Time to rethink the standard offshore allocation models

Wealthy South Africans have more than 83% of their wealth concentrated locally and many are missing the benefits of being true global investors. South Africa represents less than 1% of the global investment opportunity set, has significant political and currency risks and is subject to capital controls. Most of the nation’s high-net-worth individuals (HNWIs) are not global investors, and aren’t enjoying the options and flexibility they should be aspiring to.

There is a very real need to rethink the standard offshore asset allocation models for the emerging market context, which is very different from the developed world. When your home country represents less than 1% of world economic activity and is subject to capital controls, you can’t divide the world into local vs. offshore and place the two groups on an equal footing. Too many investors and advisors still cut and paste models that were originally intended for the developed market context.

Live here, but be a global investor

To be truly wealthy in a financial sense you need to be a global investor – which we define as someone whose lifestyle is not overexposed to the political risks of any one country. Global investors can live anywhere in the world, South Africa included, move anywhere at any time, and send their children to study in the country of their choosing. A global investor has options and flexibility.

Essentially, it comes down to two requirements: You need a globally diversified portfolio of liquid assets and you need unrestricted access to funds from anywhere in the world.

Where you live and where you invest needn’t be the same place. A global portfolio is usually the best funding model irrespective of your choice of residence. While there may be many lifestyle perks to living in an emerging market country, doing so is far less stressful without being fully invested there too.

Have unrestricted access to your funds

While many advisers and investors are starting to realise the need for global diversification, most are still unaware of the importance of unrestricted access to their funds from anywhere in the world.

While a Rand-based offshore investment (a feeder fund or a local unit trust that invests offshore, for example) might satisfy the need for global diversification, the proceeds of such an investment are not accessible from elsewhere in the world.

There are two major problems with an indirect offshore portfolio based solely in Rands. First, should investors want to access these funds globally, they would need to divest, apply for exchange control clearance, and then move the funds offshore. You might not be able to move your entire Rand-based investment at once because of exchange controls, particularly if you build a large investment over time. Second, exchange control regulations might be different in future. While the window to move funds offshore might be fairly open at the moment, it is possible that this window could close should unforeseen political risks arise in future. Under this scenario, however unlikely one might perceive it to be, the exact time that you most need access to your funds offshore will be the worst time to try and make it happen. There is simply no upside to bearing this risk.

Investing directly offshore may not be as complicated or expensive as you may think. Investors might already own uninvested foreign currency or they can take Rands offshore through exchange controls. At the moment, individuals can take R1m per annum without the need for tax clearance, and an additional R10m per annum on application. With the right partner, this is a cheap and simple process.

Measure your returns in hard currency

We should also question the conventional wisdom of measuring investment returns in local currency, specifically for investors living in emerging economies with volatile exchange rates. Many South African investors have a mindset of measuring their returns in Rands – they assume Rand strength is their risk when investing offshore, and that Rand weakness is good for their offshore investments. As a result, they only see offshore investing as an attractive option if the Rand falls, and as a bad decision if it strengthens.

They see themselves as South Africans investing outwards. A global investor living in South Africa has the opposite mindset – we view ourselves as global citizens investing inwards, so we measure our returns in hard currency. Instead of viewing offshore investment as a success or failure based on what the Rand does, we see South Africa as one of many investment destinations, and while we have investments here we want South Africa to do well and the Rand to trade fairly.

Consider that Apple, at $1 trillion market capitalization, is roughly the same size as the entire JSE. We wouldn’t consider the rest of our global portfolio a success or failure based on what Apple does. We’d sooner assess whether Apple was a success or failure based on how the rest of our global portfolio performed. We should apply the same logic to our South African assets.

While South Africa may be a wonderful place to live, study and invest, no amount of optimism offers a logical reason for any wealthy individual to be over-exposed to the country. The same logic applies to other countries, particularly emerging markets where political and currency risks are more significant.