As any financial advisor will tell you, you should never have all your eggs in one basket and the best way to maximise returns is by hedging your bets against different possible outcomes. It’s understandable then, that considering the political and economic risks facing the continent, Africans should be investing offshore.
There are many sound reasons to invest offshore – to diversify the risk associated with an exclusively local portfolio; to hedge or protect investments against local currency devaluation and volatility; to take advantage of global investment opportunities; and to be invested in more stable, high-growth and tax efficient jurisdictions and structures. However, offshore diversification should form part of a sound wealth strategy and investors need to take a long-term view.
1. Investment Portfolio Diversification
Spreading your assets among investment types, styles, and markets is one of the few time-tested strategies for investors with long-term financial goals. A diversification strategy is the core of building offshore wealth – this ensures risk is spread by not placing all your assets in the same place and protects against local currency fluctuations and other local and global events that may impact your wealth. “Your home and business, as well as your local pension savings, are significant assets and make up a large portion of your balance sheet. It therefore makes sense to move liquid assets offshore where you have more choice,” says Anthony Palmer, Group Commercial Director at Carrick.
2. Access to Global Companies
The largest five companies account for 51.4% of the Johannesburg Stock Exchange. Considering that a number of companies have also exited the JSE, it makes sense to invest in international markets to have access to other companies and asset classes spread across the globe and further diversified across a number of stable currencies. “In a developed market such as Australia, for example, investors have on average 70% of their assets invested outside of the country,” says Palmer. With Africa accounting for only about 3% of global GDP, you need to access the world’s markets to have a truly diversified portfolio.
3. Reduced Market Risk
Emerging African markets are small economies by world standards, despite some clusters of first-world industries, such as banking and mining. They are also characterised by relatively illiquid and volatile stock markets. “Offshore investments provide robust protection against the volatility and risk in uncertain markets, and earning returns in foreign currencies provides additional flexibility,” explains Palmer. One of the key benefits of offshore investing is knowing your wealth is in a regulated and established market, with reduced risk. During times of global upheaval, stable regions are more likely to weather the storm. “Although diversification can never fully rule out loss, investment professionals commonly agree that it is the most important component of achieving one’s long-term financial goals while minimising risk,” says Carrick CEO Craig Featherby.
4. Protect Spending Power
Erosion of your hard currency wealth will limit your lifestyle choices so if you travel abroad regularly (for business or leisure), purchase imported items or services, or are planning to emigrate or send your child/ren overseas to study, it’s important to grow (or at least maintain) your hard currency spending power and hedge against your currency’s weakness. As you will need foreign currency to pay for tuition, for example, consider investing that money offshore. You can either transfer money into an offshore bank account, invest in offshore markets or invest in rand-denominated foreign funds, which allow you to invest indirectly into offshore assets without having to convert your Rands into a foreign currency.
5. Global succession planning
By developing offshore succession structures and shifting a portion of your tax burden to offshore jurisdictions with a more competitive tax rate, you are better able to preserve and pass on personal and family wealth as well as business assets in a tax-efficient and flexible manner.