IN A NUTSHELL Retirement funds can invest up to 45% of the fund’s assets outside of South Africa to diversify internationally, also known as offshore investing. There are different ways to get offshore exposure, but global unit trusts are generally the most common and accessible option.
According to Regulation 28, retirement funds can invest up to 45% of the fund’s assets offshore. Diversifying internationally can help contribute to the fund’s objective of protecting and growing members’ long-term savings.
Let’s clarify. Offshore, foreign and global investments all refer to investing in markets outside of South Africa.
Benefits and risks of investing offshore
While there are several benefits to investing offshore, it’s not risk-free. It’s therefore important to have a balanced view of the pros and cons before deciding whether and where to invest globally as a retirement fund.
Benefits
- Spread investment risk: By investing offshore, the investment risk of the retirement fund portfolio is spread across different economies and regions, instead of performance depending on one country.
- Access more opportunities: South Africa represents only a fraction (less than 1%) of the global economy. When investing only in South Africa, you lose out on benefiting from the growth of overseas companies. Furthermore, certain sectors, such as biotechnology, are not represented in the local market.
- Offset the impact of a weaker rand: The rand is a volatile currency. Investing offshore in a foreign currency provides a way to protect an investment from a weakening rand. A foreign investment will grow in rand terms when the rand depreciates against the currency in which the investment was made.
LET’S EXPLAIN
Let’s say a South African invests $10 000 in a US-based fund.
At the time, the exchange rate is R15/$, so the rand value is R150 000.
To keep it simple, we assume the investment doesn’t grow in the first year.
However, at the end of the first year, the rand had weakened to R18/$.
While the value of the investment in dollar terms is still $10 000, it has grown to R180 000 in rand terms: 10 000 × 18 = R180 000. That’s a gain of R30 000 or a return of 20%, purely because of a weaker rand.
It’s important to keep in mind that the opposite is also true: if the rand strengthens against the dollar, the returns in rands will be lower. This is called currency risk.
Risks
- Unfamiliar laws and regulations: Different countries have different regulatory, financial, accounting, tax and reporting requirements. Investors who don’t comply face penalties.
- Political and economic risks:All countries have challenges and are subject to political and economic instability. Some risks are more obvious and predictable than others.
- Hidden and potentially higher costs: Investing offshore can lead to additional fees that affect investors’ returns and their long-term outcomes. These costs include setting up offshore accounts, currency conversions, as well as exchange control and tax implications.
Investing in global unit trusts
There are different ways in which retirement funds can invest offshore. However, global unit trusts are generally the most common and accessible option.
Global unit trusts give investors exposure to a range of assets selected by an investment manager, but in markets outside of South Africa. This means much of the hard work of navigating the complex world of foreign investments is already done. Most of the other benefits of unit trusts also apply, such as:
- Easy access to a range of assets through a single fund
- More cost-effective than investing directly
- High liquidity
Alternative methods of investing offshore, such as buying shares in international companies or investing in real estate overseas, require expertise and resources. It can be more expensive, and the investment can be locked in for many years. These methods are most suitable for large, specialised retirement funds.
Further reading
Sources
Allan Gray: Beyond our borders: A case for investing offshore
Holborn: Offshore investing for South Africans: What you need to know
Momentum: The offshore investment guide
Smart about Money: Do unit trusts invest in financial markets outside of South Africa?
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