By Nic Riemer.
Gaining offshore exposure: The why and how!
In the world of investing, diversification is often the key fundamental principle for mitigating risk and maximising returns. A portfolio can never be effectively diversified if all investments lie in the same geographic location. For South African investors, incorporating an element of offshore assets is key when looking to effectively diversify. By allocating assets located outside of South Africa, investors can access a myriad of benefits that can enhance their overall financial standing. Let's delve into the why's and how's of offshore investing for South African investors:
Why invest offshore?
Global diversification: One of the most significant advantages of offshore investing is the ability to diversify geographically. By spreading investments across different countries and regions, investors can reduce their exposure to risks associated with local economic conditions, political instability, or currency fluctuations. The JSE currently makes up less than 1% of total global market capitalisation.
Access to global markets and opportunities: Investing offshore provides access to a broader universe of investment opportunities that may not be available domestically. South African investors can tap into thriving industries, emerging markets, and innovative companies around the world. This access allows investors to capitalise on growth prospects and potentially higher returns in sectors or regions with strong economic fundamentals. The US tech rally at the beginning of 2024 is a prime example of why global exposure can boost returns.
Currency diversification and hedging: Offshore investing allows South African investors to diversify their currency exposure, which can serve as a hedge against depreciation or volatility in the local currency, such as the rand. Holding assets denominated in stable or appreciating currencies, such as the US dollar, euro, or Swiss franc, can help preserve the value of investments and provide a buffer against currency risk. The rand weakening can be a positive to those investors holding international currency.
Portfolio optimisation and performance enhancement: Including offshore investments in a portfolio can improve its risk-adjusted returns and overall performance. Research has shown that portfolios with international exposure tend to exhibit lower volatility and higher risk-adjusted returns over the long term. By optimising portfolios with a mix of domestic and offshore assets, South African investors can potentially enhance their investment outcomes and achieve their financial goals more effectively.
Access to specialised expertise and investment vehicles: Offshore markets often provide access to specialised investment expertise, products, and vehicles that may not be available domestically. For example, AI, solar, and semiconductor exposure can be gained through offshore investment platforms or funds managed by experienced professionals.
How to gain offshore exposure?
As an investor there are different options to consider when looking to gain exposure to international markets:
1) Buy shares directly through a global stockbroking account: Access to international markets can be obtained through the opening of a global or international stock broking account.
2) Unit Trusts: Unit trusts can give you access to offshore assets through a balanced fund tracking a sector index, or a fund with direct offshore company investments. Unit trusts pool investors' money together and offshore assets are then acquired and managed by a professional fund manager with a specific mandate. money
3) Exchange-Traded Fund (ETF): A pooling of funds vehicle but differs to a unit trust as an ETF can be bought and sold directly on stock exchanges. Offshore or international ETF's can either be acquired internationally and include the Vanguard International Technology ETF, or locally like the Stanlib S&P 500 Info Tech ETF, which tracks the S&P 500 technology index.
4) Exchange-Traded Note (ETN): An ETN allows investors to gain exposure to international shares without physically owning them. ETN's can be purchased locally and allow investors to choose exposure with or without currency risk. FNB has introduced locally listed ETNs that allow investors to gain exposure to individual international companies like Microsoft and Meta. As the instruments are local, there will be no impact on your foreign investment allowance.
What are foreign investment allowances?
From a regulatory perspective, South Africans have broad access to the international markets but there are certain limits thereto. South African resident individuals, 18 years and older, looking to invest offshore may use all or part of the following annual allowances:
Investors gaining access to international markets through a local unit trust, local ETF or FNB ETN will not utilise any of their offshore allowance in doing so.
Investing offshore presents compelling benefits and opportunities for South African investors seeking to diversify their portfolios, mitigate risk, and optimise their investment outcomes. Investing offshore means access to a broader range of markets, sectors, and asset classes, thereby enhancing a portfolios resilience and prosperity in an increasingly interconnected global economy. Obtaining offshore exposure has never been easier, with a range of options available to South African investors.
