Going offshore: hedging your investment bets
Offshore investing is an essential ingredient in any discerning investor’s overall portfolio. In tumultuous times, diversifying your portfolio allows you to hedge against risk – both domestic political and economic risk, and potential currency depreciation. There are different ways of accessing the global market – at Sanlam Private Wealth (SPW) we provide the full range of options, with a customised offshore solution to complement your individual investment strategy.
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Besides protecting against the not inconsiderable headwinds facing South Africa, international diversification provides an opportunity to gain exposure to growth across different markets as well as asset classes. Investing offshore may also allow you to benefit from opportunities not available locally, including certain high-quality assets.
Price remains crucial
A word of warning before you decide to ship out, however. In our experience, investors often attach too much value to the principle of reducing risk, and in the process all but ignore that most crucial of factors: price. There are two types of price you need to take cognisance of:
- The relative value of the assets you want to buy. In other words, the price of the assets in your home country compared to the price of those same assets in your new investment destination. You need to make doubly sure you’re not selling a cheap asset to buy an expensive one. If you are, you may not be reducing risk!
- The price of currency. Here you need to consider the price of the currency you’re selling (in our case, the rand) versus the price of the foreign currency you’re buying. We’ve seen far too many instances where investors have ignored this comparison and focused only on perceived reduced risk – but the timing has been disastrous. Why is this so important? One simple, very human, reason: emotion. When making decisions based on currency fluctuations, it’s a huge challenge not to let our emotions – especially (for many sceptical South Africans) fear – get in the way.
The bottom line is that you need to make sure that when you invest and diversify internationally, you’re not overpaying for the benefits associated with these investments.
Having said all this, what are the various options for increasing your global investment exposure? Remember, to invest offshore with SPW, you can use your offshore allowances (effectively around R11 million a year) to transfer your funds abroad, or you can make use of our asset swap capacity, or you can invest in rand-denominated options.
Multi-asset class fund
If you’re not restricted by the SA Reserve Bank or SA Revenue Service from holding direct offshore assets, and you don’t want to go the equity-only route, SPW has a multi-asset class offering: the SPW Global Balanced Fund. While asset allocation is done by our expert team in South Africa, the equities in this Dublin-based fund are selected by our SPW (UK) global equity team led by Pieter Fourie in London. The fixed interest component is run by our offshore fixed interest specialists headed up by Craig Veysey. The investment objective of the fund is to provide long-term capital growth.
Fixed income exposure
What if you’re interested in global fixed income as part of your broader offshore exposure? Actuaries would argue that based on historic evidence, international bonds are the best risk diversifier in a multi-asset class portfolio. At SPW we can provide access to the Sanlam Strategic Bond Fund – a fund with an excellent track record – also run by Craig in the UK. This fund aims to provide monthly income generation with the potential for capital growth. It invests in best-value corporate and government bond opportunities from a broad global bond universe.
Global equity offering
If it’s pure equity you’re after, SPW has a global equity offering, which can be accessed in three ways:
- If you have regulatory approval to do so, you can invest directly in the SPW Global High Quality Fund managed by Pieter and his team in London. The fund invests in quality blue-chip international companies that have diverse sources of revenue in terms of product line, geography and currency. It has built an enviable track record since its inception three years ago, and was recently named the winner in the Best Fund category of the City of London Wealth Management Awards.
- If you’re restricted from going the direct route, or if it’s simply not practical for you to do so, you can invest offshore via our recently launched rand-based SPW Global High Quality Feeder Fund, which provides convenient access to the SPW Global High Quality Fund.
- A third option is for our global equity team to put together a customised share portfolio for you, depending on your risk profile and investment objectives. You can transfer your funds onto our platform, and the team will construct a tailor-made, segregated portfolio of individual companies listed on international exchanges.
Offshore tracker funds
At SPW we’ll always recommend a long-term, active approach to investments. However, some of our clients may be interested in a more ‘passive’ offshore solution and require low-cost access to global markets in a single transaction. For this reason, we can help you to access offshore tracker funds on different indices – including the MSCI World, the MSCI Emerging Markets and the S&P 500.
What if you’re keen to diversify offshore, but want some level of capital protection during periods of market uncertainty and volatility – when downside risk is high? There are now several structured products in the market that provide a guaranteed pay-off while offering protection against loss – we can assist you with accessing certain of these products that meet our approval. Unlike traditional investments such as unit trusts and index trackers, these provide a level of principal protection against negative returns at maturity of the investment.
Rand hedge stocks
A final option for investors who can’t or don’t want to physically take funds out of South Africa is to invest in dual-listed or rand hedge companies on the JSE. For these clients, we can put together a customised portfolio consisting of high-quality companies that have a significant portion of their operations or income generated in foreign jurisdictions, such as British American Tobacco, Naspers and BHP Billiton. Remember that despite rand hedge stocks offering some protection against a depreciating rand, they don’t always protect investors and their share prices can be positively correlated with the rand.
Customised offshore solutions
In a nutshell, SPW has all the building blocks you’ll need to put together a stand-alone offshore solution or one that complements your South African investment portfolio. People invest offshore for different reasons, and every international investment strategy therefore starts with your own unique set of circumstances. Supported by our fiduciary and tax experts, your portfolio and wealth managers will work with you to design a customised offshore solution based on your personal financial circumstances, and your dreams and plans for the future.