Is there still a case for investing offshore?

Is there still a case for investing offshore?

Just over 10 years ago when I left the corporate world I put my pension fund into a preservation fund…and the R23000 odd that I invested then is worth about R23000 today…what happened?

One of the important principles in life (and financial planning) is this: each time you make an important decision write down the reasons that you are making it. This will help you years later when you cant remember why on earth you did what you did at the time and what the context of the decision was.

Think back 10 years: it is 2000, we have just come through the Y2K scenario and all of a sudden, the Rand, our beloved currency, started its downward spiral against the US Dollar and UK Sterling. We had never seen anything like this before and almost overnight we went from a respectable exchange rate to what seemed (at the time) like an endless depreciation. At its worst the rand was just under R14/$ and almost R20/Sterling…and at that stage, South Africans could not get money offshore fast enough (the stories of cash going out are the stuff of legend).

And so it was in that context that I decided to invest my preservation fund into 2 offshore funds…Since its worst days, the rand has recovered to just below R5/$ and been back as high as R11/$ and up and down so many times that we have almost lost track of where it currently sits (±R7.3/$). In the ensuing 10 years my preservation fund has been as high as R29000 and as low as R16000…and right now it does not look too clever!

Currently the “consesus” view is that the rand is strong relative to the uS$ and other currencies…surely this would therefore be a good time to take money offshore?

Problem is this: the rand has been strong before and we have taken funds offshore in anticipation of it weakening but it has only confounded (almost) every one and either got or remainded stronger for longer. As a result, right now, harldy any one wants to invest money offshore – we have all been “burnt” by the strong rand!

But that, I think, is a major part of the problem – we have all been taking money offshore for the wrong reasons – fear of a weakening currency and now that this does not appear to be an issue any longer, we cant see reasons to take funds offshore anymore or more importantly, to invest outside of SA.

Consider the following:

  • Africa and the Middle East currently still make up less than 1% of the global investable universe. South Africa might have a very first world financial system as well as the largest stock exchange in Africa, but we still dont even make up 1% the total global markets.
  • Added to this is the fact that the number of shares on the JSE is shrinking and as a result, the average fund can now only meaningfully invest in somewhere between 50 and 120 shares with some big funds being limited to 20-30 shares at most (this is due to legislation limiting exposure to any 1 share). And this is only going to get smaller as the size of funds grow and as companies either de-list from the JSE and move offshore or de-list altogether.

So there is a big wide world out there and if you were sitting on the moon looking at it (unemotionally) and wondering where to invest your money, you can bet you would not be putting 99-100% of your money into a tiny market at the foot of Africa. So why do we?

I think the reasons are a few fold:

  1. We were encouraged to invest offshore for the wrong reasons in the first place – fear is usually not a good guide in making decisions about money. We were fearful of an ever depreciating (worthless, Zim-like) currency.
  2. We were fearful of another failed African State and as a result were happy to take money offshore and “get it away from this place” at almost any cost (again the stories of this are the stuff of legend).

Now that neither of the above has come to pass (and in fact currently look like the opposite has happened) we can no longer see a need to invest elsewhere (and in some circles it is even considered disloyal to take money out of SA).

Bollocks I say. Successful investing is about time, diversification and mostly about the price you pay for your investment. And right now, the rand is strong, SA equities are fairly valued (they are no longer cheap) and developed markets are the out of favour “basket cases”.

Truth is no one knows where the currency is going (it might get a bit stronger in the short term still) but we do know that there are “bargains” to be had elsewhere and an astute investor would consider this exactly the time to be taking money out of SA and investing it elsewhere.

So if I were faced with the same decision about investing my R23000 again, would I still take the funds offshore? Absolutely! But this time the rand is signficantly stronger and as a result the price is better – I cant guarantee it but I am sure that 10 years from now we will wish that we had taken more money offshore in 2010.