Is the offshore investing hype different this time around?

Though much has changed since the mid-1990s, the market risks may continue to be cyclical and the rand may remain volatile, says Old Mutual International

05 December 2023 - 09:27
By Sheldon Holdsworth
Old Mutual International recommends a diversified portfolio and looking at your overall assets before deciding what should be invested offshore.
Image: Supplied/Old Mutual International Old Mutual International recommends a diversified portfolio and looking at your overall assets before deciding what should be invested offshore.

Offshore investing trends in the mid-1990s differs hugely from today.

Fund choices open for South Africans extended to no more than five options, yet almost every application form received allocated the funds, whether on a recurring premium basis or as a lump sum, to asset swap or feeder funds.

Gradually, as the relaxation of exchange control limits began, investors had the option to use their newly introduced lifetime offshore allowance limits to invest directly offshore in hard currency and access assets around the world.

Investors, or their heirs, could redeem their investments anywhere in the world.

These investments could physically leave SA, via perfectly legal means, and would be held in jurisdictions generally within the Channel Islands.

The factor that attracted many investors to this option was protection against political risk, which was an important consideration at the time but not the only reason to bear in mind.

As such, the value of a well-diversified investment portfolio cannot be overstated, and the cyclical nature of both the markets and the currency also needs to be considered.

If not, when these cycles go against you, many investors make poor decisions driven by fear, when patience and resilience are required.

It is, however, always so easy to reflect on these issues in hindsight, forgetting the factors in play at that specific time — especially in terms of political uncertainty. And, while we are often reminded that past performance shouldn’t be an indicator of future growth, it is so tempting to invest in all the areas where money has been made most recently, as we often then feel like we are the only ones missing out on this opportunity.

Article author Sheldon Holdsworth is Old Mutual International's regional offshore specialist.
Image: SUPPLIED Article author Sheldon Holdsworth is Old Mutual International's regional offshore specialist.

While SA was previously excluded from accessing these global economies, markets around the world experienced amazing returns, since the early 1980s.

For so long South African investors were unable to participate in this bull run, so it’s no surprise they jumped in boots and all. The depreciation of the rand over the previous decade was yet another incentive..

For example, the Cape Town bid to host the 2004 Olympics was based on an exchange rate of 25/1, and investors expected a rand depreciation of at least 10% a year.

Looking back now, however, one could easily argue that the timing of the relaxation of exchange control was a perfect storm.

The 18-year bull run in offshore assets created an expensive market and the commodity super cycle, driven primarily by the demand for commodities from China, resulted in significant benefits for SA as a resource-based economy.

In line with this, the rand appreciated from just over R14/$ to just below R7 over the next decade.

This impact also saw the SA market rally, with returns of about 13% a year from the turn of the century up to 2013, while offshore markets ran flat, with the added impact of the sub-prime crisis of 2008.

Then offshore markets rallied hard again after the financial crisis of the proceeding 12 years and, with a drop in demand for commodities, the SA market and the rand were once again under pressure.

At this point you may feel more confused and uncertain than before you started reading this article, and leaving your money in the bank may seem like a pretty good idea.

Or simply investing in the perceivably low-risk property market — at least you can see the asset, and many investors have become very wealthy over the past 30 years or so. But though property is a good asset class to include in a diversified investment portfolio, liquidity remains an issue.

The answer to establishing financial independence and security in retirement lies in investing across a diversified portfolio of assets.

Once your needs and objectives have been assessed by an adviser, you can determine how much of your discretionary money can be invested offshore

Financial advice is key

When constructing a diversified portfolio, it is prudent to take the risks mentioned above into consideration.

It’s also important to consider your overall assets, and not just your discretionary funds when deciding what portion of funds should be invested offshore.

Once your needs and objectives have been assessed by an adviser, you can determine how much of your discretionary money can be invested offshore.

Though it is a different time, the risks associated with markets may continue to be cyclical and the rand may remain volatile. The big question is how high the political risk barometer is and what impact it will have on our markets and currency.

Scaremongering should not cloud your decisions and lead you to put all your discretionary money offshore. An appropriately constructed financial plan and a well-diversified portfolio will give you the best chance of it being different this time.

This article was sponsored by Old Mutual International.