How to diversify efficiently from South Africa?

by Tinotenda Mtemeri - Allan Gray Business Analyst in the Institutional Client Services Team
how-to-diversify-from-sa

The poor performance of the rand is an ongoing concern for investors. Gaining offshore exposure is a good way to mitigate against the risk that a weak rand presents, but what is the best way to go about doing so?

South African investors looking to protect their investment from rand weakness will look to diversify their portfolio with offshore assets. Also, South Africa represents less than 1% of the global investment universe and, by diversifying offshore, investors gain access to companies and sectors not available on the local market. Expanding offshore lowers your overall risk, while increasing the potential for long-term returns.

To gain international exposure, South African investors can invest directly in foreign-listed stocks or purchase rand-hedge stocks. Rand hedges are companies listed on the Johannesburg Stock Exchange (JSE) that tend to benefit from a weaker rand as they derive a considerable percentage of their profits from foreign markets and currencies. The likes of Richemont, Aspen, BHP Billiton, British American Tobacco, Glencore and Sasol, are widely considered to be rand hedges. There are pros and cons to investing in rand hedges versus investing directly in foreign-listed stocks that investors should consider. We have listed some of these below:

Pros

  • Administratively, rand hedges are less burdensome to invest in than going directly offshore. Investors do not require an offshore stockbroker account, a tax clearance certificate from the South African Revenue Service (SARS), nor do they have to apply to the Reserve Bank to trade on the JSE.
  • Tax is also simpler when investing locally. Investors receive dividends from JSE-listed companies net of tax, while local investors receiving dividends from foreign-listed stocks must personally account for any local taxes due. Also, when you die while holding foreign-listed stocks, there is a risk that the stocks may be classified as situs assets, meaning they are subject to that country’s laws. This could result in your estate being subject to substantial foreign inheritance and estate taxes.
  • Many rand hedges tend to be quite large and also have a dual listing, which means they are extensively covered by analysts and are reasonably well known to local stockbrokers and investors. They are also well covered in the local press relative to their offshore peers, which reduces the effort, and cost, required to research the stock.

Cons

  • Choice is limited: The number of high quality and attractively priced rand hedges is small and they are concentrated in certain sectors and geographies.
  • All the rand hedges still earn some of their profits domestically or have local operational exposure. As South Africa is an emerging market, our stocks generally experience more volatility than developed markets. This means that the protection against rand weakness may not always work in your favour.

Given these factors, on balance, we believe investing directly into foreign-listed stocks is an efficient way to diversify your investments. With investors being able to invest R1 million annually without the need for SARS clearance, and up to R10 million with SARS approval, exchange control is no longer a major consideration for the majority of South Africans.

For those who don’t have the skill or time to pick individual stocks, exposure to foreign-listed stocks can be achieved by investing in offshore unit trusts via a locally domiciled platform, such as the Allan Gray Offshore Platform. Platforms offer convenient access to a range of offshore investment managers with one point of contact for the administration and ongoing management of your offshore investments.

This article was published on the Allan Gray Website on 12 June 2019.

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