Is too much of your wealth at home?

• Offshore investing adds geographic, currency and investment diversification to a portfolio and provides access to companies, markets and assets beyond South Africa.
• You don’t necessarily need foreign currency to start. Rand-denominated feeder funds can provide exposure to offshore assets.
• The right offshore allocation depends on what you are investing for and, importantly, where you expect to spend the money.
• Waiting for the “right” rand-dollar exchange rate can keep investors out of the market. For long-term investors, phasing money offshore can reduce the pressure of trying to pick the perfect moment.

You earn your salary in rands. Your home is here. Your emergency savings are probably in rands and, if you have built an investment portfolio, much of that may be locally invested too.

There are good reasons for this. If you plan to educate your children and retire in South Africa, you will need rands. But for money invested over 10, 20 or 30 years, concentrating too much wealth in one country can close the door to opportunities elsewhere.

Episode three of Investec’s Mastering the Basics webinar series looks at why offshore investing should form part of the diversification conversation and, importantly, how you can get started.

“Building wealth doesn’t stop in the country you live in,” says Darren Behrendt, Head of Invest & Insure at Investec. 

Why look offshore when my life is in South Africa?

Offshore investing gives South African investors access to different economies, industries, companies, asset classes and currencies. It also reduces the extent to which the fortunes of a portfolio are tied to a single geography.

Kate Robson, Head of My Investments at Investec, says: “Offshore investing is taking diversification to the next level. Think about it as geographic diversification. You’re effectively diversifying away from the local markets, or your local currency, into offshore markets or offshore currencies.”

But Robson says that doesn’t mean abandoning South African assets. It simply means broadening the opportunity set.

Different economies and markets move through different cycles. A period of weakness in one region may coincide with stronger conditions elsewhere. As Behrendt puts it, “not everybody and not every country is in the same place at the same time”.

How much should I invest offshore?

There is no magic percentage.

A more useful starting point is to ask where you expect to spend the money. Robson describes this as matching assets with future liabilities: “Where am I saving and where do I intend to spend?”

If you expect to fund a child's overseas education, retire abroad or meet another future expense in foreign currency, building assets in that currency can make sense as part of the plan. Someone whose future financial needs remain largely in South Africa may have a different allocation.

Offshore exposure can also serve a broader purpose: long-term diversification.

Behrendt warns against waiting to invest offshore. “Often clients think that offshore investing is something to think about when their portfolio has grown relatively large, and that's not the case. The earlier you start, the better in terms of slowly building that offshore portfolio for long-term growth.”

How much should I invest offshore?

There is no magic percentage.

A more useful starting point is to ask where you expect to spend the money. Robson describes this as matching assets with future liabilities: “Where am I saving and where do I intend to spend?”

If you expect to fund a child's overseas education, retire abroad or meet another future expense in foreign currency, building assets in that currency can make sense as part of the plan. Someone whose future financial needs remain largely in South Africa may have a different allocation.

Offshore exposure can also serve a broader purpose: long-term diversification.

Behrendt warns against waiting to invest offshore.

“Often clients think that offshore investing is something to think about when their portfolio has grown relatively large, and that's not the case. The earlier you start, the better in terms of slowly building that offshore portfolio for long-term growth.”

Do I need dollars to invest offshore?

No. This is one of the misconceptions that can make offshore investing feel more complicated than it needs to be.

Some investors already have offshore exposure without realising it. A South African balanced fund, for instance, may invest a portion of its portfolio outside the country.

For more deliberate offshore exposure, one accessible option is a rand-denominated feeder fund. You invest in rands, while the underlying fund invests in offshore assets.

“Feeder funds are very accessible. You’re investing in rands, but you’re getting exposure to non-rand assets,” says Behrendt.

Investors can also externalise money by investing directly in foreign currency, subject to South Africa’s exchange control and tax rules. Other structures, including asset swaps and certain structured products, can provide offshore exposure in different ways.

The distinction matters because the structure you choose can affect currency exposure, access to money and the way gains are calculated for tax purposes.

Should I wait for a stronger rand?

Trying to identify the perfect exchange rate can become a reason to do nothing.

The rand can move sharply in either direction and even professional investors cannot consistently predict short-term currency movements. For someone investing offshore over decades, the exchange rate on one particular day becomes less significant as the investment horizon lengthens.

Robson points to two principles: time in the market rather than timing the market, and rand cost averaging.

For an investor moving a substantial amount offshore, that could mean investing in stages rather than converting everything on one day.

“Consistently invest in the market over a period of time means you’re not betting the entire investment on one currency call,” she explains.

Behrendt makes the broader point: “Long-term investment is not about speculating. It is about building your wealth in a very structured manner over the long term.”

Can my TFSA or retirement fund invest offshore?

Yes, although the rules differ depending on the investment wrapper.

A tax-free savings account is a rand-based investment, but it can gain offshore exposure through rand-denominated feeder funds.

Retirement annuities and other pre-retirement funds are subject to Regulation 28. Under the current rules, offshore exposure is limited to 45% of the underlying portfolio.

Robson says this is why investors need to look across the different structures they hold when considering their overall offshore position. “It’s really important that you use all of the different wrappers at your disposal to gain the offshore exposure that is required in your portfolio.”

Living annuities are treated differently and are not subject to Regulation 28, although the appropriateness of any offshore allocation will depend on the investor’s circumstances and income needs.

What should offshore investing actually achieve?

A weaker rand is not an investment strategy. Neither is a nervous reaction to South African politics or a sudden enthusiasm for whichever overseas market happens to be performing well.

The stronger rationale is diversification.

Your local assets still have an important job to do, particularly if most of your future spending will be in rands. But offshore assets widen the range of opportunities available in your portfolio and reduce dependence on a single market and currency.

So rather than asking whether now is the moment to “go offshore”, look at the portfolio you already have.

• How much of your wealth ultimately depends on South Africa?
• Where will you need to spend your money in future?
• And does your current mix give you enough exposure to the rest of the world?

The answers will differ from investor to investor. But your postcode needn’t define the boundaries of your portfolio.