IS INVESTING R15K MONTHLY IN A GLOBAL EQUITY FUND WISE?
Marius answers a reader’s question and gives valuable insights and considerations for global equity funds.
Reader’s question:
I’m 32 years old and considering unit trust investments. I’m particularly interested in global equity funds. I have ample emergency funds and plan to invest around R15 000 per month. My investment horizon is approximately five, six, or seven years before needing access to some of the invested funds.
Is allocating this amount to global equity funds a wise decision?
It sounds like you are well on track with your investments; well done!
When people ask me if investing in a particular strategy is wise, I always answer by saying yes. Invest in anything as long as you invest. When I say “anything”, I don’t really mean anything because there are investments that should preferably be avoided. Recently, we have witnessed again how people got scammed with unrealistic promises of returns and unenforceable guarantees.
Invest only in regulated investments, and if you don’t understand the investment, don’t invest in it.
With the offshore market substantially larger than ours, please be careful. The number of scams and dishonest people is also proportionately higher than in SA, and South Africans often get propositioned by foreign “traders”, advisors, and scamsters.
Offshore investments
Since you specifically asked about offshore equities, I will keep my answer focused on them with the assumption that you have done your homework to ensure that your current overall portfolio is optimised by considering all asset classes and jurisdictions.
Given your age, you can aggressively invest in offshore unit trusts. However, I suggest you earmark offshore funds for longer-term investments (seven or more years) unless you have a healthy exposure to SA assets that you can access in an emergency.
Due to currency movements, offshore investments carry more volatility than SA investments if measured in rands, and you may just find yourself short-changed if you decide to cash in offshore funds shortly after investing. We all agree that the rand will continue devaluing over the long term, and volatility risk does reduce as time goes by, but over the short term, it can be a very bumpy ride.
I am a big supporter of offshore investments as long as they are acquired at the right price.
However, one must be aware of certain challenges and technicalities regarding taxation on investments. You referred to investing in offshore equity unit trusts, which is possibly the most sensible approach. Of course, you can also invest via exchange-traded funds (ETFs) and direct shares.
Some considerations
Although you mentioned investing via unit trusts, you did not specify if you intend to invest via SA “feeder funds” or directly offshore. Be mindful of the following:
SA feeder funds attract capital gains tax on the unit price, which includes the underlying offshore fund returns (the base fund that the SA unit trust feeds into) plus rand depreciation since they are priced in rands. This is not a problem for retirement funds (including retirement annuities and preservation funds as well as living annuities) since they are tax-exempt. It is, however, a problem for individual investors who invest discretionary money. If the rand devalues by 6% per year, it will mean that your rand “return” on a 15-year investment horizon will be approximately 139% more than the return in base currency on which you must pay capital gains tax. Assuming the base currency fund return is also 6% per year, that is tax calculated on 139% (base currency) versus 278% return (rand-based). That is a lot of additional tax …
Direct offshore unit trusts only attract capital gains tax on the actual investment. As long as the returns are declared in the base currency, there will be no capital gains (or losses) on currency movements. Therefore, it makes 100% sense to invest directly offshore rather than via feeder funds.
Offshore funds tend to have longer trading periods. Some investments trade weekly, and others take even longer. This means redeeming offshore investments may take longer than repurchasing local unit trusts. Feeder funds will be restricted by the trading rules of the underlying base fund or funds.
If you intend to draw income from offshore funds sometime in the future, be careful of the amount of offshore exposure you have. The higher the percentage of your drawdown, the less offshore exposure you should have. Volatility is your enemy when you draw against investments, and more stable solutions provide better outcomes than portfolios with higher levels of volatility. This only really comes into play when you start drawing more than 8% of your portfolio value as income.
Offshore platforms tend to be more expensive than local platforms.
Passive funds are cheaper than actively managed funds. Remember that passive funds own the market, and actively managed funds own companies/shares of companies they select based on fundamentals and their investment style. You will have to decide which fund managers’ philosophies match your views.
There is a much wider variety of investments, styles, and sectors available overseas (one of the motivators to invest offshore), but be careful and ensure you understand what you are investing in.
Depending on the jurisdiction you invest in, it can adversely affect estate duty and taxes should you pass away. Make sure you understand the implications of probate and situs taxes in specific jurisdictions. This may mean you need two wills, one for SA and one for the foreign jurisdiction. This does not apply to feeder funds since they are considered SA funds.
If you decide to invest directly offshore, you can do so via a life wrapper (offshore endowment) or an open-architecture offshore platform. Both have pros and cons. Make sure you understand them.
Although you mentioned offshore equities, it may pay you to investigate alternatives like flexible funds with an open mandate. All asset classes perform differently during different market and interest rate cycles. It is not guaranteed that equities will provide the best returns over the next five years; something else may trump them.
After all that, my simple answer is yes, investing in global equities (or global growth funds, for that matter) is wise.
Given your age, you can pursue this aggressively, and it should reward you handsomely as long as you remain patient and stay invested, irrespective of market scares that will pop up now and then.
However, I suggest you also optimise your retirement fund and tax-free investment contributions before taking on a too-aggressive offshore portfolio. You did mention that you have sufficient emergency reserves. I cannot see a reason why you should not go for it …
Enjoy the ride!
