If you’ve been toying with the idea of investing abroad, it’s natural to have concerns regarding the exchange rate, market cycle and the risk factors. Here, FNB Wealth & Investments Chief Investment Officer, Renzi Thirumalai, sheds some light.
In an era where financial landscapes transcend national boundaries, investors are increasingly setting sail for offshore opportunities to harness the vast potential of global markets. Renzi notes that there are two main reasons why people invest offshore. “To diversify local investments via access to a wider universe of assets. And to match an offshore liability, e.g. sending a child to an overseas university or perhaps retiring offshore.”
Glamour: What are the pros and cons of investing offshore?
Renzi: Benefits...
South Africa accounts for 0.5% of the world’s GDP and around 0.4% of the world’s market capitalisation, so diversifying beyond its borders seems a sensible approach.
Access to foreign markets widens the available opportunity set, allowing for the luxury of “choice” when making investment decisions.
There are additional asset classes, sectors/industries, a wide variety of companies and a broader range of investment vehicles or instruments. It provides the ability to invest in companies where no peers exist in the local market, or where the local market is very small, and could broaden the universe to select the best quality companies from.
Additionally, different markets will have different underlying drivers and conditions, from valuations to the stage of a market cycle. This adds an extra dimension of diversification.
Drawbacks...
Investing offshore however brings additional risk factors that need to be assessed and considered in the total portfolio, including volatility introduced by currency. Short term movements in global asset class prices are driven by several factors including macro-
economic data flow, geopolitics, country specific news flow, and sentiment – this means that daily and even monthly returns can be quite volatile.
It is by no means a foregone conclusion that this broader opportunity set will result in superior investment outcomes.
Offshore investing is complex and the luxury of choice can quickly become a curse.
Appropriate selection and combination of these investment opportunities is no mean feat, and with the literal world at your disposal the task can be overwhelming. It could also be
more costly to do proper due diligence on offshore investment opportunities.
Whilst these risks are present in local investments as well, the wider universe and complexity increases the potential for negative outcomes and thus caution is recommended.
The rand volatility can further complicate matters and return profiles of offshore investments are heavily influenced by the currency, thus requiring careful consideration.
External events like geopolitical risk can hurt returns, e.g. Russia’s invasion of Ukraine.
Glamour: What options are available?
Renzi: Investments are usually classified by “asset class”, e.g. equities, bonds, property which are group assets based on their characteristics and features. In the offshore space the range of investments will naturally be wider than that on offer locally, influenced by a variety of factors including the economic and regulatory environment, as well as the level of competition and market sophistication.
Glamour: Please share your top 5 points to consider?
Renzi:
1. What currency are you investing in? Rand vs Dollar investments carry different risks
2. What vehicle are you using, e.g. a unit trust, or an exchange-traded product? Different vehicles have different features, risks and constraints.
3. What are the liquidity terms, i.e. how quickly can I get my money back? This can range from daily, to quarterly to much longer time frames.
4. What are the fees? The more sophisticated an investment, typically the more expensive
5. How does this blend with the rest of my investment portfolio? Is it diversifying existing investments, like the FNB Global Equity fund, and does it align with the client goals?
Renzi further enlightens that with investing offshore, macro factors such as currency valuation, GDP differentials between countries, monetary and fiscal policy, as well as bottom-up factors such as equity valuation and flows, must be considered. “It might thus be worthwhile to use the expertise of well-established investment managers with a proven track record of successful investment in offshore markets. The easiest is often to buy a unit trust via a LISP (Linked Investment Service Provider or Platform) that is managed by a professional investment team, who makes the asset allocation and stock selection decisions on your behalf.”
He adds that FNB Wealth and Investments has a great offering in the unit trust space that could meet this need, like the FNB Global Equity fund. “Another avenue is the plethora of low-cost exchange-traded products through which an investor can obtain exposure to the returns of offshore markets, for example the FNB Global 1200 EquityFund of Funds ETF, that captures 70% of the world’s market capitalisation and covers seven districts across 30 countries. To buy ETFs, you’ll likely need to trade via a broker such as FNB Stockbroking,” he concludes.
Renzi’s Top Tops For Investing Offshore:
• Keep it simple and do not overcomplicate things.
• Ensure you get advice to make sure your chosen investment is appropriate for YOUR goals and needs. Your financial advisor should also consider the appropriate timing and implementation of your offshore investments (phasing in when the rand is stronger, is
preferable), as well as the taxation thereof.
• Always prioritise your goals and needs, e.g. educating your kids offshore, retiring offshore, diversifying your portfolio.
• Be aware of and understand the fees that you would be paying on your offshore investments, including potentially platform fees and brokerage fees you’ll incur when buying exchange-traded products.
• Consider a cost-effective solution fund managed by an experienced investment team such as the FNB Wealth and Investments team, where the hard decisions regarding appropriate asset classes, sizing of exposure, balancing local versus offshore exposure, and selecting the appropriate building blocks to achieve the required outcomes, have already been taken on your behalf.
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