Stick to your long-term offshore investment plan

By Trevor Garvin

Amid the tide of reports of doom and gloom for the local economy, supported recently by Moody’s official downgrade of South Africa to “junk bond” status, financial planners are faced with the dilemma of what to do with their clients’ long-term investments and savings.

One option that deserves attention, and could benefit investors handsomely, is to diversify their portfolios into global markets. Many South African investors are, however, hesitant to approach offshore investing and consider the process intimidating.

While there is a good case for diversifying offshore, it is crucial in times of heightened uncertainty, both domestically and abroad, to stick to the basic principles of investing and remember to keep a long-term view and investment time horizon.

The table below sets out the market returns across the key asset classes as at the end of March 2020. March was one of the most volatile months on record and no asset class was spared from capital losses and high levels of daily volatility.

It is clear to see that, measured in Rand terms, offshore investments provided a material downside buffer to one’s overall investments. This was largely due to Rand weakness against the USD over the month. Both global bonds and USD cash gave returns in Rands in the high twenties.

When investing offshore, stick to some of the key basic rules of investing.

1) Thorough wealth planning - Before making any decisions, take time out to do some thorough research. Be realistic about your current financial position, your risk profile and your long-term investment objectives. Try to match up the appropriate offshore funds that meet your requirements and do a fair comparison between them. Consulting with a financial advisor can be very helpful as they have had exposure to several funds and can guide your thinking.

2) Time in the market – Sound research will ensure that once you are invested you have peace of mind and can more easily withstand any short-term underperformance that the fund manager may experience. It is imperative to stay invested in your chosen funds for as long as possible and to ride out short periods of capital drawdowns or underperformance.
 
3) Choose a credible investment partner - Some indicators that investors should look at when choosing an investment management company are: the company’s access to industry expertise and information, their investment stewardship principles and whether they put clients first in terms of their decision making; commitment to maintaining a well-resourced research team and, importantly, transparency of communication to investors.

4) FSCA Fund Approval – Establish if the fund you are investing in has been “approved” by the South African Financial Services Board (FSB) for marketing and distribution within the country. The FSB has certain criteria that it looks at when assessing offshore domiciled funds – if the fund has been approved by the FSB it provides an added layer of comfort and protection for investors.

5) Diversification - One of the best ways to protect against large capital losses and reduce volatility is to ensure that you have a well-diversified portfolio across cash, bonds and equities. There are three main asset classes – cash (money market), bonds (government and corporate fixed income instruments) and equities (large, medium and small cap equities as well as developed versus emerging market equities). One can get exposure to these asset classes via South African domiciled funds as well as offshore domiciled funds or listed instruments.

6) Avoid making emotional decisions - In the current fluid market environment it is nearly impossible to forecast, with any degree of certainty, the short-term holds in terms of investment returns. Rather  do the correct research and wealth planning, but once you have made your investment decision try to stick with it for the long term. Regular fund switches and shifts in asset allocation that occur out of short-term panic generally lead to a loss of investment returns in the long run.

The bar chart above plots the average annual return in USD from the S&P 500 Index (a proxy for US equity markets) since it was launched. If you’d had  a buy and hold strategy, you would have achieved a return of 9.3% per annum on average. If you had tried to “time” the markets and missed just the 10 biggest positive day moves, that return would have fallen to 6.8%, the biggest 40 days your return falls all the way to 2.3% and 70 days you land up in negative territory. The best strategy is to hold your course and not panic in times of market stress.

7) Remember that valuation drives long-term return - When markets are erratic or in a downturn it is easy to forget that valuation drives investment returns over the long term. Investment managers look for pockets of value to drive consistent performance over time. Your entry price is one of the biggest drivers of future returns. It is often in times of the greatest discomfort or pessimism when you should actually be increasing your exposure to “risk” assets.

8) Don’t base your decision on currency alone - Investors in South Africa tend to be very sensitive when it comes to the Rand exchange rate on a specific day, but we urge you not to base your financial and investment decisions on currency fluctuations in isolation.

9) Seek advice - Investors should speak to their financial planners to ensure that they have a well-diversified portfolio with both domestic and offshore exposure. Investors can gain offshore exposure by investing in Rands via Rand-denominated feeder funds or by using their foreign allowance money to invest in foreign funds. There are nuances to which approach is best and the benefits of each so again seek professional guidance from a qualified advisor.

Whenever there are large movements in the South African Rand, controversial events on the political landscape or upheaval across equity and bond markets we, as money managers, generally face a consistent set of questions:
• Is the country going to collapse and should we be taking all our money offshore?
• Given that the Rand has weakened so much, is it too late to take money offshore?
• How much money should we take offshore for investors?

The table below shows the Rand movements relative to the USD, GBP and Euro as at 31 March 2020. It is clear to see that over the first quarter of 2020 we saw material Rand currency weakness. Much more than the long-term average. Be aware of this when making decisions on whether to re-allocate your investments across domestic and offshore markets. 
 

One can’t predict exactly what the future holds, but what we do know for certain is that investing in international markets remains an important diversification building block in all investors’ portfolios. The good news is that you as an investor are spoilt for choice in your search for investments uncorrelated to the local economy.

There are two broad ways to invest globally.

The purest form of investing offshore is physically moving your money out of South Africa by converting Rands into a foreign currency and then investing in the foreign currency. This can be as simple as holding cash in an offshore bank account or investing in funds domiciled outside of SA. Ireland and Luxembourg are the two most commonly used jurisdictions for offshore funds to be registered.

The South African Rand-denominated unit trust industry offers offshore exposure options for you to choose from, without needing tax clearance.

Global feeder funds directly “feed” your investment via asset swap capacity into a fund that is domiciled outside of South Africa. Unlike when you invest directly offshore and use your natural person foreign allowance via Rand denominated offshore unit trusts, you will be using the foreign allowance of the MANCO itself.

Available fund range

Nedgroup Investments has the full range of investment funds available to investors. These funds cover the full risk spectrum – from conservative funds all the way to global emerging market equity funds. In addition, we offer both foreign denominated funds domiciled in Ireland as well as several Rand denominated funds. Speak to your financial planner in assessing the best possible option that suits your needs.

The table below sets out the full range of offshore investment options across our two fund categories - Irish domiciled offshore funds and, SA registered Rand denominated feeder funds. All funds are open for new investments.