By: Maarten Ackerman
South African investors who are serious about long-term wealth creation need to pay special attention to their offshore allocation. To be successful, this goes beyond picking the next Nvidia or Amazon, but rather, it entails the adoption of a structured and holistic investment philosophy.
The first key consideration for offshore investment is the investment instrument you would be using. Is it a technology share in the US? Perhaps an exchange-traded fund (ETF), unit trust or structured product? Are you looking to bolster the income portion of your portfolio through global property or a combination of emerging market and developed market bonds?
If one considers the structure of the South African market, investors have a primary bourse with around 400 companies listed. The number of investment vehicles, whether exchange-traded funds or unit trust funds, are multiples of these. This might sound significant, but when you consider that South Africa makes up less than 1% of global assets, you realise the diversity of the global investment universe.
While the past few years have been characterised by outperformance in US technology shares, we are increasingly seeing opportunities in markets like Europe, the UK and Japan.
This brings us to our second consideration: understanding the objective of the investment. A key driver of offshore investment activity is protecting your wealth against rand depreciation. We would argue that the currency is simply a tool in your investment toolbox. We believe that investors should view themselves as global citizens.
If you are earning your salary in rand but buying your car, cellphone or television from overseas, then you need to use your investment portfolio to preserve your hard currency buying power. All these are priced in US dollars.
Your third consideration is around governance and compliance. This can be highlighted through two examples. The first is Russia which was part of the “BRICS” grouping, characterised by well-capitalised banks and valuable commodity assets. investors here have been frozen out and lost money due to sanctions applied by the Western economic powers in the form of the US and Europe.
Closer to home, South Africa’s greylisting has seen the cost of compliance rise as international regulators demand additional information from South Africans moving money offshore. The additional cost of compliance and administrative burden has discouraged many people from enhancing their offshore asset allocation, something which could negatively impact their long-term risk-adjusted returns.
Understanding the investment jurisdictions and compliance requirements should not be a reason not to invest offshore.
The fourth consideration is around the platform you would be using to make your investments offshore. There are two primary ways in which you could facilitate offshore investments. The first is the direct route where you move money offshore and make investments and the second is where you make use of an asset swop arrangement. While the direct route has become far more popular as exchange control regulations have eased, investors in companies or trusts may need specialist advice when making use of asset swop arrangements.
This leads us to the fifth consideration which is around advice and the associated fees. New platforms have made it easier for investors to go the direct or do-it-yourself route, but this should never discount the value of expert wealth management advice. Whether it is assisting with the compliance costs of the greylisting, more specific tax structuring advice or providing you with an independent set of eyes and ears, a high-quality adviser could be an asset when deciding to go offshore.
Investors who are serious about long-term wealth creation will recognise that they cannot limit their investment universe to South Africa. By incorporating the key considerations, you could tackle an uncertain future from an informed perspective. Investors could also pair this informed perspective with a wealth management specialist who could assist them with their offshore needs.
* Ackerman is the chief economist and advisory partner at Citadel.
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