How much offshore exposure should your investment portfolio have? (2024)

Offshore investment is no longer a luxury enjoyed by a few, it has evolved into a crucial component of financial planning for all individuals looking to preserve and increase their wealth. Investors should view offshore investing as part of their overall investment portfolio, instead of a standalone asset class. It should be about where to access various sources of returns as efficiently as possible.

Investors are often not too hasty when choosing to invest offshore as not many of them are well-informed. However, it does increase diversification in an investment portfolio. With diversification comes the benefit of solid returns and lower portfolio risk. Some investors might find that they are overexposed to the domestic market because it’s what they know best.

So, how much offshore exposure should your portfolio have in order to be well diversified? There is no exact answer as not all investors have the same investment goals, but a useful starting point would be to keep approximately 30% of your assets offshore. It is important to note that every investor’s situation is different depending on their financial circ*mstances and investment goals. Expert portfolio managers will take into account the investor’s risk appetite, financial situation, investment goals as mentioned above, and overall portfolio.

Offshore markets have greater depth than domestic markets, allowing investors to better diversify risk and access more investment options for growth. The Johannesburg Stock Exchange (JSE) also has significant global exposure, with more than half of JSE-listed businesses generating revenue outside of South Africa. Investors that generate income from their portfolios are perhaps the most vulnerable to currency fluctuation. South African interest rates are consistently higher in emerging markets and some developed markets. Even when currency fluctuations are taken into account, it makes sense to rely on local income-producing assets while gaining global exposure in the long term.

Furthermore, there are better opportunities for growth outside of South Africa. While our economy bounced back quickly from the depths of the Covid crisis, overall growth remained subpar. Also, growing assets outside of South Africa tend to be of higher quality and have greater predictability of cash flows. Companies exposed to diverse markets grow at varying rates due to varied opportunities, demographic shifts, innovations, and growth circ*mstances. Investors miss out on opportunities to invest in some of the world’s largest and fastest-growing enterprises in the world when they restrict themselves to local markets.

Yes, every individual’s needs differ, however it is vital that you have enough assets in your native currency to live comfortably and cover your costs in retirement. Generally, the greater the amount of money available for investment, the greater the proportion of it that should be invested offshore. Ultra-high net-worth individuals, for example, may choose to invest a larger amount of their investable asset base offshore because they will still have enough assets to meet all of their local needs.

In addition to that, ever since the National Treasury decided to increase the offshore investment limit from 30% to 45% for Regulation 28 funds, such as retirement annuities across all service providers, they have broadened the opportunities available to investors. With the increased flexibility we are able to build portfolios that better reflect our investment beliefs.

Living annuities, endowments, and tax-free investments, on the other hand, allow greater flexibility in terms of offshore exposure among multiple service providers. Allan Gray, for example, provides a maximum offshore exposure of 45% across these investments. Momentum allows 100% offshore exposure, whereas Ninety One allows 40% offshore exposure.

When investing offshore, you have a discretionary allowance of R11 million per year where with the first R1 million you can invest it without tax clearance and for the remaining R10 million, you will need to apply for tax clearance from Sars.

The attitude that comes with offshore investing will vary from investor to investor, but it should be a positive attitude as offshore investing presents many opportunities for growth and diversification in an investment portfolio. Especially when the rand is weaker than most currencies, offshore investing can be seen as a safety blanket for investors who would’ve locked in huge losses if they only had assets in South Africa.

In our opinion, offshore investment should be part and parcel of each return-conscious investor’s toolkit, as it has the propensity to diversify your overall portfolio. Moreover, offshore investment enables an investor to benefit from currency fluctuations among other notable offshore return drivers.