement.

“It is certainly not just noise and will have an impact on global trade, inflation, and many other aspects of daily life,” he says.

South Africa is an emerging market and, like Russia, is one of the BRICS nations (the others are Brazil, India and China). It will therefore be perceived as higher risk. “This will have an effect on the value of the rand versus other currencies,” Mitchell says.

Porter adds that it is important to remember that you can have too much global exposure. If you would like to invest offshore without currency conversion, tax clearance, and minimum investment worries, feeder funds are a good option.

“These allow you to invest the majority of your funds in foreign currency on a unit trust platform, using the management company’s offshore allowance. Always remember that the advice of a reputable financial advisor cannot be overestimated.”

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