If you look at your balance sheet, how many of your assets are directly linked to the South African economy.
Looking internally at portfolio diversification which is how much of your portfolio is exposed to the various assets. I.E equities, bonds, property and cash. Should this change or be different in the current crisis? Bonds and cash are good instruments to protect against the downside and market volatility. Equities and property are your growth asset classes and allow your investment to give an above inflationary return over the long term.
The key to portfolio diversification is how long you intend to invest for. This doesn’t change even in the period we are in now. There might be some short-term gains available in the market but if you were invested correctly before the pandemic, your portfolio does not need to change now. If you are in an equity-based portfolio, don’t be tempted to cash in as you will then realise the losses.
Focus on long term growth. Asset classes do not move in the same direction at the same time. A well-diversified portfolio is key at the moment, whether it be a local or offshore investment. The below table illustrates this perfectly for us. This table shows us the best performing asset classes per year for the last 15 years. Focusing on the last 5, 10 and 15 years you would have received the best returns from Foreign Equity. Coming in second place over 15 years is SA Equity. The last 5 years you would have been better off in Cash if not in Foreign Equity.
There are various products and strategies available to us if we want to invest offshore. We can invest in a direct share listed on an exchange around the world. We can use an exchange traded fund or a unit trust structure. We also have the ability to invest in a wrapper structure which comes with some tax and estate planning benefits. Discretionary fund managers are gaining lots of traction in South Africa at the moment. They make the asset manager and asset allocation calls for you as an investor. If you are new to investing globally this a good option to go for due to the size of the investment universe. If you are comfortable in making your own investment calls, then an ETF structure is the best route to consider.
To invest offshore you require liquid money or cash. Retirement funds in South Africa are restricted in how much they can invest offshore. If you want pure offshore exposure you will need the cash and lump sum to transfer overseas.
To invest offshore all taxpayers, have a R1 million a year discretionary allowance. In other words, we can each invest R1 million per year without SARS approving this. If you are lucky enough to have more than this to invest, then you have a further R10 million per year but tax clearance will be required.
Once investing overseas, the usual taxes will apply. When you sell your investment and have made a profit, capital gains tax will be levied. The usual dividends tax will apply as well as foreign interest earned. In terms of estate planning, if you did pass away the usual estate duty applies to offshore investments, unless your investment is in a wrapper structure.
With South Africa falling in the emerging market space, consider how much of your portfolio is exposed to the South African economy. For most of us there is a need to gain exposure to more developed countries. Also remember that our local JSE has offshore exposure with many of the companies enjoying income form around the world.
Focus on resilient, stable countries in a time of crisis. Focus on the countries that have a solid plan for economic growth post COVID-19. Gaining offshore exposure is essential for all South Africans. Not just in this time of COVID-19 but also for the long-term success of your investment portfolio.