How to consider your offshore investment strategy

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CIARAN RYAN: How much should you invest offshore? Investing abroad is not only about looking at different asset classes and securities beyond your home turf, or gaining exposure to a wider universe of opportunities. Those who have a poor view of South Africa’s future will be inclined to take a good chunk of their wealth offshore, but how much you invest offshore is a complex question with many parts. Do you intend to retire abroad or do you need income offshore for the children’s education or for annual holidays? There can be a thousand other reasons, so let’s get to the bottom of it.

To help us explore this we are joined by Adriaan Pask, who is chief investment officer at PSG Wealth. Hi, Adriaan. Good to talk to you again. I see there’s a big appetite among South Africans for investing offshore – for any number of reasons. Sometimes it’s a hedge against what they see as a steady national decline.

What would you say are the primary considerations for investors when they are thinking of investing abroad?

ADRIAAN PASK: Currently what we see in the industry is quite a lot of new investment money flows. We’ve seen a lot of foreign direct investment leaving the country – and obviously, that’s part of the broader risk-off trade bringing money back to home countries, etc, investing more conservatively.

But from a local investor’s perspective, what we’ve seen in our unit trust industry is that flows have really gone into two places – either in more conservative investments like cash deposits, or money market funds.

The other beneficiary for a few years already has been the offshore space which has really attracted a lot of capital flows. That largely is a good reflection of the concerns on investors’ minds. They obviously see what’s happening in the country and adopt a more conservative approach, investing either in more conservative investments, as I’ve mentioned, or taking money abroad, feeling that the prospects there are better for the outcomes they wish to achieve.

CIARAN RYAN: I imagine that there are other factors that you’ve got to consider when you are thinking of investing offshore. There’s tax, there’s estate planning and various other considerations. What factors should there be to consider?

ADRIAAN PASK: I think the most important is probably the estate planning, and this is where some of what we’ve seen publicised and what we observe anecdotally flows from. I’m a bit concerned that investors aren’t necessarily taking the tax considerations into account.

In the fixed-income space, obviously investments are often taxed at marginal income rates as opposed to capital gain rates.

But more closely related to our offshore discussion is that estate planning becomes quite complicated when you start investing a portion of your assets abroad.

From a diversification point of view, it might make a lot of sense, and if you’ve got fears around the long-term prospects for the country you could potentially justify that – but you’ve got to keep in mind what’s going to happen with your asset base on death.

Often what happens is there are significant tax implications for offshore investments. To give you an idea, in the US and the UK they tax individuals who invest within their borders from abroad, and often those taxes amount to 40% of your estate invested there.

So to say that you think the prospects are better on nominal terms might be true, but on an after-tax basis it might actually be untrue.

So, with the best intentions in the world, looking at this problem just on the surface without thinking of the second- and third-order effects of your decision might be quite costly.

CIARAN RYAN: A lot of DIY investors base their decisions on emotional reactions to things they’ve just heard in the news – such as the latest report on corruption or a political scandal that’s just broken. I guess that’s a problem. Should investors avoid making emotional decisions like this, and rather let the professionals do it without any kind of emotion?

ADRIAAN PASK: Yes, I would absolutely be in that camp because what we see at the moment is a large portion of the assets flowing offshore because of these concerns.

But we know, for example, that the dollar is incredibly strong at the moment. We know that US markets are incredibly concentrated into a big portion in highly valued companies, as in valuation being excessive, which obviously means potential downside on the prices of those securities.

So I think there are really three types of investors that we can consider when we look at what’s happening in the industry at the moment. I think most DIY investors who approach this investment dilemma without the help of an advisor or an asset manager, or someone who is thinking of risk-adjusted returns, or thinking of after-tax returns, are purely basing their decisions on what they read and how they feel.

Those things are typically not very good sources for making good investment decisions. We’ve had this chat before – quite often actually – and it can be quite toxic to the outcome. Where I think we are much closer to the right answer is where we start, for example, using a multi-asset fund like a balanced fund, where these managers can have quite a lot of discretion in terms of how much they want to invest offshore, how much they want to invest locally, and how they assess the relative risks versus the opportunities.

So you’ll often hear managers say that, yes, they recognise that there are risks in South Africa, but given the price; that has excessively been priced in, and they’re willing to take on that opportunity, which is a big departure from what the DIY investors do, because they are staying away from those assets because they’re looking only at the risk side of the equation.

That being said, although asset managers do add a lot more science and research to finding out the right combination of assets, they’re thinking about portfolio construction – what the optimal blend, given the interaction between different asset classes.

There is no way that a fund manager with thousands of clients can be aware of the needs of specific investors. So they don’t know your local liabilities – you referred to this in your introduction – and they don’t know what your personal situation is with regard to what you need over the short term in terms of cash assets, what your needs are long term, are you emigrating, etc. That’s really the job of a wealth manager to come in and say, yes, this is the view from the asset management industry from a purely invest-and-hold perspective.

But, if we take into consideration what your taxes might be on your estate, and what your needs are over the short term, these are the adjustments that we should make. I think that’s a really important part of the bigger considerations that investors should keep in mind.

CIARAN RYAN: Alright. It’s pretty clear that offshore investing is complex. It has a lot of elements to it. People reading the news might be sort of frozen in their decision making, because they read about very high, very rich valuations offshore [and] maybe they don’t want to invest in South Africa.

What’s your advice to investors who have that uncertainty as to what to do, but would still like to invest abroad?

ADRIAAN PASK: I think for my money at the moment multi-asset funds provide a very good alternative, for largely two reasons.

On the one hand you’ve got a large spectrum of assets actually offering reasonable valuations. So if you think about many of our fixed-income asset classes locally, notably bonds look quite inexpensive, yielding quite a decent yield. And then there’s potential for capital appreciation, given that we are on the top of the interest rate cycle.

Those instruments will typically benefit when interest rates do come down again.

And even offshore, there are opportunities – not necessarily on the S&P 500, if you look at how top-heavy the index is, but maybe lower down on the index or maybe in Europe or Asia or wherever.

So I think allowing a fund manager a lot of flexibility, where they can have exposure to a wide range of asset classes, is a good idea at this point in time, given that there are many opportunities. By implication, that [fund manager] has the flexibility to navigate the prevailing circumstances more appropriately, because I do think that typically investors confront this question of ‘how much offshore’ only at the time that they make the investment. Then largely it is left, [whereas] what you actually need is someone who keeps an eye on the various risks as they transpire and knows how to deal with them as they transpire.

So we see things like investors investing abroad. Now with the Gaza turbulence that we’ve seen, that immediately shakes someone up and they’re asking, ‘Is it still fine? Is it still right?’ etc.

But those are really questions that the asset manager is already addressing in the multi-asset fund. So a lot of that active management component is being done, and I think investors are getting a lot of value for money in those types of products, where a large scope of assets is being managed quite actively to avoid risks but also harvest the opportunities out there.

CIARAN RYAN: Alright. Adriaan Pask, chief investment officer of PSG Wealth, we’re going to leave it there. Thank you, Adriaan.

Brought to you by PSG Wealth. 

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