During the past week media commentators jumped with joy when it became evident that a technical change to the definition of certain listed instruments, meant that one could now potentially invest up to 100% of one’s pension money offshore. Given how poorly South African investments have performed relative to offshore investments over the last 5 years, it is no wonder there was so much excitement, especially amongst those who have been punting offshore investments in the media. As it turned out, the regulator quickly reminded the enthusiasts that the current regulation still required offshore assets to be limited to 30% in pension vehicles.
Advertisements for offshore investments are currently everywhere I turn. Offshore webinars. Offshore podcasts. This is particularly true for the American share market, which has been driven to new heights by the soaring technology sector. It sounds like a winning theme.
I’ve been around long enough to remember such times during the past. For example, in 2007 small companies were booming. One-year returns exceeded 50%, even touching 80% in that year. I specifically remember a well-known bank splashed the stellar returns of its small company fund on advertising boards outside the Wanderers cricket stadium. It almost coincided perfectly with the end of the small company boom. New investors experienced nothing like those returns, quite the contrary. Fund values declined by nearly 80% in the following year.
It is easy to advertise last year’s best performer. Past performance sells. Sadly though, last year’s winner does not generally bode well for the new investor. It’s more of a counterintuitive thing. The longer the above average returns from a specific type of asset last, the greater the likelihood that it will start to under perform relative to expectations. Of course, it’s not quite as simple as that.
What is the relevance of this caution for offshore investments? Specifically, with regard to the American share market? There is a strong likelihood that you will not make nearly as much money from that market over the next five years as you would have made over the past five years. In fact, there is a strong likelihood that the current favourite, technology shares, will cease their meteoric rise (earlier this year the one-year return exceeded 50%) and dampen the returns on the whole market.
I am not saying that offshore investments are not necessary or that new offshore exposure as part of a holistic financial plan should not be made. I am reminding you that it is easy to sell offshore assets to you right now, especially investments linked to the American market. Offshore products are selling like hot cakes and the people selling those products are smiling all the way to the bank. You should be aware of that.
Someone will make a lot of money from the current trend. It is unlikely to be you.
//27 November 2020