The hype around investing offshore is back at the euphoric levels of the mid-nineties – but is it different this time?

By: Sheldon Holdsworth, Old Mutual International Regional Offshore Specialist

Sheldon Holdsworth

Offshore investing trends in the mid-1990s differed hugely from today. Fund choices open for South Africans extended to no more than five options, yet almost every application form received allocated the funds, whether on a recuring premium basis or as a lump sum, to asset swap/feeder funds*.

Gradually, as the relaxation of exchange control limits began, investors had the option to use their newly introduced lifetime offshore allowance limits to invest directly offshore, in hard currency (US dollar, British pound, euro or Swiss franc), and access assets around the world. Investors, or their heirs, could redeem their investments anywhere in the world.

These investments could physically leave South Africa, via perfectly legal means, and would be held in jurisdictions generally within the Channel Islands. The factor which attracted many investors to this option was protection against political risk, which was an important consideration when investing offshore but not the only reason to bear in mind. The value of a well-diversified investment portfolio cannot be overstated, and the fact which both the markets and the currency could be cyclical also need to be considered in planning when and where to invest offshore. If not, when these cycles go against you, many investors make poor decisions driven by fear, when patience and resilience are required.

It is, however always so easy to reflect on these issues in hindsight, forgetting the factors in play at that specific time – especially in terms of political uncertainty. And while we are often reminded that past performance shouldn’t be an indicator of future growth, it is so tempting to invest in all the areas where money has been made most recently, as we often then feel like we are the only ones missing out on this opportunity.

And while we as South Africans had previously been excluded from accessing these global economies, markets around the world had experienced amazing returns since the early eighties. Looking at these hard currency returns, and for so long having been unable to participate in this bull run, it is no surprise that South African investors jumped in boots and all. And just to add more incentive, the depreciation of the rand over that previous decade was yet another bonus when considered over and above the hard currency returns achieved. For example, the Cape Town Olympic bid to host the 2004 Olympics was based on an exchange rate of 25/1, and investors therefore expected a rand depreciation of at least 10% per annum going forward.

Looking back now, however, you, as the adviser, could easily argue that the timing of the relaxation of exchange control was a perfect storm. The eighteen-year bull run in offshore assets had created an expensive market, and the commodity super-cycle driven primarily by the incredible demand for commodities from China, resulted in significant benefits for South Africa as a resource-based economy. In line with this, we saw the rand appreciate from a level just over R14 to the US dollar to just below R7 over the following decade. This impact also saw the SA market rally with returns of around 13% per annum from the turn of the century up until 2013, while offshore markets ran flat over that time period, with the added impact of the subprime crisis of 2008. We then once again witnessed offshore markets rally hard post the financial crisis over the following 12 years, and with a drop in demand for commodities, the SA market and the rand were under pressure once again.

At this point you may feel more confused and uncertain than before you started reading this article, and leaving your clients’ money in the bank may seem like a pretty good idea. Or alternatively, simply investing in the perceivably low-risk property market – at least they can see the asset, and many investors have become very wealthy over the last thirty years plus. How many times at a braai have you heard someone bragging about buying a property and flipping it a year later, doubling their money. Although property is a good asset class to include in a diversified investment portfolio, liquidity remains an issue.

But fear not, as there are solutions to manage these daunting decisions, and while we would like it to be as simple as possible, and the fundamentals remain fairly aligned, they will inevitably differ from client to client. In many instances they will not simply be based on objective financial planning but could also include some very emotive issues. Nevertheless, the ultimate way to establish financial independence and security in retirement is to invest across a diversified portfolio of assets. Yes, that’s the boring route, and you, or your clients, will never be able to be the person around the braai with the legendary tale of making quick money, but you will be the people who will be at the braai every year, while the ‘big talkers’ may not.

Financial advice is key

I do believe that when constructing a diversified portfolio, it is prudent to take the risks mentioned above into consideration. It’s also important to consider your clients’ overall assets, and not just their discretionary funds, when deciding what portion of funds should be invested offshore. Once you have assessed your clients’ needs and objectives, you can determine how much of your clients’ discretionary money can be invested offshore.

To answer the question on it being different this time, the risks associated with markets may continue to be cyclical and the rand may remain volatile. However, the big question is how high the political risk barometer is, and what impact it will have on our markets and currency going forward. It would be so easy to list these issues, but when putting your clients’ financial plans together, your decisions should not be so affected by scaremongering that you end up focusing only on one option, such as putting all your clients’ discretionary money offshore. By providing your clients with an appropriately constructed financial plan, and a well-diversified portfolio, you give your clients the best chance of it being different this time.

*Asset Swaps

Asset swaps are when a company uses its offshore investment allocation on behalf of clients to invest funds across a much broader range of assets around the world. These funds are ultimately only redeemable in South African rand and cannot be paid out abroad.

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