We live in a time of great change, and great uncertainty.
The recent volatility in the local equity market, profoundly worsened by the Covid-19 pandemic, seems to be matched only by the dizzying up and downs of the rand exchange rate.
We get it — it’s hard to know what the future holds, and how best to plan for it. As uncertainty abounds, there has been a surge of interest among South Africans seeking to invest their money abroad.
By gaining a diverse exposure to assets spread across different markets, in different countries around the globe, offshore investing works to protect your wealth against the potential downside events and dynamics that can affect the local market and currency.
Besides that advantage, by opening the door to a world of opportunity not available locally, offshore investing offers may potentially enhance your returns. While SA will always offer immense potential, both the theory and evidence are conclusive: it makes sense to seek offshore diversification, no matter where in the world you call home.
The offshore risk paradox
There are potentially numerous additional benefits to seeking offshore exposure, depending on where you are in life and what your financial needs and goals may be.
These might include notable tax advantages, planning for international expenses and for the future prosperity of your loved ones, or gaining access to international sectors, opportunities and expertise.
Yet, the reduction in risk — the enhanced stability and security of your investments — is unquestionably one of the soundest investment principles that offshore investing achieves.
It would appear somewhat paradoxical therefore, that investing in offshore equities is often considered to be an inherently high-risk endeavour.
What if you invest ahead of a dip in the offshore markets or a spike in the valuation of the rand, resulting in a big loss?
Often, investors become obsessed with the question: is now the right time to consider investing offshore? Unpacking the secret to this dichotomy lies somewhere on the (time) horizon.
The importance of time — growth assets vs cash assets
“When we think of risk, generally we consider growth assets like equity as being higher risk than, for example, cash,” says Craig Sher, head of research and development at Discovery Invest.
“Everyone agrees: equity is higher risk. If the time horizon of your investment is a few months or a year, that is true. So you would think that if you want to be conservative you should move into cash and if you want to be risky and get a higher return, you should move into equity and global equity.
“But the reality is that when you start pushing out the investment term, things look very different. So, if instead of considering your investment horizon in days or months, you start looking at it over 10 years or 20 years and include your long-term goals, you will find that cash becomes far more risky than equity and, even more, than global equity. This is because, over a longer period, cash is almost guaranteed to underperform.
“As your time horizon goes out, it is the assets that are generally considered the most risky that are most likely to meet your financial needs, and the assets that are considered the safest in the short term that are most likely to kill your financial plan,” says Sher.
The currency question — local equity vs global equity
The local equity market, the JSE, is known to be volatile — often far more so than markets in developed economies such as the US. Yet the sometimes-rapid swings in the valuation of local equities can be dwarfed by the volatility of the rand, one of the most erratic currencies on Earth.
That being the case, why is it that offshore equity is often viewed as riskier than local equity?
“That is because we look at it through the lens of the rand. If you were in the US and looking at the same global investment through the lens of dollars you would say that it is less volatile than investing in the JSE. But once you are looking at it from rand, then not only do you get equity volatility, you get equity plus currency volatility,” says Sher.
“So wherever in the world you call home, investing in another market, in another currency, will feel more volatile than investing locally. It’s important to note that currency volatility is felt in the short term though. Over a longer-term time horizon, investing offshore lets you capture the gradual rand depreciation trend.”
Shared value for long-term investing
“Broadly, the idea behind shared value is that if you can get clients to behave in the right way — the way that is good for them and good for the company — then both the company and clients will benefit from that,” says Sher.
“At Discovery, we partnered with some of the biggest names in asset management in the world — BlackRock and Goldman Sachs — and added a unique feature to our new Global Endowment Plan: if you invest with us in our funds and you stay the course for a 10-year term, we will funnel the extra profits that we get over the period into an upfront benefit, which is an exchange rate discount.
“This allows you to buy in at significantly lower than the prevailing exchange rate, which means you will have more money to buy those funds. Over the course of your investment this can translate into significant value,” says Sher.
This article was paid for by Discovery Invest.
The offshore risk paradox: why is reducing risk considered a high-risk endeavour?
Offshore investing protects your wealth against events that affect the local market and currency
Image: 123RF/Chuyu
We live in a time of great change, and great uncertainty.
The recent volatility in the local equity market, profoundly worsened by the Covid-19 pandemic, seems to be matched only by the dizzying up and downs of the rand exchange rate.
We get it — it’s hard to know what the future holds, and how best to plan for it. As uncertainty abounds, there has been a surge of interest among South Africans seeking to invest their money abroad.
By gaining a diverse exposure to assets spread across different markets, in different countries around the globe, offshore investing works to protect your wealth against the potential downside events and dynamics that can affect the local market and currency.
Besides that advantage, by opening the door to a world of opportunity not available locally, offshore investing offers may potentially enhance your returns. While SA will always offer immense potential, both the theory and evidence are conclusive: it makes sense to seek offshore diversification, no matter where in the world you call home.
The offshore risk paradox
There are potentially numerous additional benefits to seeking offshore exposure, depending on where you are in life and what your financial needs and goals may be.
These might include notable tax advantages, planning for international expenses and for the future prosperity of your loved ones, or gaining access to international sectors, opportunities and expertise.
Yet, the reduction in risk — the enhanced stability and security of your investments — is unquestionably one of the soundest investment principles that offshore investing achieves.
It would appear somewhat paradoxical therefore, that investing in offshore equities is often considered to be an inherently high-risk endeavour.
What if you invest ahead of a dip in the offshore markets or a spike in the valuation of the rand, resulting in a big loss?
Often, investors become obsessed with the question: is now the right time to consider investing offshore? Unpacking the secret to this dichotomy lies somewhere on the (time) horizon.
The importance of time — growth assets vs cash assets
“When we think of risk, generally we consider growth assets like equity as being higher risk than, for example, cash,” says Craig Sher, head of research and development at Discovery Invest.
“Everyone agrees: equity is higher risk. If the time horizon of your investment is a few months or a year, that is true. So you would think that if you want to be conservative you should move into cash and if you want to be risky and get a higher return, you should move into equity and global equity.
“But the reality is that when you start pushing out the investment term, things look very different. So, if instead of considering your investment horizon in days or months, you start looking at it over 10 years or 20 years and include your long-term goals, you will find that cash becomes far more risky than equity and, even more, than global equity. This is because, over a longer period, cash is almost guaranteed to underperform.
“As your time horizon goes out, it is the assets that are generally considered the most risky that are most likely to meet your financial needs, and the assets that are considered the safest in the short term that are most likely to kill your financial plan,” says Sher.
The currency question — local equity vs global equity
The local equity market, the JSE, is known to be volatile — often far more so than markets in developed economies such as the US. Yet the sometimes-rapid swings in the valuation of local equities can be dwarfed by the volatility of the rand, one of the most erratic currencies on Earth.
That being the case, why is it that offshore equity is often viewed as riskier than local equity?
“That is because we look at it through the lens of the rand. If you were in the US and looking at the same global investment through the lens of dollars you would say that it is less volatile than investing in the JSE. But once you are looking at it from rand, then not only do you get equity volatility, you get equity plus currency volatility,” says Sher.
“So wherever in the world you call home, investing in another market, in another currency, will feel more volatile than investing locally. It’s important to note that currency volatility is felt in the short term though. Over a longer-term time horizon, investing offshore lets you capture the gradual rand depreciation trend.”
Shared value for long-term investing
“Broadly, the idea behind shared value is that if you can get clients to behave in the right way — the way that is good for them and good for the company — then both the company and clients will benefit from that,” says Sher.
“At Discovery, we partnered with some of the biggest names in asset management in the world — BlackRock and Goldman Sachs — and added a unique feature to our new Global Endowment Plan: if you invest with us in our funds and you stay the course for a 10-year term, we will funnel the extra profits that we get over the period into an upfront benefit, which is an exchange rate discount.
“This allows you to buy in at significantly lower than the prevailing exchange rate, which means you will have more money to buy those funds. Over the course of your investment this can translate into significant value,” says Sher.
This article was paid for by Discovery Invest.