Offshore investing (or ‘overseas’ investing) is when you invest in assets that are outside South Africa. The investment is usually made in a currency other than Rands, in a country exposed to different geopolitical risks, and with different regulatory and tax laws.
But different is good! And it’s exactly what you need when you want to spread your eggs between different baskets; when you want to ‘diversify your assets’, in investment speak.
But first, it’s important to understand the pros and cons of investing offshore…
The main benefit of investing offshore is diversification. You reduce your exposure to South African-related risks: a long list that includes political and economic instability; corruption; power constraints; labour strikes; unrest and social inequality. By investing in a currency other than Rands, you can also hedge against the volatility of our currency.
Another plus is that overseas markets give you exposure to companies and brands that can’t be accessed easily in South Africa – a wider range of industries and asset classes, all of which increase your investable universe and your opportunities for returns.
Yup, there are downsides. While being exposed to different currencies can act as a hedge against the Rand, if those currencies weaken against the Rand, the value of your overseas investment will be reduced when you convert back to Rands… This could lead to losses if there are large currency fluctuations.
A classic example is when South Africans invest offshore at a time of panic and extreme Rand weakness (say US$1:R20). A few months later, the Rand recovers to US$1:R16. This is a -20% currency movement and the value of your Dollar investment will have dropped by 20% in Rand terms.
Offshore investing can also come at a higher cost, depending on how you do it. There are sometimes additional expenses like currency conversion fees, foreign brokerage fees and custodian charges.
And don’t forget about tax. Depending on how your offshore investment is structured, it might be subject to complex tax laws and reporting requirements. It’s a good idea to get professional tax advice to avoid unintended consequences.
So, what’s the answer?
The best way forward is to seek advice from a professional financial advisor with offshore experience – they’ll be able to suggest the best and most cost-effective ways for you to diversify your investments. You might invest in a Rand-based fund with offshore exposure, or you might convert Rands to foreign currency and invest in an entirely offshore fund. Other options might include investing in an exchange traded fund or an offshore index.
To avoid getting caught investing when the exchange rate is bad, the best thing to do is invest little bits monthly so that you average out the exchange rate you buy into.