Why you should invest offshore – a recap
The Zimbabwe Stock Exchange (ZSE) when compared to the rest of the global share market consists of less than 1 per cent.
Therefore, if your portfolio is made up entirely of shares on the ZSE or any investments restricted to Zimbabwe then you are potentially missing out on 99 per cent of the global share pace.
This is massive and a good reason for retail investors to look beyond borders to enhance returns, diversification and to hedge against the volatility and risk in the local economy.
Offshore investment is a necessity!
If you had not thought about it before, you should give very careful thought to it. To make the best use of the investments in your portfolio the geographic borders of your investing activities must collapse.
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Practically speaking, it is not difficult to invest offshore. It is not illegal. It is perfectly legal.
There are no guarantees that investments made offshore will perform better than those available locally. FNB the South African bank says that diversifying share portfolio geographically has similar benefits to diversifying across asset classes. Should the Johannesburg Stock Exchange (JSE) and ZSE experience a reduction in growth an investor who has invested offshore might see higher growth from the other markets to counter the negative growth of local investments.
By limiting your investments to either South Africa and or Zimbabwe, an investor’s risk is concentrated in one location. Should an adverse event occur in any one of these countries it will be reflected in the returns generated by the investment portfolio.
It is critical to keep in mind that developed economies like the US, UK and Japan might experience slower growth compared to the ZSE and possibly the JSE during certain economic cycles but the growth is more consistent and therefore carries lower risk. Interestingly, for investors based in South Africa, international markets performed relatively well during the global shutdown in comparison to local markets due to the depreciation of the Rand, only if they were invested offshore to begin with.
For further emphasis, the ZSE has delivered very impressive returns in US$ terms; however, it is notoriously risky. Renowned US investment manager Kyle Bass acknowledged the good returns but lamented that despite the returns the actual value of your investments would be worth much over time. Investors with geographically diversified portfolios would have been able to counter local pullbacks with the growth provided by offshore investments.
This can be done in either one of two ways or a combination of both. The methods of offshore investing have been broadly characterized into two namely directly and indirectly.
OPTION A: Invest directly
This is the most straightforward method and involves transferring funds to another jurisdiction and purchasing foreign assets. For Zimbabwean nationals, they can transfer up to US$10,000.00 at a time before approval from the central bank is needed. In South Africa nationals can transfer up to ZAR10 million after obtaining tax clearance from SARS and they are also permitted what is known as a Single Discretionary Allowance of ZAR1 million without a tax clearance.
Investing offshore via this route will require that individuals and organizations set up bank and brokerage accounts in offshore jurisdictions through which they can fund and invest in offshore assets and securities. Going this route places responsibility for due diligence on the individual who is investing in terms of selecting assets and allocating funds to those assets. Because of the things required to be successful in this area it is advised that only knowledgeable and experienced individuals do so. Only after you have taken all the care to understand the offshore jurisdiction that you want to invest in should you go ahead and invest.
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This option presents a higher risk than the alternative which will be explored later. It is too high a risk to venture into blindly or without prior preparation to mitigate any risks that may arise in the future.
OPTION B: Investing through fund managers or unit trusts that offer exposure to offshore markets
In South Africa mutual funds and unit trusts that offer exposure to offshore markets are plentiful and include among others the Momentum International Balanced Feeder Fund, Momentum Wealth International, Coronation Global Plus Feeder Fund, Global Managed Feeder Fund, the Coronation Optimum Growth Fund and the Allan Gray Orbis Fund.
For the investor who is a novice and lacks experience, this option is most appropriate because of the benefits it offers. Indirect investment offshore through this avenue eliminates most of the risks that arise from investing directly. The mutual funds and unit trusts are managed by companies that are highly experienced and have long track records in that space.
Zimbabwean investors who desire investment offshore through mutual funds do not have this option as there are few to no asset managers, mutual funds and or unit trusts that offer exposure to offshore markets. This is a gap in the marketplace that an astute financial services company could offer as interest and demand in such a service would be strong because of the merits of going offshore. The only exceptions in the Zimbabwean market are DeVere and Carrick Wealth.
Zimbabwean retail investors would therefore have to physically transfer funds offshore to be able to gain access to these mutual funds and to invest through them for as long as the gap in the local market remains.
CONCLUSION: The Third Option
If the risk of transferring funds out of the country and purchasing assets directly is too much to stomach and the idea of handing over money to third parties to invest on your behalf is not the easiest thing to do then this third option is worth considering.
The major premise of investing offshore is to hedge against volatility in the local economy. This can still be achieved without moving a single cent out of the country. There are companies listed on the ZSE and the JSE that have significant operations outside of Zimbabwe and South Africa. Investing in these companies offers shareholders a unique opportunity for exposure to offshore markets.
Locally companies like Padenga Holdings and PPC Limited have significant export operations that make up a substantial part of their earnings and as a result, offer a hedge to their investor against the upheaval in the local economy. Prior to the lockdown last year, listed tourism operators had begun to pay their shareholders dividends in hard currency because their operations for the most part were foreign exchange generators and an effective hedge for their investors.
In South Africa, there is also a number of listed companies which because of their significant operations outside of the country are able to generate earnings that are not strongly correlated to the economic performance of the country and as such offer a currency hedge against the local economy. The most prominent of these include Richemont, (the luxury goods company which will be profiled in the future), Naspers, the multinational media conglomerate and Sasol, the petrochemicals giant.
Investors are not short of options when it comes to protecting their wealth. Your portfolio as an investor must as a matter of urgency have a portion invested offshore and exposed offshore at the very least. If it is concentrated only in Zimbabwe and or in South Africa, you are placing your financial wellbeing at the mercy of the whim of the economies of both countries.
Go forth and prosper!
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