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VIEWPOINT: Is offshore best?

Offshore equities are looking increasingly attractive: the MSCI World Index returned 39,7 per cent in rand terms during 2013. However, with the rand’s recent depreciation, emotions are once again running high, with fear and greed rampant and herd behaviour becoming evident. And to compound the excitement, it’s election time again.

At the start of 2014, markets sold off across the world on the back of softer economic news and the weakening of several emerging market currencies (including South Africa’s) following the Fed’s tapering decision. Nonetheless, many leading economic indicators reinforce the continued recovery of the global economy and this factor, coupled with continued rand volatility, suggests that for South Africans investing offshore remains attractive.

For local investors, currency risk, exchange controls and the challenge of selecting the right assets and markets make investing offshore a challenge.

So how can investors increase their offshore exposure?

Myles Waldeck CFP® suggests: “The easiest method is to invest in rand-denominated offshore funds. These allow investors to invest amounts by lump sum or debit order without having to use their personal offshore allowances or obtain regulatory approval. However, the performance of these funds is subject to rand volatility, and stagnant asset returns can be incorrectly perceived as under or outperforming local funds purely based on the rand’s performance. Alternatively, they can invest in foreign currency denominated offshore funds, which utilise one’s own offshore allowance and where the necessary approvals and clearances become necessary. Before making any final decision, first consider to what extent you may already have global investment exposure within your existing portfolio, through multi-manager strategies or balanced funds.”

Critically, the investment decision must be in the context of real-return expectations spelled out in your financial plan. Craig Kiggen CFP® and Financial Planner of the Year explains: “You must ensure that the foreign currency in which you invest meets your real-return requirements relative to the currency of the country where you spend the majority of your time.

“January 2014 the official inflation rate in the UK was 1,9 per cent vs SA’s 5,8 per cent. If you required a return of 3 per cent above inflation to fund your SA lifestyle, you need to achieve 8,8 per cent in the UK for a  6,9 per cent real return net of fees (ignoring rand volatility). The FTSE only returned 2,69 per cent in that period.”

Therefore, there are several additional issues to be considered when investing in offshore equities. Before one starts to consider the implications of market and currency risk, get professional advice and have a plan. It’s a lot tougher than a ‘home’ game. ❐


Author: Mike Lledo CA(SA)