A world of possibilities: the strategic advantage of offshore diversification

The common adage for offshore investing, “don’t put all your eggs in one basket”, is somewhat limiting; a more effective approach is to spread your investments across multiple baskets. Imagine a Smartie box filled with various colours - this vividly illustrates the benefits of diversification in investing. Over the past decade, global equities, as represented by the MSCI World Index, have outperformed South African listed equities by an impressive 230 percentage points (in rands).

Source: Bloomberg, MSCI and Investec Investment Management  Date sampled: 31 May 2024

While the FTSE/JSE Capped SWIX comprises only 133 stocks, offshore markets offer access to thousands of global companies that are not available locally. For instance, the MSCI World Index includes 1,429 global companies, and the World Federation of Stock Exchanges boasts approximately 58,200 companies listed worldwide.

Diversifying offshore not only broadens your investment opportunities but also enhances resilience. Different asset classes respond uniquely to various market conditions - a concept known as non-correlation. By combining them, you create a more robust investment portfolio.

To illustrate, consider how your diversified Smartie box might look, with different asset classes performing variably under different market conditions over the long term. Our offshore funds range from multi-asset class options (representing many different colours of Smarties in one fund) to single asset class offerings - such as offshore equity (all one colour in a box). Multi-asset class funds tend to yield smoother returns due to diversification, making them suitable for clients with medium-term horizons or those who are more risk averse. Conversely, global equity funds are best suited for clients with a longer-term outlook and a higher tolerance for market fluctuations.

Source: Bloomberg, MSCI and Investec Investment Management  Date sampled: 31 May 2024

Finally, it is worth taking into account the methods of investing offshore. This can we done using rands or using the foreign currency. When you invest into offshore investment funds using rands, you access offshore asset classes using the investment fund’s offshore allowance (rather than your own personal allowance) – examples of this includes feeder funds and using asset swaps. However, when you sell these funds, the proceeds must be repatriated to South Africa and in rands. 

Alternatively, you can invest using foreign currency by using your personal offshore allowances - either the annual R1 million Single Discretionary Allowance or seek tax clearance to externalise an additional R10 million under the Foreign Investment Allowance. These funds are fully invested offshore, requiring currency conversion into US dollars for investment. In this case, the proceeds remain offshore in foreign currency on disinvestment.

You might view this route as ‘front-loading administration’ for true offshore diversification or political diversification. Regardless of the path you choose, both options provide significant economic offshore diversification. For example, if your goal is to save for your child's education at Harvard, you would want to invest the funds directly offshore using allowance-cleared funds. Conversely, if your aim is simply to grow your wealth economically, you might opt for a rand offshore fund.

Offshore investing provides so many diversification benefits - economic, political and across asset class. This creates greater resilience and a more favourable investment portfolio.