A recent report found that South African High Net Worth Individuals (HNWIs) substantially increased the share of their assets allocated to equities from 23% in 2007 to 28% in 2017, with the majority of this growth in equity exposure having been through increased foreign equity allocations.
Although local political uncertainty likely played a role in the shift to offshore equity, lower costs and improved access to equity markets also contributed significantly. This is particularly apparent on the global front where exchange controls have been relaxed allowing investors to take as much as R11m per person per year offshore.
Overexposed to South Africa
Having been restricted from investing offshore in the past, many South African HNWIs have the vast majority of their wealth concentrated in South Africa. They live here, work here, and own businesses here – often in addition to holding local property portfolios and even local equity portfolios.
Given that South Africa represents less than 1% of the global opportunity set, it makes sense to look at the other 99%, which includes some of the best run businesses in the world.
Earning Potential, Practicality, Diversification
The report shows that while exposure to foreign cash, bonds and property has also grown, the vast majority of money being taken offshore by South African HNWIs has been allocated to foreign equity markets. This preference comes down to a matter of earning potential and practicality, for the most part. Foreign cash earns close to nothing in interest and the yields on foreign bonds aren’t much better. While offshore property may be a fair consideration, it is far simpler to invest in and manage a foreign equity portfolio than a foreign property portfolio.
It is also easier to achieve diversification through global equities. This is because one can invest in stocks across multiple countries, industries and currencies for the price of one property.
Other major advantages to global equities include liquidity and easy access to funds. Investors can access all, or a part of your investment within days, and at very low cost. Properties generally take months to sell, at higher cost, and one can’t simply access a small part of their value at any time.
When talking about perceived risk that is often associated with equities, much of this sensitivity has to do with the fact that equity prices are visible on a daily basis, making the volatility plain to see. You can’t see how the price of a property or a private business reacts to events as they unfold, creating the impression that these assets are somehow less risky.
But we would argue that a portfolio of high-quality, multibillion-dollar businesses spread across various countries, industries and currencies is fundamentally less risky than any individual property or private business – despite the short-term volatility.
Low-Cost, Simple Process
Another common misconception is that investing offshore is an expensive and complicated process. Opening and managing a direct global equity portfolio can be as easy and cost-effective as opening and managing a local portfolio, when done properly. With the right platform investors can log into their accounts and see their portfolios in real-time, draw statements, and request withdrawals.
Trading costs are generally much lower than for local accounts – well under 0.1% on a good platform. For those who haven’t already moved funds, taking money offshore is very easy – individuals can take up to R11m a year without much hassle.
Wider Opportunity Set, Strong Investment Process
When looking for a global portfolio manager, dealing with a specialist who can cover a very wide opportunity set is very important. Some of the best investments can be made in lesser known companies that are nevertheless very well-managed multibillion dollar businesses. Many investment managers are unable to cover the opportunity set widely enough and have significant biases towards the largest companies with household names listed in major markets like the UK, US and Switzerland, for example.
This barely scratches the surface of what is available to global investors and familiarity is a poor substitute for sound investment process. A good investment process should cover much more than just the big names.