John Kennedy, Citadel Director: Wealth Planning
Investing offshore has been a hot topic of late. The rand’s weakness, coupled with South Africa’s low economic growth, has driven many to consider offshore investments as something of a safe haven. However, as the Brexit market turmoil has demonstrated, offshore investing in and of itself is not a panacea.
As importantly as ever, investors need to look at their portfolios holistically and view offshore investments as an asset class within the total portfolio structure. Too often investing offshore is implemented as a “product sell” as opposed to being advice led whereby the advisor takes your bigger picture into consideration.
At Citadel, when deciding on an offshore allocation, we start by looking at our clients’ balance sheets – specifically the investment balance sheets – as well as their investment objectives and their tolerance for risk. We ask questions such as: Are clients looking for capital growth or do they require income? How much risk are they comfortable taking on? Only once this exercise has been completed can we build a portfolio to meet those objectives and risk parameters.
Offshore investments are included in a portfolio as a means to achieve a particular goal. It’s not “offshore for the sake of offshore” but as a strategic element of holistic financial planning. Investing in different geographies, in different sectors, brings the benefits of diversification as well as expanded opportunities. We can’t, for example, invest in listed utilities in South Africa, but this sector is available on the New York Stock Exchange.
The timing of externalising assets is also interesting. History has shown that South African investors tend to be particularly anxious when the rand weakens significantly or they face political or economic uncertainty. At this stage in the cycle, they seem overly keen to take assets offshore. And the reverse is true when the rand is strong, when the economy is performing well and when the country is politically stable. One needs to keep a watchful eye on this investment behaviour as it can be, and has been proven to be, counterintuitive. Maintaining a balanced investment position is a safer option than either of the extremes.
Foreign currency denominated investments can therefore serve as an anxiety relief mechanism, which is probably the worst reason for making investment decisions. The price you pay for assets form the base from which you will earn a return. Overpay for those assets and the return is negatively affected, turning what could have been a good investment into a bad one. Buying offshore assets when the rand is weak can have the same effect.
The principles for a good investment hold true, no matter where you are investing. So make sure that you are buying the asset for well-considered reasons and that you acquire it at the right price.