Do not put all your eggs in one basket is an idiomatic phrase, meaning that one should not focus all his or her resources on one hope, possibility, or avenue of success. If you put all your eggs in one basket, you risk everything on a single opportunity which, like eggs breaking, could go wrong. “Dad, how many eggs are in the basket?” chuckled my daughter in one of our coffee chats.
We all face various challenges and risks during our investments and wealth accumulation journey. For example, there are political risks, currency risks, interest rate risks, longevity risks, diversification risks and many more. Offshore investing addresses two main risks; namely diversification as well as currency risks.
I regard diversification as the second wonder after compound interest. Diversification provides stability of returns over a long term. It provides opportunity to minimise the risk of capital loss due to an under-performing asset class. Offshore investing should be considered as and additional diversification mix.
The purpose of regulation 28 of the Pension Funds Act; is to protect investors in retirement funds from the effects of poorly diversified investment portfolios, over-exposure to higher-risk asset classes as well as complex financial instruments and portfolios. The regulation aims to ensure that the savings South Africans contribute towards their retirement; are invested in a prudent manner that not only protects the retirement fund member but are channeled in ways that achieve economic development and growth.
At the budget speech earlier this year, the finance minister announced the increase of the offshore asset limit to 45%. Considering that South Africa is now part of a global society; these limits provide opportunities for optimal diversification. Furthermore, the Johannesburg Stock Exchange (JSE) has become more global: Ownership of especially Industrial shares has increased dramatically since 2008. SA companies have diversified their revenue sources outside the borders of our country. Several of our major companies have primary listings in developed markets (examples include Anheuser-Busch Inbev, Richemont, British American Tobacco, BHP Billion,). This means that most retirement funds have offshore exposure by merely holding these shares in their portfolios.
As mentioned above, offshore investing may be considered as a way to hedge against currency risk. If you hold South African assets that are denominated in Rand, then when the rand depreciates, your assets are worth less (in the sense that they can buy less goods and services). Holding assets that are denominated in dollars, euro, or pounds can hedge against that.
As South Africans, we are disconcertingly accustomed to major changes to the value of the rand. However, the US dollar’s rampant performance in September left many other currencies quite shaken, including the British pound, whose performance was also rocked by some questionable fiscal announcements. Given the extent of the economic and financial headwinds, heightened in South Africa’s case by intense load-shedding, the ride is likely to remain quite unsettling for some time.
Since April, the South African rand has fallen victim to heightened levels of global risk aversion, broad-based US Dollar strength, and softer commodity prices. This year’s increase in local institutions’ prudential limits may aggravate rand weakness if global risk aversion persists.
While the South African investment environment is relatively limited, offshore investing has the added complexity of a choice of thousands of companies and funds to invest in. This is where intimate knowledge and expertise of the offshore investment space plays a crucial role. If an investor is risk-averse, lumping all their money into risky offshore equity markets is futile. An investor’s risk and needs analysis must be done by their financial advisers first and foremost to decide on the various asset classes to invest in abroad.
There is also the added complexity of geographical exposure to markets in the US, UK, EU, or emerging markets, among many others
Investors eager to explore their offshore options should consider more than just returns. In addition to potential returns, the various investment structures available also need to be considered, as well as tax implications and estate planning consequences. All of these factors can impact the ultimate success of an investment.
Publication : FPI Newsletter
Spokesperson : Sydney Sekese, CFP® professional and member of the Financial Planning Institute
Date : 10 October 2022