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The primary benefit of offshore investment is diversification, according to Andrew Duvenage, managing director at NFB Private Wealth Management.
He says it offers the opportunity to expand your portfolio to a wider selection of shares, countries, asset classes and currencies, rather than betting only on South Africa.
Investors should not just be looking to invest offshore during periods of rand volatility, it should be a part of their strategy, in his view.
He offers 3 reasons why SA investors should have offshore exposure in their portfolios:
Global growth opportunities
South Africa represents less than 1% of the global gross domestic product (GDP).
"With the rand taking a lot of blows in recent years, many investors are fixated on offshore investment as a risk mitigation strategy. But it’s also important to look at offshore investment as a way to tap into global growth opportunities and to grow your wealth in real terms," says Duvenage.
"It's no secret that our economy is caught in a low-growth trap. Investors should, therefore, be looking for exposure to other markets, where GDP growth is higher and where business and consumer confidence are more buoyant."
Preserve your global spending power
One of the implications of living in an era of globalisation is that erosion of your wealth in hard currency terms can limit your options and affect your lifestyle, says Duvenage.
For example, you may wish to move to another country. It's also important to hedge against rand weakness if you are a frequent overseas traveller, or if your lifestyle includes the frequent use of imported products and services.
Hedge against local inflation
Investing in hard currencies can be an effective way to hedge against the effects of inflation on your savings and wealth, according to Duvenage.
Options for offshore investment
Investing in a feeder fund:
A feeder fund is a unit trust that is priced in rand, based in South Africa and "feeds" into an offshore version of that fund.
These investments give you exposure to foreign investments – such as cash, bonds, property and equities or a combination of these instruments – in the denominated underlying currency.
Using your foreign investment allowance:
Taxpayers over the age of 18 can invest directly offshore via two allowances – the Single Discretionary Allowance (up to R1m a year) and the Foreign Discretionary Allowance (up to R10m a year, accompanied by a tax clearance certificate).
An asset swap:
Certain local financial institutions are granted permission to invest a percentage of their assets offshore. When they do not need their full allowance, they sometimes sell it on.
This is called an asset swap. While the money is physically offshore, it will have to be repatriated to South Africa upon redemption.
Investing in rand hedge shares or ETFs:
One way to get offshore exposure in addition to (or without using) your foreign investment allowances is to buy exchange-traded funds (ETFs) or rand hedge shares on the JSE, according to Duvenage.
Rand hedge shares are those that earn much of their revenue offshore, while there many ETFs that "track" the performance of global indexes like the S&P 500.
