The market downturn in March posed substantial challenges for investors due to the halt in economic activity associated with Covid-19 and the simultaneous sovereign rating downgrade. While the March volatility proved to be a short-term spike, the intensity of these threats significantly impacted investor sentiment. Investors often experience anxiety and concern about their investments during times of high uncertainty and market volatility. While these feelings are rightfully expressed, they can often lead to investment changes that may prove to be detrimental to long-term investment goals, explains Linda Sherlock, Executive Head: Wealth and Business Development for PPS Wealth Advisory.
Similar historical market downturns have demonstrated that short-term market movements have short-term impacts on investment. Consequently, the *long-term statistics confirm that the capital always returns, provided that the commitment to the longer-term investment goal remains intact, Sherlock says.
Is investing offshore still the best option for private investors?
The best option for every investor is to ensure that investment decisions are aligned to their investment goals and overall financial plan. PPS Wealth Advisory’s role as wealth managers is to assist its investors in realising the goals and outcomes contained within their personalised financial plans, says Sherlock. This means guiding investors during challenging times when making decisions that could negatively impact the outcomes of their financial plans.
Sherlock elaborates: “As the market experienced a downturn during March, our wealth managers simply fulfilled their purpose — reminding investors about the goals they have set and restating the outcomes they wish to realise. Our priority is always the wellbeing of our investors, to which end we help them to protect, create and accelerate their wealth. In some instances, offshore investing is part of the diversified wealth portfolio rather than a standalone solution set, but that is entirely dependent on the investment goals and outcomes the investor wishes to achieve through the financial plan.”
Linda Sherlock, Executive Head: Wealth and Business Development for PPS Wealth Advisory
According to Sherlock, offshore investing remains an excellent option for private investors for many reasons, including:
• Geographical diversification
• De-concentration of domestic exposure
• Variety of fund managers available globally
• Hedging against the Rand
• Accessing a larger portion of the equity market universe.
Sherlock continues: “Offshore investing allows investors to have appropriate equity exposure without the concentration that comes with being invested in only one market (South Africa). It provides investors with the opportunity of realising the benefits associated with diversification. For some investors, however, the need for greater diversification may prompt shifts in investment baskets from domestic equity exposure to greater offshore equity exposure, which is further exacerbated during times of increased market volatility. In this instance, we caution investors to be cognisant of their domestic cashflow, lifestyle requirements and long-term wealth creation goals.”
As an example, she points out that in the current environment, it may feel intuitive for private investors to conclude that they should be investing all their wealth offshore. This view is likely being framed by the fact that according to the *MSCI All Country World Index we’ve seen an annualised performance of 18.48% p.a. (in rands) over the last decade. Compounding this is the prevailing sentiment that one cannot beat inflation by investing in South African businesses, given the outlook for the local economy and volatility of the Rand. Financial decisions should be guided by a well-defined process that starts with the reasons for investing, the primary domicile and the extent of existing assets in South Africa. The reality for many investors is the fact that their wealth accumulation is already concentrated within South Africa, exposing them to significant country-specific risk — and this presents an argument for greater diversification and allocation towards offshore exposure.
But excessive offshore exposure can also present significant challenges if misaligned with investment goals and not incorporated into wealth accumulation and protection strategies. Investors who are already invested in domestic multi-asset class funds will have a considerable international allocation by way of direct and indirect offshore exposure. Many large South African corporates have a high percentage of their businesses located offshore. The question is therefore not when you should be investing offshore, but how to appropriately structure a portfolio with a combination of domestic and offshore assets, says Sherlock.
One of the ways to invest offshore is via unit trusts, explains Hayley Brown, Executive of Business Development for PPS Investments. This can either be via a foreign domiciled unit trust or feeder fund. “The difference is that when one is invested in local currency, it is into a feeder fund into an international fund manager’s fund which acquires offshore assets. When the investor wishes to sell, it is sold and paid out in Rands. Capital taken offshore in foreign currency remains in that foreign currency and is invested directly with a foreign manager.”
PPS Investments earlier this year launched the PPS Global Equity Fund (in association with Prescient Fund Managers) and the PPS Global Equity Feeder Fund, the latter of which can be accessed via the PPS LISP. The former can be accessed via the Ninety One platform (formerly Investec Asset Managers) in a “sinking fund” which is similar to an endowment, or via Prescient Global Funds ICAV, says Brown.
Why is advice important?
Investing offshore can present numerous advantages and benefits to investors if constructed — and included in — a structured financial planning strategy, prioritising wealth protection and accumulation outcomes. Consideration should be given to various jurisdictional challenges such as probates, treatment of assets and estate planning requirements. Investors who wish to diversify jurisdictional risk can externalise their rands and invest in a fund incorporated in another country. “In this case, the laws of the country of incorporation govern the investment, and advice in constructing the portfolio is essential to ensure that all elements are appropriately considered,” says Sherlock.
A final consideration, according to Sherlock, is that wealth managers provide investors with the required support, knowledge and guidance when navigating market volatility. With access to a team of specialists, PPS wealth managers are able to assist investors when making key investment decisions that impact the long-term sustainability of their wealth portfolios.
PPS Wealth Advisory was launched in February this year and has a regional representation of wealth managers who can assist investors with their wealth protection, wealth creation and wealth acceleration needs.
PPS is a Licensed Insurer and Financial Services Provider