Should you invest offshore?
Jo-Anne Bailey, sales director and country manager for Africa at Franklin Templeton Investments, explores the growing trend in South Africa of investors turning to offshore investments.
South African financial markets have provided local investors with strong returns over several years, often with a lesser degree of volatility than in offshore markets, both developed and emerging. However, we are now seeing a growing realisation among South African investors of the benefits of investing offshore, prompting greater interest in offshore opportunities.
Major reasons for investors being increasingly attracted to offshore markets include the need for greater diversification away from the relatively small South African market, exposure to a much larger investment universe i.e. a wider selection of asset classes and sectors, the potential to benefit from attractive valuations and faster growth, and access to state-of-the-art research provided by global investment teams.
Recognising the benefits
It goes without saying that there is a much broader range of investment opportunities available globally than in a local market, and investing offshore can provide exposure to certain asset classes, sectors and companies which are not available to locally-focused investors, e.g. stocks such as Nestlé and BMW.
In addition, there is a growing perception among South African investors that there is better value offshore than locally, especially after several years of strong performance in the domestic market. Asset valuations, particularly in equities, are seen as more attractive in the US and parts of Europe, Asia and South America, than in South Africa.
While China is still seen as one of the world’s major growth engines, considerable investment focus is now being placed on India and parts of South America as the next major growth stories. Other emerging and frontier markets around the world also continue to enjoy rapid growth, notably in regions such as the Middle East, Africa and South East Asia.
Some investors may not feel comfortable with offshore investment because they lack experience with a particular asset class or are not familiar with international investments. As a result, investors may be overweight in asset classes with which they are most familiar, leading to a less diversified portfolio. Investors can feel they know the companies in their home country best, and because of this level of familiarity, some investors tend to invest primarily in domestic funds and/or securities.
Although South African institutions and individuals are increasingly diversifying their assets through investing offshore, there is still a degree of hesitancy due to historically strong performance in local financial markets, the need to match local liabilities with local assets, and bouts of rand recovery after sharp weakening of the currency. Many private investors have painful memories of investing offshore when the rand slumped to an all-time low of R13.85 to the US dollar at the end of 2001, only to recover strongly back to around R6 to the US dollar over the next few years. The rand’s recent weakness can be traced back to September 2011 when it was at R6.80/USD. It is currently in a band of between R9.00-R10.00 against the USD.
While many institutions, including pension funds, have been slow in fully utilising their 25% offshore asset allocations allowed by the South African Reserve Bank, they have recently increased their exposure as they recognise the need to spread their investment risk and reduce their exposure to one market. They are also allowed to invest an additional 5% in African assets outside of South Africa, which has led to the establishment of several Africa-focused funds in South Africa.
Asset allocation and diversification
An important factor for investors to consider is the sovereign and political risk that exists if one is invested too heavily in one country. It is essential for investors to maintain a well-diversified portfolio, which is in line with their overall investment objectives, risk appetite and investment horizon.
Tactical asset allocation is also important to ascertain where value is coming from and where potential investment opportunities exist. Investing offshore must always be based on careful consideration of the investor’s circumstances before a decision can be made on how much and where to invest.
Private investors in South Africa have a generous offshore asset entitlement with each individual taxpayer able to invest up to R5 million offshore annually, R4 million of which requires tax clearance. These investment allowances are being used more and more by high net worth individuals to diversify their investment portfolios.
The importance of a long-term view
Investors should be aware of investment timelines and retail investors should discuss their investment horizons with their financial advisers in order to have the best chance of achieving their goals. It’s important to hold a long-term view to navigate periods of market volatility and maintain the discipline to be invested in a bear market to take advantage of market dips.
What the markets have taught us in the last four years is that we cannot afford to have all our investments in a single asset class and/or region. Investors should have exposure to a globally diversified portfolio backed by strong and credible fund managers. South African investors are increasingly looking to offshore investment in order to achieve a well-diversified portfolio and we believe this trend will continue to grow.