Personal investing

PART 4: Investing offshore to finance international education

It’s hard to make space for saving in our already-stretched budgets, but what about those of us who have children aspiring to spread their wings by studying abroad? 

In a world where a Big Mac costs US$2.24 in South Africa, versus US$5.58 in the US, US$4.35 in Australia and US$4.07 in Britain, according to the January 2019 Big Mac Index, affording tuition, supplies and living expenses in a foreign currency will be tough going without some serious planning. 

If sending your children overseas is a consideration, it is a good idea to invest at least a portion of your portfolio offshore. Costs are likely to be more palatable if you are saving and spending in the same currency. 

While the US, Australia and UK are popular choices for tertiary education, tuition and lifestyle in these areas come with a hefty price tag. The QS Top Universities survey for 2018 reflects that a year of study in Melbourne and London – voted in the top three of the best student cities in the world – will cost US$23 300 (around R323 000 at the time of writing) and US$21 200 (R294 000) respectively before you’ve eaten even one Big Mac, versus around R109 000 for a year at the University of Cape Town, including tuition and accommodation (based on 2018 prices for a first year Bachelor of Commerce Degree and a single room in a catering residence). Obviously, your child’s chosen institution and city will influence these figures. 

How to invest offshore

As an investor in South Africa you will have a percentage of your portfolio effectively earning offshore revenue through exposure to top JSE-listed companies, with approximately half of the revenues of the Top 40 listed companies in South Africa (representing more than 80% of the market) generated outside of South Africa’s borders. In addition, many local unit trusts, such as your typical balanced funds that comply with retirement fund regulations, allow up to 30% of their assets to be invested offshore. How much offshore exposure you get in these unit trusts depends on the asset manager’s view at the time. 

However, if you are planning to send your children to university overseas, you may also need direct access to the full global listed equity universe that is not available on the JSE, and to earn returns in foreign currency. To do this, you can either invest in a rand-denominated unit trust that invests entirely offshore or directly via a mutual fund through an offshore provider. 

Rand-denominated offshore unit trusts are offered by locally based asset managers, who offer ‘feeder funds’ that invest everything into a single offshore fund, or ‘funds of funds’ that invest in more than one underlying offshore fund. You invest and withdraw in rands, but your investment is into foreign assets. 

The other route is to invest using foreign currency, either directly with an offshore provider, or through an offshore investment platform. While going this route can be a bit more admin-intensive, in that you may require clearance from SARS, it is not difficult. 

The impact of exchange rates on your investments

If you are going to be spending on tuition and living expenses in foreign currency, it is useful to understand the profound effect exchange rates have on the returns of international investments – and your overall budget. If you are paying fees in dollars and the rand drops 10% against the dollar overnight, your fee bill will be 10% heftier in rands. A well-diversified offshore investment portfolio can help protect you against these fluctuations. 

When you live in South Africa and purchase a US stock, each dollar is costing you about R14.00 (at the time of writing). Over your holding period, the rand may weaken against the dollar, and you would get back more rand for each dollar you have put in (assuming the price of the US stock did not move). Alternatively, the rand could strengthen, so that you would get back less in rands for each dollar you put in. In both scenarios, the exchange rate impacts the value of your investment in rands only, not in dollars. Having exposure to US assets means that your purchasing power is better protected in dollars, regardless of the exchange rate movement. This is important to think about if your expenses are going to be denominated in US dollars.  

Investing regularly helps smooth out fluctuations

It is impossible to accurately and consistently forecast the movements of the rand. There are just too many factors at play that we can’t control – the mood and actions of local politicians, foreign investor sentiment, and the daily noise in global markets. Coupled with this is the fact that global markets themselves are unpredictable, so even if we could pinpoint what our currency was going to do next, there is no telling if the right opportunities would be available offshore at that exact point in time. 

A better strategy is to figure out how much of your investment portfolio you want to place offshore, and what you are trying to achieve, and then formulate a plan to invest as regularly as possible in carefully selected assets. Arguably, it is more important spending your time identifying which global assets you want to invest in for the long term, rather than determining the exact perfect entry point – which, as we know, is impossible to do reliably. Over the long term, having exposure to exciting industries and opportunities outside of South Africa allows you as an investor to participate in the growth of these companies and ultimately add value to your investments. 

Investing offshore should never be a knee-jerk reaction to events, but rather a considered decision. Remember these four things, which will improve your chances of success:

  1. Make sure your portfolio is well diversified.
  2. Adopt a regular approach to investing offshore, rather than making one-off investment decisions or trying to time the rand, and take a long-term view.
  3. If you partner with an offshore manager, check that they have an investment philosophy that you believe is sustainable and that they have proven they can implement.
  4. Seek advice from a reputable financial adviser to help you navigate the greater complexity that inevitably arises from the huge number of funds available globally. It can otherwise be overwhelming.

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