South Africans have been transferring money offshore at a rapid rate over the last few months as a result of the negative sentiment at present. We have also seen an increase in the number of discussions about emigration as the experience of crime in targeted or affected areas comes to the fore.

This situation can present us as professional planners with a dilemma as to how we assist or advise our clients with these decisions.

We know that an emotional driver is the best tool to secure the sale of a product. To rely, however, on an emotional vulnerability, (for example insecurity about the local currency), as a driver to sell an offshore investment product, whether it makes sense or not, could easily be seen as abuse of your relationship with the client.

In our view, there are no absolutes, ‘musts’, or ‘shoulds’ – only choices and consequences.

We would want to ensure the issues affecting any advice are broken down into fundamentals requiring understanding or decision. We thus create a decision-making process which we can repeat in the future.

Advice should generally be based on firstly, the facts, in which there should be little or no uncertainty. Secondly, it requires sound research, which may be uncertain, but will be based on some fact, and have substance. Thirdly, we need to take emotion, opinion and personal circumstances into account.

In offering solutions we need firstly ensure the solution will satisfy the requirements, then we need to ensure the client understands the solution, but also satisfy ourselves that the consequences of a strategy is understood and accepted.

Within most scenarios there will be a high road and a low road and it is important that we offer these. By way of example if we look at a portfolio with low equity or high equity, a low equity portfolio will have more predictable returns, less uncertainty and volatility, but lower real returns over time. At the same time a higher equity portfolio will offer higher real returns over time, but with higher real returns over time.

Thus:

Option 1:
Choice = low equity – Consequence = low volatility/return = Less income in retirement.

Option 2:
Choice = high equity – Consequence = higher volatility/return = More income in retirement.

Shorter term tactical asset allocation adjustments can add value in the short term but we do not offer market timing as it cannot be consistent.

Before investing offshore we would ensure that we have summarised the total offshore exposure of any client within all of their existing portfolios before considering allocating more.

You would need to rely on your research to determine an appropriate offshore exposure. Considerations for the amount of offshore exposure from a technical point of view would include asset/liability matching and an assessment of the imported component of the producer price index. An assessment of relative value in the various markets and factual fundamentals would also have a bearing.

Asset/liability matching is the assessment of where the future expenditure to be financed by the investment is to occur.

If future expenditure is to occur in RSA, then a significant allocation to RSA assets is prudent. If, however, the future expenditure is to occur in the USA, then a significant exposure to USA assets would be appropriate. In so doing you will be matching assets and liabilities.

Adjustments should be made for the effect of exchange rates on the economy you will the spending in; and the relative value of the available markets you can invest in. Having done this, a sensible offshore exposure can be derived for a given objective.

The consequences of longer investment time frames and the two levels of volatility would also need to be measured against a client’s circumstances for appropriateness.

Two levels of volatility is a key risk in that the client needs to understand the volatility of the foreign currency value of the investment due to market movements as well as the volatility in the Rand value on the investment on top of that.

The effect of a declining market and a strengthening rand can be all to devastating as was experienced in 2001/2002.

Investing offshore is in effect diversifying risk and is by definition, something that will either cost you of save you (returns), and is not a tool for outperformance. Thus, if we consider that a significant portion of the return of an offshore portfolio will be due to currency movement we should act with caution and ensure that the uncertainty is something your client can afford.

Ian Beere

Ian Beere, CA (SA); CFP is a partner in Netto Financial Services and was named the Financial Planner of the year for 2007/08 at the IFP convention, June last year. He has been writing a regular column for Blue Chip for the past year, sharing his insights during what turned out to be quite an eventful year. In this last column in this capacity he takes a look at some of the challenges facing the professional planner/adviser during difficult times.

Ian Beere will continue to contribute to the contents of Blue Chip from time to time in the future.