Offshore investing: It’s not unpatriotic

There is not a South African investor that has not watched the meteoric share price rise of the FAANGS — Facebook, Amazon, Alphabet, Netflix and Google — with something close to envy. 

The Big Tech superstocks aren’t just surviving the coronavirus crisis, they’re thriving.

The NYSE FANG+ index, also home to the likes of Tesla, Twitter, Nvidia and Alibaba, is blowing away the rest of the stock market and flirting with record highs of its own. 

All this while local markets have returned just 2% to 3% over the past five years. 

However, there is no reason why South African investors should watch from the sidelines. While repressive laws and capital regulations prevented outward investing in the 1980s and 90s, this changed as the ANC government loosened capital controls in the 2000s, and the rise of exchange-traded products made the process easier and cheaper.

 

The result was that over the past decade there has been a slow but steady trickle of funds out of South Africa.

But then along came the Covid-19 pandemic and South Africa’s infamous lockdown, now on day 126, which will prove to be the proverbial straw that broke the back of the economy. 

South African consumers and investors, more depressed than at any other time in this nation’s history, are wondering whether it is worth investing their hard-fought-for funds into local stocks. Will the returns justify the risk? 

Daily Maverick associate editor Ruan Jooste hosted a webinar to discuss this topic. Her guests were Magnus Heystek, co-founder and director of Brenthurst Wealth Management, an outspoken advocate for offshore investment, and Dr Ralph Mathekga, an equally outspoken political and economic analyst who provided some perspective on the local political landscape.

“Historically investors did not need to take the risk,” says Heystek. “Local returns easily matched or beat offshore returns. But this started to change in 2010 when the commodity cycle started to turn. By 2013 the rand was losing value as a result of the economic policies of the ANC and the JSE started to lose its sparkle. The returns over the last decade suggest you should definitely add to your offshore portfolio.”

Hindsight is a marvellous thing, but $100 invested into Netflix 10 years ago would be worth $6,000 today. “The tech funds have been growing at 15% per annum in dollar terms,” says Heystek. “Domestic investors don’t have this opportunity, simply because we don’t have a tech or biotech sector in South Africa. One hundred years ago, if you wanted gold you had to come to SA. The gold mines of today are in Silicon Valley and elsewhere.”

The problem with any conversation on offshore investing, as Heystek will attest, is that it quickly becomes emotional, with those investing offshore branded as “unpatriotic”.

“It’s an emotional topic,” says Mathekga. “It becomes even more so when it’s assumed that offshore investors are rich whites. But that is not necessarily the case. Offshore investors are those who want to manage their money wisely — whether they have a lot or a little.”

He finds the idea of economic patriotism an odd one. People cannot invest in one place just because it makes emotional sense. “You must go where the returns are and where the fundamentals make sense. In SA the fundamentals can be questioned.”

Inevitably, what investors really want to know is: “Is South Africa the next Zimbabwe?”

What is disconcerting, says Mathekga, is that the government has shifted visibly during the time of Covid towards a command-style economy.

“We are becoming more inward-looking with a bigger role for the state. The political circumstances are not in favour of growth.”

Heystek is blunt.

“Are we going the route of Zimbabwe? No. But the country we should compare ourselves to is Argentina.” 

In the 1930s it was believed that Argentina would be the next United States, a superpower in the making. Instead, since then it has defaulted on its sovereign debt at least nine times. “It was just bad politics.” 

Today Argentina is paying the price with a currency that has collapsed to ARS72 to one dollar. A decade ago it was ARS3 to the dollar. 

Under the circumstances then, it seems that if one has the means to do so, some offshore investing is prudent.

How much one invests is up to the individual investor.

“Finding a balance can be tough,” says Heystek. “But if you view yourself as a global citizen, one who plans to travel, or consume products produced overseas like the iPhone, it might even be close to 100%.” 

Of course, for those invested in funds governed by Regulation 28 of the Pension Funds Act, there is little choice. The rules allow fund managers to invest a maximum of 30% of the fund into offshore equities.

There has been talk about National Treasury possibly adjusting some of the rules governing asset allocation within pension funds, but this requires a lengthy period of consultation with the asset management industry and is unlikely in the immediate future.

What is alarming investors is the suggestion that the government will direct a portion of pension fund investments into “strategic” projects. 

“Can we trust a government that has failed to manage its own funds adequately and is now extending its hand?” asks Mathekga. “The public mood is not in favour of this.” 

Of course, unless one’s employer directs it so, investing in a retirement fund is entirely voluntary — but there are massive tax advantages to doing so. The pros and cons make for an interesting discussion, but one that was well beyond the 60-minute limit of the webinar. 

For individuals older than 55, Heystek suggests maturing their retirement annuity and taking out the one-third allowance, which is tax-free. This can be invested offshore into ETFs, gold coins or biotech funds, he says. Convert the balance into a living annuity that you can take 100% offshore. “The returns last year were 37%.”

If you are younger, he says, look at your portfolio and move funds within the portfolio to ensure it has offshore exposure. 

He favours developed markets — particularly tech, healthcare and biotech — but also advocates for a small exposure to emerging markets like China.

“China has only recently been included in the MSCI and Morningstar benchmarks. One or two local fund managers have made great returns investing in China, but I would not put all my money there – maybe 10%.”

South African asset managers offer a variety of products that make offshore investing relatively simple. Some are rand-denominated, while others are denominated in dollars, euros or sterling and require that you convert your funds before investing — your bank or investment platform will do this for you. 

And for Mathekga, who claims he is looking for easy-to-understand investment solutions, as do most millennials, the likes of Sygnia, CoreShares, Easy Equities, Satrix and globally, Blackrock, offer an easy entry into the world of investing. BM/DM

There is a wealth of information available on this topic for anyone interested in reading further:

https://www.dailymaverick.co.za/article/2019-03-25-take-more-savings-offshore-money-managers-urge-sa-investors/

https://www.dailymaverick.co.za/article/2019-05-19-best-property-investment-is-far-from-home/

https://www.dailymaverick.co.za/article/2019-06-07-regulation-28-hindering-investors-ability-to-maximise-return-or-protection-from-greater-downside/

https://www.dailymaverick.co.za/article/2019-05-13-the-economic-cost-of-tax-our-low-savings-rate-and-red-tape/#gsc.tab=0