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Adriaan Pask | Navigating offshore investments and crafting your strategy

Adriaan Pask | Navigating offshore investments and crafting your strategy
28-11-23 / Adriaan Pask

Adriaan Pask | Navigating offshore investments and crafting your strategy

“The list of important considerations when investing offshore doesn’t stop at what is most efficient from a risk-reward perspective. The decision is far more complex than that.” 

Investing abroad is not only about looking at different asset classes and securities beyond your home turf or gaining exposure to a wider universe of opportunities. Those who have a poor view of South Africa's prospects will be inclined to take a good portion of their wealth offshore, but how much you invest offshore is a complex question with many moving parts. For example, do you intend on retiring abroad or do you need income offshore for your children's education or for annual holidays?

In recent years we have noted a lot of foreign direct investment leaving South Africa. That is in part due to the current global risk-off trade. From a local investor’s perspective, unit trust flows have recently also predominantly moved into more conservative asset classes like cash deposits and money market funds. This follows several years of large local flows into offshore investment options.

This reflects the concerns on South African investors' minds. They obviously see what's happening in the country and have adopted a more cautious approach, investing either in more conservative asset classes or taking money abroad.

While there are several factors to consider when investing offshore, our experience has shown that investors do not always consider key elements such as taxation and estate planning. In the fixed-income space investments are often taxed at marginal income tax rates, as opposed to capital gain rates. However, estate planning becomes more complicated when you start investing a portion of your assets abroad.

Investors have to keep in mind what's going to happen with their asset base on death, as there can be significant tax implications for offshore investments. As an example, the US and the UK tax individuals who invest within their borders from abroad, and often those taxes amount to 40% of your estate invested there. So the offshore investment return prospects might be better in nominal terms, but on an after-tax basis you might actually be worse off.

The first step to avoid surprises such as these is to seek advice to help you avoid making decisions based on emotions.

This is certainly what we are seeing in the current environment where people are concerned about the future of South Africa and making investment decisions based on fear at a time when the US dollar is strong, the rand is weak and US markets are incredibly concentrated, expensive and with potential downside for asset values.

Broadly there are three types of South African offshore investors. Firstly, there is the do-it-yourself investors who makes investment decisions without the help of an advisor. These investors are purely basing their decisions on what they read and how they feel. The reality is that the investment outcomes for this type of investor can be, and often is, sub-optimum.  A significantly better point of departure is using a multi-asset fund, like a balanced fund, where managers have discretion in terms of how much they want to invest offshore, locally, and how they assess the relative risks versus the opportunities. Secondly there are asset managers or someone who is thinking about risk-adjusted and after-tax returns. Thirdly there are wealth managers or financial advisers, who consider a client’s portfolio holistically and use investments to reach a specified goal.

You'll often hear professional managers say that, while they recognise that there are risks in South Africa, these risks have excessively been priced in and that there are opportunities locally. Asset managers also think carefully about portfolio construction, for example what the optimal asset class blend is.

This is a big departure from what the do-it-yourself investors do, given that they're looking only at the risk side of the equation.

It is also important to remember that there is no way that a fund manager, with thousands of clients, can be aware of the needs of specific investors. They are simply not aware of your local liabilities, your tax position and your current and future needs. That is ultimately the role of a wealth manager. They take into consideration estate taxes and what your needs are over the short, medium and long-term.

Against this backdrop multi-asset funds currently provide a very good alternative to offshore investing, for two reasons. On the one hand you've got a large spectrum of assets actually offering reasonable valuations.

This is not to say that there are no offshore opportunities now. These opportunities might however not necessarily be in the S&P 500, given how tech concentrated the index is, they may sit lower down on the index or reside in Europe or Asia.

Allowing a fund manager flexibility, where they can have exposure to a wide range of asset classes, is a good idea at the moment, given the opportunity set. These managers can navigate the prevailing circumstances more appropriately, because typically do-it-yourself investors only ask the question of ‘how much offshore’ at the time that they make the investment, without considering all the implications.

The reality is that with all the uncertainty and turbulence globally and locally, obtaining financial advice has never been more important.

*Adriaan Pask is CIO at PSG Wealth.

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