Offshore investing has become a buzzword, especially amid the current economic and political uncertainty. However, while investing offshore is a recommended and valuable exercise for investors to mitigate their risk, it is also crucial to understand the difference between investing offshore and investing in offshore assets.
The usual definition of investing offshore is moving one’s money out of South Africa to invest in assets held in another country. This is a common practice around the world, as it allow investors to benefit from favourable tax rates in other countries. In recent years, this has become much more feasible for most of us, but there are still limits to how much investors can take offshore. Navigating the product choice may also be daunting.
What many investors do not realise is that they can invest in offshore assets and enjoy the benefits of diversification without taking their money offshore.
In other markets, offshore assets are more frequently referred to as overseas, international or global assets. Investing in such assets can be done simply by investing in a rand feeder fund with a reputable local asset manager. When investing in a feeder fund, the product is bought and priced in rand and does not require a foreign exchange transaction. Feeder funds will typically hold a single position in an underlying fund that is domiciled offshore and normally buys overseas assets.
Most asset managers will have an online investment application option where one can find information on a variety of options and open an investment with exposure to overseas assets directly. Nedgroup Investments has a range of feeder funds across a spectrum of risk and investment profiles to suit investors’ individual goals.
Another way to gain exposure to overseas assets without actually taking money offshore is to invest in a South Africa-domiciled fund that focuses on directly buying global assets. A number of multi-asset funds partially or fully use this investment strategy, such as the Nedgroup Investments Multi-Asset Range.
Including overseas assets in an investment portfolio is a prudent diversification exercise The worldwide multi-asset flexible subcategory of unit trusts liberates fund managers from restrictions and enables the investment of rand-denominated portfolios in any country, including South Africa, and in any type of asset (equities, bonds, listed property or cash).
Including overseas assets in an investment portfolio is a prudent diversification exercise. South African capital markets represent a small percentage of the investable assets in the world and they restrict access to a broad array of attractive investment opportunities elsewhere. For the same reason that it is advisable to invest in more than just one company’s stock, investing in assets based both in South Africa and overseas reduces the risk of an entire investment portfolio being exposed to local risk factors.
South Africa is not alone with a focus on domestic assets, and investors should not permanently avoid or fear local investments. In fact, a home bias for investments, whether enforced or preferred, is prevalent around the world. The exposure to US assets for the average US investor, for example, is typically in excess of 80%.
Regardless of whether an investor is based in South Africa, the US or any other country, diversifying investments into other markets is advisable to improve the overall risk profile of one’s investments.