The #1 question clients ask their brokers

The top question being asked by South African investors of their financial advisers is whether they should still invest their discretionary savings locally, or rather take all of these funds offshore. There are countless compelling reasons to give in to the ‘everything offshore’ argument; but South Africa cannot be ignored. “You should still consider local investments; but it is important for your clients to have sufficient global exposure to make the most of opportunities in the rest of the world,” said Dr Francois Stofberg, Senior Economist and Head of Sales at Efficient Group, during the asset manager’s recent Global Investment Conference.

Make sure your offshore exposure is appropriate

We thought it fitting to share some of Stofberg’s closing remarks before expanding on the offshore versus onshore debate. “The best advice is for your clients to have appropriate levels of offshore exposure for their risk appetite and for their financial means,” he said. Factors that will influence investment allocations include the amount of discretionary savings; the impact of financial services and tax regulations in different jurisdictions; and the lifestyle-based needs of the client and his or her family. In other words: “The answers to questions about how much and where you should be investing begins with independent, holistic financial advice”.

There are three dominant themes that steer the offshore versus onshore discussion. The first is that South Africa’s economy represents only a fraction of the global economy. If, for example, you owned every share on the JSE, you would be the proud owner of less than 1% of global market capitalisation.  “If you have no exposure to the rest of the world, then you are missing out on 99% of the opportunities,” said Stofberg. Another concern is that the JSE has too few companies for investors to gain exposure to all industries and sectors. “There are a lot of investment themes that are either not represented on the JSE, or only sparsely represented,” noted Riaan Prinsloo, Chief Investment Officer at Efficient Private Clients.  

Protection from crazy domestic risks

The second theme centres on the volatile nature of emerging market economies, of which South Africa is a part. “Volatility does create a lot of opportunities; but this volatility may not be suitable for clients who are approaching retirement,” said Stofberg. In this context, global investments offer a worthwhile alternative. Local investors are also exposed to a range of risks that stem from policy uncertainty, not least of which the ongoing sabre-rattling about the South African Reserve Bank’s independence and continued threats to property rights through expropriation. 

The third theme, centres on the relative outperformance of offshore versus local assets, over decades. Efficient Group has spent some time analysing market data published by the likes of Investec, Momentum, Ninety One, and Sanlam to get a clear picture of the three and five year rolling returns on local and offshore markets, going back as far as 1980. “In every single one of those periods, you would have been better off with more global exposure, except for 2000 to 2005,” said Stofberg. 

He then illustrated the difference that an appropriate level of offshore exposure would have had over the decade starting 2010. An equity portfolio with 40% offshore exposure would have delivered almost R75 000 more from an initial R150 000 investment compared to a regulation 28 compliant local portfolio. The conclusion: “Most investors are constrained by not having enough global exposure.” 

The asset manager viewed the offshore versus onshore decision through three lenses to accommodate investors’ different life stages, such as pre-retirement, post retirement and ad-hoc or discretionary. “Each one of these stages demands a different investment philosophy or strategy,” said Stofberg. One of the most interesting observations during the presentation was that only contributing to a regulation 28 compliant pension fund was sub-optimal, even after factoring in the tax concessions that South African retirement savers enjoy. 

Counterintuitive; but your pension savings could be sub-optimal

“We found that it was actually not the best advice to tell someone to contribute only to a pension fund; the returns that you generate there are capped by your foreign exposure allocation being insufficient to make up for the potential of having more global exposure,” said Stofberg. A better alternative would have been a mix of retirement fund, endowment and / or tax free savings and discretionary investments. “The reason why investing offshore works is not just because you have better returns, but because you have better returns with less risk,” he said. 

As to how much to invest offshore, the asset manager deferred to an independent, holistic financial advice process. “Independent advice means that you are invested in what is most appropriate for you as an individual,” said Stofberg. He then offered the ‘slippery slope’ consequences of advice shortcoming as follows: “We found that most local investors do not receive independent, holistic financial advice. As a result they are not invested in the correct structures. And because they are not invested in the correct structures, they do not have enough global exposure. And because they do not have enough global exposure, they are not generating the returns that they need for the risks that they are taking on”. 

Back the winning sectors for winning returns

Given the obvious motivation to invest offshore, the next step is to identify the offshore opportunities that will deliver alpha. “At the end of the day, our job is to preserve and grow our clients wealth, and in order to do that we invest in companies that have a sustainable competitive advantage, or what Warren Buffett calls an economic moat,” said Prinsloo. The most important consideration from a portfolio manager perspective is whether a company can “preserve its ability to make money”. The Efficient Group team does not obsess over short-term trends, preferring instead to identify and back structurally winning sectors of the offshore opportunity set. This requires investing in the sweet spot of emerging trends, including the growing middle class in China; pandemic and post-pandemic healthcare opportunities, and, obviously, technology. 

“We found that what you invest in is less important that which portfolio manager you choose, which structure you choose and which adviser you partner with,” concluded Stofberg. “That is the most important finding that our research has made”. He advocated independent, holistic financial advice to consider a client’s entire portfolio and understand the client’s need for and ability to generate and protect income at various life stages. 

Writer’s thoughts:
We have attended hundreds of asset manager presentations that confirm the benefits of an appropriate offshore investment strategy. This was, however, one of the few times that the value of the tax concessions on SA-based retirement funding contributions was so openly criticised. Do you agree that offshore returns outweigh the ‘returns plus tax concession’ on SA retirement funds? And do you advise your clients to make additional investments into offshore-focused funds alongside their regulated retirement savings vehicles? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.