Navigate the offshore investing undercurrent
Offshore Investing has become a buzz word, especially in the midst of the economic and political uncertainty that abounds. However, while investing offshore is a recommended and valuable exercise for investors to mitigate their risk, it is also crucial to understand the difference between investing offshore and investing in offshore assets.
The most commonly assumed explanation of investing offshore is the moving of one’s money out of South Africa) and investing in assets held in another country. This is a common investment practice around the world and normally done in order for investors to benefit from favourable tax rates in countries other than their country of residence. In recent years, this has become much more feasible for most of us, but there are still limits as to how much investors can take offshore and navigating the product choice may be daunting for many investors.
What many investors do not realise, is that they are able to invest in offshore assets and gain from the diversification benefits without taking their money offshore. In other markets, offshore assets are more frequently referred to as overseas, international or global assets. Investing in overseas assets can be done simply by investing in a Rand Feeder fund with a reputable local asset manager. When investing in a feeder fund, the product is purchased and priced in Rands and does not require a foreign exchange transaction by the investor. Feeder funds will typically hold a single position in an underlying fund which is domiciled offshore and normally buys overseas assets.
Most asset managers will have an online investment application option where one can find information on a variety of options and open an investment with exposure to overseas assets directly. Nedgroup Investments has a range of Feeder Funds across a spectrum of risk and investment profiles to suit investors individual goals.
Another way to gain exposure to overseas assets without actually taking money offshore is to invest in a South African domiciled fund that focuses on directly purchasing global assets. A number of multi-asset funds partially or fully use this investment strategy, for example the Nedgroup Investments Multi-Asset Range. The Worldwide Multi-asset Flexible subcategory of unit trusts liberates fund managers from restrictions and enables the investment of rand-denominated portfolios in any country, including South Africa, and in any type of asset (equities, bonds, listed property or cash).
Including overseas assets in an investment portfolio is a prudent diversification exercise. South African capital markets represent a small percentage of the investable assets in the world and they restrict access to a broad array of attractive investment opportunities elsewhere in the world. For the same reason that it is advisable to invest in more than just one company’s stock, investing in assets based both in South Africa and overseas (for example the US) reduces the risk of an entire investment portfolio being exposed to local risk factors.
South Africa is not alone with a focus on domestic assets and investors should not permanently avoid or fear local investments. In fact, a home bias for investments, whether enforced or preferred, is prevalent all around the world. The exposure to US assets for the average US investor, for example, is typically in excess of 80%.
Regardless of whether an investor is based in South Africa, the US, or any other country diversifying investments into other markets is advisable to improve the overall risk profile of one’s investments.