Navigating the offshore investment maze

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SIMON BROWN: I’m chatting with Brandon Naidoo, Lead Specialist: Investment Proposition, Insurance and Asset Management, Liberty Group South Africa. Brandon, good to chat again. There are a couple of things I want to touch on, but I want to talk broadly offshore in particular.

I think we get the case for investing offshore, but a lot of folks are looking right now and being worried about, I don’t know, valuations and bubbles and AI and everything. The short version is that for a long-term investor wealth creation is mostly going to happen offshore. We’re such a tiny part of the global economy.

BRANDON NAIDOO: Thanks, Simon. As always, it’s a pleasure to chat with you. You’re right. The case for offshore has certainly been made, and we’ve seen offshore investing change over the years from being a nice-to-have to becoming vital, to now almost considered essential. I think that’s the stage that we’ve got to.

The question around valuations – are valuations looking frothy? Yes, they are. They’ve looked frothy abroad for a number of years now, haven’t they?

But I think the bigger issue is: ‘I’m going abroad because I need a wider opportunity set than I have in South Africa. I want access to industries like AI that you mentioned, which will dominate for decades to come. And can I really get access to that in the listed market on South Africa’s exchange right now?’ Probably not.

So I think those are the dominating factors when going abroad. And of course, you’ve got the small matter of being a country on the southern tip of Africa with a volatile emerging market currency, which does not help the situation, albeit strengthening over the last few months.

SIMON BROWN: I take your point. Valuations come and go. But you don’t necessarily need to be in the high, expensive stuff. I like your point around ‘essential’. I would add to it: It has also become easy. Ten years ago it was so, so easy. Twenty years ago, getting offshore was actually quite hard. These days it really is for anybody out there a really simple process. And that’s a big part of it.

BRANDON NAIDOO: Absolutely. If you think about it, the manners in which you can go offshore differ as well. You and I are talking about offshore generally, but people could consider their rand-based investment into an offshore fund. They could consider that offshore, that so-called ‘asset swap’ if you want to name it that.

But when we’re talking about going offshore in hard currency, using your single discretionary allowance, that has become much easier than in times gone by. Yes, most of the business is done via financial advisors. The most typical option used when going abroad is the international endowment. I’m sure you know all those reasons and your listeners would as well but [it’s] also going into investment accounts for the odd cases.

I’ll tell you what’s really picked up over the last number of years is the use of structured products. And more specifically – and I think when I say this everyone’s going to be nodding – structured products give you upside opportunity with downside protection. It feels like the best of both worlds and that’s why we’ve seen such an uptick in structured products.

I suppose being in a group like ours we’ve actually got the ability to take a structured product, put it within an endowment, and now you’ve really got the best of both worlds there.

SIMON BROWN: It’s almost like magic. I take your point. We’ve seen a significant growth in structured products but, again, 10 years ago there were very few of them. Now they give you that downside, they give you the upside. It is kind of magic, but it is actually under the hood quite simple and I think becoming a critical part of investors’ portfolios.

BRANDON NAIDOO: Absolutely. And structures also give you the ability [to] look at it and say: ‘Look, what structure am I investing in? Is it some fancy AI structure that gives me access and will form a satellite in my core satellite approach?’ or ‘Am I invested in the S&P 500 and the Euro Stoxx to form the core part of my portfolio?’

So the way you use structures, whether as a core or a satellite in your overall approach as well, differs from person to person. And we even see corporates using it.

SIMON BROWN: I like that. It’s around building that portfolio. A portfolio isn’t all all-in on Nvidia. It’s fun right now, but that could become painful.

But then the next challenge – and there are 130 000 regulated funds globally – is how do you find solutions? How do your DFM [discretionary fund manager] teams sort through it and find the best in class? I’ve got to be honest – I just look at the number of equities available and that overwhelms me.

BRANDON NAIDOO: I think you hit the nail on the head there with the use of the word ‘DFM’. Look, discretionary fund managers have had global tailwinds and we’ve seen them really pick up in South Africa over the last number of years and being part of our group. We have world renowned DFM that’s part of the group.

Now, different businesses have different ways of curating these panelists and getting to their ‘essential buy’ list and eventually putting together a portfolio for their client. So I think the manner in which you do your operational due diligence, your performance due diligence, the manner in which you curate those funds down will differ across the country, I’m sure, depending on which business you’re talking to.

But we make use of strategic relationships. Now, our Fund Solutions business will have a strategic relationship with the likes of a BNP Paribas, will help us narrow down that list because these guys are sitting in Europe and have access to the world via their thousands of analysts around the world. So that’s one manner in which you can curate your lists and get it a little bit narrower and allow you to really dive into them and do the operational and performance due diligence that I was talking about.

The other manner, which we’re seeing become more and more popular, is to form some strategic relationships with managers who are global players – and actually this is where they are experts.

Again, and this isn’t intended to be sort of punting here, but within the group we formed a relationship via STANLIB Asset Management, a strategic relationship with JP Morgan Asset Management, a conglomerate. And more and more of these plays are happening in South Africa because, again, if you’re sitting in the southern tip of Africa and you say to yourself there are 130 000 funds available abroad; go pick one that will work for my client – sheesh, that’s a tough starting point.

SIMON BROWN: Even more so for the individual. And it’s why the importance of advice – and I know a lot of my listeners are DIY investors – absolutely the respect is, I can’t do the level of due diligence over a fraction of those funds. This is where advice really sort of pays for itself and earns it stripes.

BRANDON NAIDOO: Simon, when going abroad, I think advice almost earns its stripes and more, if that makes sense because, yes, there are complications that need to be factored in.

Words that I’ve heard on your show many a time, are like ‘situs’ and ‘probate’, et cetera. But there are also more simplistic questions like ‘Do you want a beneficiary for ownership, or do you want a beneficiary for proceeds?’ That is going to impact your intergenerational wealth transfer plans.

And you can get a bit further than that, because financial advisors are no longer just people who run numbers. We’re talking here about people who are data gatherers, psychologists, behavioural scientists, problem solvers, communication specialists and everything in between. But the role that they perform has moved on from being a service provider. I think they are now a strategic partner to a client.

SIMON BROWN: I like that – and the psychologist part. I’ve beaten that drum so many times. They talk you off the ledge when you start to panic.

We’ll leave it there. Brandon Naidoo, from Liberty Group South Africa, I appreciate the time.

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