An illustration of the vast difference in personal wealth accumulation between a local investment portfolio and an offshore investment portfolio over the past decade.

Ask ten investors or market commentators whether offshore or local investments will deliver the best returns in the months ahead and you will get ten different views. Everyone has a different perspective and analyses research differently.

It is no secret that Brenthurst Wealth has advocated offshore investing as the better route for local investors for close to a decade. Sometimes attracting the ire of individuals and some asset managers.

Our commitment has always been and will remain independent advice based on our own research and what we believe will serve investors’ interests in the best way. For us, the numbers don’t lie.

In the past 10 years, from 2011 to date, the following has happened:

  1. The rand has dropped from below R7 to the USD to current levels of around R14 to R15.
  2. SA’s residential property market has declined by almost 25% in real terms. When compared to global property prices, SA property prices, when priced in USD, have declined by approximately 60-70%.
  3. The JSE has been one of the worst-performing stock markets in the world, with its average growth of 10% per annum over the years, well below the average growth rates earned in the US and global markets.
  4. The average pension fund has shown very little real growth (after the deduction of all costs and taxes) over eight years and only marginal growth over 10 years. This is mainly due to the restrictions of Regulation 28 of the Pension Funds Act which limits offshore exposure to only 30% of total assets.

Add to that the fact that foreigners are withdrawing investments from South Africa. Brenthurst consulting economist Mike Schüssler’s latest report investigated this in detail. “Foreigners’ portfolio investment in South African assets are erratic and volatile from quarter to quarter, but longer-term trends reveal that since December 2015, when the then Finance Minister Nene was unexpectedly fired, foreigners have continuously shed South African equities,” he notes in the report.

Net cumulative flow into shares and bonds by foreigners

It is not only foreigners. Wealthy South Africans have also been sending their capital offshore at unprecedented rates. Schüssler, estimates this outflow to be more than R1 trillion since 2014. This is money that is not being invested with SA managers, but with the global giants such as Vanguard, BlackRock, Franklin Templeton and Fundsmith, to name just a few.

Most investors are aware of the vast difference in returns between the local and global markets, but the following hypothetical example illustrates the vast difference in personal wealth accumulation between a local investment portfolio and an offshore investment portfolio, over the past decade.

The story of Local Lenny and Offshore Otto

Let’s assume, for the sake of illustration, twin brothers Lenny and Otto were fortunate enough to inherit exactly R10 million each 10 years ago.

Local Lenny: R10 million strategy

Local Lenny decided he was not going anywhere with his money and invested his inheritance as follows, all in local currency and local assets:

R5 million in a multi-asset portfolio consisting of the following funds:

  • Allan Gray Balanced 40%;
  • Prudential Div. Maximiser 25%;
  • Ninety One Equity 25%; and
  • Ninety One Emerging Companies 10%.

Current value: R12 004 000

Weighted average return: 10.36%

R4 million was used to purchase a sizeable house on a golf course estate.

Current value: R6 000 000

R1 million invested in a cash portfolio with interest earned reinvested Ninety One Diversified Income.

Current value: R1 730 000

Nothing unusual and very standard for someone with such a large amount of money to invest. For the benefit of this example, I am assuming he lived in his property, but have excluded rates and taxes, levies, and upkeep.

Total current value 2021: R19 300 000

Offshore Otto: R10 million strategy

Otto decided to spread his financial wings and wanted to create a global portfolio with his inheritance. Not that he didn’t love his country, he just preferred the idea of diversifying his risk and investing in global investment opportunities.

In order to do so he converted his R10 million into dollars at an exchange rate of R7/$ and invested the proceeds of $1 428 000 as follows:

$714 000 in an offshore global portfolio in the same ratios as above:

  • Brenthurst Global Balanced Fund 40%;
  • Fidelity Health Care 25%;
  • Franklin US Opportunities 25%; and
  • Fidelity Emerging Markets 10%.

Current value: R29 276 000

Weighted average return: 19.31%

(These funds were not picked with the benefit of hindsight. These were funds in Brenthurst’s global portfolios basket for more than 10 years, including our own fund, which is now more than a decade old).

Offshore property: $571 000 (UK, US, or Mauritius)

Current value: $800 000 = R12 000 000 (using several averages-UK/US market/Case Schiller index)

Again, to standardise the comparison, I have excluded any potential rental income as well as maintenance and property taxes. If one were to assume that both properties were rented out during the 10 years, it would not have made any difference to the general outcome.

Cash deposit: $142 000 at 2% per annum.

Current value: R2 060 000

Total current value: R43 336 000

Offshore Otto has no plans of leaving South Africa, he simply followed a globally diversified portfolio to reduce risk and benefit from economic and financial opportunities elsewhere in the world. While this exercise will, no doubt, attract criticism from some quarters, it clearly shows what effects the government’s lack of policy direction and poor execution are having on almost every South African who has some modicum of assets. Today most middle class and even wealthy South Africans are starting to feel the pinch unless they have expatriated at least some of their assets and investments.

If you were like Local Lenny and stuck to the false belief that “local is lekker” and only focused on SA investments, you have become substantially poorer in a relatively short period of time.