Financial Planning

Saving in offshore investments

We still find ourselves in the month of July, which also happens to be National Savings Month. In my previous three columns, I discussed the importance of saving both before and after retirement. This week, I would like to touch on something that has recently appeared regularly both in the press and on social media: saving in offshore investments.

Let’s first discuss the elephant in the room. By now, we all know that the South African stock market (FTSE/JSE All Share Index or JSE) has had a very tough time over the past five years. Over this period (until the end of June 2019) the JSE didn’t only struggle to keep up with both money market returns and inflation, but with a total return of 5.85% per year, it also underperformed severely against the MSCI All Country World Index (ACWI, 12.3% per year in rand-terms) and the S&P500 (17.1% per year). However, only when we turn the clock back a little further, do we gain a little more perspective. When we take a look at the very same stock exchanges over the past 15 years, you will see that the ACWI and S&P500 respectively delivered 12.9% and 14.9% in returns per year since 2004.

Compare that to the JSE’s 15.7% over the same period, and you will see precisely why it’s risky to leave the JSE out of your investment portfolio altogether. More importantly, it also shows us just how close the total return was compared to offshore markets in rand-terms. Not only would a combination of local and offshore shares have given you much the same returns as an individual investment in offshore shares, but it also would have provided you with a more stable income.

Graph 1: International markets (source: Thomson Reuters & PSG Wealth Old Oak)

As you probably know by now, I love analysing different indices and this does provide some thought-provoking insights. But taking your money directly offshore is not the only option and you can also get exposure via rand denominated funds that are fully invested offshore (or even multi-asset funds that include some offshore exposure). This route is even more accessible and most investments that can provide you with this kind of exposure, such as unit trusts and exchange traded funds, have a minimum monthly investment requirement of about R500.

If we consider the average annual inflation rate of 5.6% since 2004, it’s roughly equal to a monthly investment of R220 in 2004. If you had invested R220 per month in the JSE and S&P500 respectively, your investment of R79 200 over this period, would be worth around R267 300 (excluding costs) today.

Many investors might steer clear of offshore investments because they feel that the process involved in investing offshore might be too complicated, but the truth is that our investment world has opened up quite a bit during the last (just over) two decades. Up until July 1997, South Africans were confined mainly to saving locally.

In March 1997, the Minister of Finance announced that individuals over the age of 18 whose taxes were up-to-date were allowed to invest up to R200 000 offshore. This wasn’t much, and the administrative process attached to getting tax clearance back then hardly made it worthwhile. Today, 22 years down the line, we are allowed to apply for tax clearance to invest a maximum of R10 million offshore per calendar year.

Furthermore, the tax clearance process has become much simpler, and individuals may now invest up to R1 million offshore without obtaining a tax clearance certificate. Saving offshore, therefore, isn’t more complicated than saving locally, and it’s just as easy to monitor your performance.

Saving in offshore investments is definitely a much more accessible option today, and the returns it offers cannot be overlooked, but as I have mentioned countless times before, it also isn’t wise to place all your eggs in one basket. I can understand why investors feeling pessimistic about our local market, and although historical performance does not guarantee future performance, a combination of local and offshore investments can provide you with a good stable return, so ask your adviser or portfolio manager what options are available to you within your risk profile.

The opinions expressed in this document are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this document, no responsibility can be taken for actions taken based on the information contained in this newsletter. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.

Schalk Louw
As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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