Citadel Chief Economist and Advisory Partner, Maarten Ackerman unpacks five key considerations for offshore investment strategies.
South African investors who are serious about long-term wealth creation need to pay special attention to their offshore allocation. To be successful, this goes beyond picking the next Nvidia or Amazon, but rather the adoption of a structured and holistic investment philosophy.
As a wealth management specialist, we have centred our investment approach around some core principles which would be applicable irrespective of where you invest. Our departure point is always that the future is uncertain, and you need to diversify. When you do diversify, you need to do so at a time when valuations make sense, and you need to ensure you have the right asset allocation.
The first key consideration for offshore investment is the investment instrument that you will be using. Is it a technology share in the United States (US)? Perhaps it is an exchange-traded fund (ETF), unit trust or structured product? Are you looking to bolster the income portion of your portfolio through global property or a combination of emerging market and developed market bonds?
If one considers the structure of the South African market, investors have a primary bourse with around 400 companies listed. The number of actual investment vehicles, whether exchange-traded funds or unit trust funds are multiples of these. This might sound significant, but when you consider that South Africa makes up less than 1% of global assets, you realise the diversity of the global investment universe.
While the last few years have been characterised by outperformance in US technology shares, we are increasingly seeing opportunities in markets like Europe, the United Kingdom and Japan.
This brings us to our second consideration which is understanding the objective of the investment. A key driver of offshore investment activity is protecting your wealth against rand depreciation, but we would argue that the currency is simply a tool in your investment toolbox. Instead, we believe that investors should view themselves as global citizens.
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If you are earning your salary in rand but buying your car, mobile phone, or television from overseas then you need to utilise your investment portfolio to preserve your hard currency buying power. Since all of these are priced in USD.
Your third consideration will be around governance and compliance which can be highlighted through two examples. The first is Russia which was part of the “BRICs” grouping – characterised by well-capitalised banks and valuable commodity assets –investors here have been frozen out and lost money due to sanctions applied by the Western economic powers in the form of the US and Europe.
Closer to home, South Africa’s greylisting has seen the cost of compliance rise as international regulators demand additional information from South Africans moving money offshore. This additional cost of compliance and administrative burden has discouraged many people from enhancing their offshore asset allocation, something which could negatively impact their long-term risk-adjusted returns.
Understanding the investment jurisdictions and compliance requirements should not be a reason not to invest offshore.
Our fourth consideration is around the platform that you will be utilising to make your investments offshore. There are two primary ways in which you can facilitate offshore investments. The first is the direct route where you move money offshore and make investments and the second is where you make use of an asset swap arrangement. While the direct route has become far more popular as exchange control regulations have eased, investors in companies or trusts may need specialist advice when making use of asset swap arrangements.
This leads us to the fifth consideration which is around advice and the associated fees. New platforms have made it easier for investors to go the direct or do-it-yourself route, but this should never discount the value of expert wealth management advice. Whether it is assisting with the compliance costs of the greylisting, more specific tax structuring advice, or providing you with an independent set of eyes and ears, a high-quality advisor can be an asset when deciding to go offshore.
Investors who are serious about long-term wealth creation will recognise that they cannot limit their investment universe to South Africa. By incorporating these key considerations, you can tackle an uncertain future from an informed perspective. Investors can also pair this informed perspective with a wealth management specialist who can assist them with their offshore needs, an example of this is Citadel, where the people and solutions are in place to guide you on your wealth journey.