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Take 100% of surplus assets offshore says Stonehage Fleming

Investors always ask how much of their portfolios should be invested offshore.  After many years of analysing this question from different angles, Stonehage Fleming Investment Management in South Africa suggests that all surplus assets should be invested offshore. 

Surplus assets are those not required to sustain your standard of living and business interests in South Africa. 

During a recent webinar titled ‘Future Proof your Family in South Africa and abroad”, Reyneke van Wyk, Partner and Head of Stonehage Fleming Investment Management South Africa told viewers to start by looking at assets they were unlikely to need for the next seven to ten years.  Then, together with their adviser, set a target for a long term, strategic offshore allocation and preferably a specific period over which to achieve this. “You don’t have to externalise these assets immediately – a phasing process tends to work really well, reducing timing risk and smoothing out the volatility of the rand,” said van Wyk.

South Africans are notorious for trying to time the rand when they take assets offshore.  The currency’s value against ‘hard’ currencies such as the US dollar or the British pound is a favourite topic of conversation at social occasions. 

To demonstrate that, over the long-term, trying to time the currency has limited impact, van Wyk compared three fictional investors, all with R10 million a year to invest over the ensuing 20 years.  All three invested their funds in the MSCI World Index but followed different approaches.

The first investor externalised R10 million a year at the best possible exchange rate each year.  The second investor externalised R10 million annually at the worst possible exchange for the year, while the third followed a disciplined approach of externalising R5 million in June and December of each year.

When comparing the portfolios of the two investors that externalised their capital at the best and worst possible exchange rates each year, the investor who externalised at the best possible exchange rate only outperformed by a cumulative 14.1% (0.7% per year) over the 20-year period. 

When compared to a disciplined approach of regular externalisation, the investor who externalised surplus funds at the best possible exchange rate each year, only outperformed by a cumulative 4.5% (0.2% per year) over the 20-year period. 

“The differences are surprisingly low, which I think comes as a surprise to all of us,” van Wyk said. “The message is to not become too fixated on timing.”

What about investors who feel they’ve fallen behind and need to drastically increase offshore exposure? Van Wyk maintains that the same 3 steps apply: i) identify surplus capital, ii) agree a strategic offshore target and preferable time period to achieve the target, and then iii) follow a phased externalisation process.

A shorter target time horizon will require more regular and potentially larger offshore transfers. Importantly, one needs to bear in mind that the value of the rand (in hard currency) is in a long term structurally weakening trend. When looking to protect the value of one’s capital in global and domestic real terms, this dynamic can be a significant headwind if surplus assets are not invested offshore.

“It’s critical to establish a strong compounding effect over time, and trying to time the market, be it a currency level or asset class, is extremely difficult to do.”

When it comes to selecting which assets to invest in, van Wyk explained a further figurative exercise where they compared the returns of a global balanced portfolio with a portfolio invested only in developed market equities.  They found that the difference in returns between the two portfolios over 20 years was smaller than anticipated.  “You weren’t materially penalised using a balanced risk approach during this period, despite the fact that equities will outperform other asset classes over time.” 

He said that combining asset classes is a more stable approach and often provides a better ‘risk-adjusted’ return to manage inter-generational wealth over time. This is because multi-asset portfolios have historically suffered less volatility and shallower declines than, for example, an equity-only portfolio. However, he stressed that there is no single right answer as much depends on each family’s circumstances and risk budget.

In conclusion, van Wyk suggests that diversifying your assets offshore is vital to diversify risk, access better opportunities, and protect the purchasing power of your capital over time.

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