Since the dawn of democracy in South Africa (SA), most financial advisors have been encouraging local investors to broaden their investment horizons by diversifying across geographies and asset classes through externalising a good portion of their wealth. The rationale being that the SA economy represents less than 0.50% of the global economy and that many other opportunities exist out there. So, by not investing offshore, local investors are missing out on a significant number of investment opportunities and on some of the best investments available globally. In addition, by limiting your investment exposure to SA you are essentially placing all your risk in only one place instead of diversifying. Still, many investors are unsure as to how much of their wealth should be invested outside SA and how to go about the process. In this note, we aim to educate those investors.
For just over a century leading up to 2016, the SA stock market was the best-performing stock market in the world, delivering real returns of 7.2% p.a. over the period. It would have therefore made sense for investors to have most of their wealth skewed inward to the SA market, with only a small portion invested abroad. Up to 2016, our observations were that most financial advisors counselled their clients to have around 30% invested offshore and 70% locally – in line with regulation 28 of the Pension Fund Act.
However, in 2020 the situation looks very different. For the past decade, the global stock market as measured by the MSCI World Index has delivered an annualised rand return of 11.5% p.a., while the JSE has given far less – a rand return of 5.3% p.a. One could argue that most stocks on the JSE look relatively cheap vs their global peers and that the SA stock market offers good value. Unfortunately, however this upside potential for the local stock market seems to be very much hamstrung by a dismal economic outlook for the country and extremely low business confidence. While this situation persists, we believe it would be best to diversify a significant portion of your wealth away from the JSE and to rather have exposure to “risky assets” (like SA equities) in other markets, where economic policy is less cloudy.
Furthermore, there is a very real risk of losing the value of your wealth in real terms (inflation adjusted), as SA slides deeper into a debt spiral with state owned enterprises (SOEs) such as Eskom leading the charge. Unfortunately, debt can be very inflationary over time if not employed to solve problems. If it is taken on and used to simply service debt further or to wastefully spend on retaining political power, in the absence of economic growth, the side effect will ultimately be a weaker rand, making the argument for offshore investing as a hedge against rand depreciation even more compelling.
Therefore, we believe that the appropriate amount of money to invest offshore is as follows:
- For pre-retirement funds (RAs), pension-, provident- and preservation funds, 30% offshore exposure (the maximum permissible in terms of Regulation 28) via an asset swap is recommended.
- For living annuities and other assets where income is drawn regularly, we propose leaving 5 years’ worth of income invested locally in cash/bonds to reduce the short-term effects of currency volatility and the balance to be sent offshore via an asset swap (if permissible by your respective insurer).
- An emergency fund of sorts should be kept in SA cash/bonds to meet short-term unexpected needs.
- A significant portion of other long-term growth investments should be invested directly offshore (i.e. by using your annual single discretionary allowance and foreign exchange allowances [totaling up to R11mn per taxpayer p.a.]).
Investors can calculate the amounts that should be invested offshore by using Anchor’s offshore calculator.
We highlight that the above is only a guideline for investors and should always be considered as part of an overall investment plan which is discussed with your financial advisor.
