Should I invest in overseas feeder funds or overseas rental property?

From time to time, Rosebank Wealth Group is sent reader’s questions from Moneyweb. This question and answer was first published on the Moneyweb site.

I have R1 million which I intend investing overseas as part of my investment portfolio as a hedge against a weakening rand. I could invest in overseas feeder funds from South Africa or overseas rental property via an offshore company. Which is the better option and is investing in overseas rental safe?

The two choices being considered differ significantly in terms of risk, possible returns and diversification opportunities.

Overseas feeder funds

These funds are rand-based, domiciled in South Africa and you do not require SA Reserve Bank permission before you invest in them.

This means that if your chosen funds had a zero annual return (in US dollars, for example), but the rand depreciates against the US dollar by 20%, your return would be 20%.

The word ‘feeder’ denotes the fact that the investments in the South African registered fund ‘fed’ or transferred to an offshore denominated fund, usually with a similar name and managed by the international component of the same asset management company.

The most popular categories of rand-based offshore funds are ‘Global Equity’ (106 funds with three-year performances ranging from 2% to 42%), Global Real Estate (23 funds with three-year performances ranging from 1% to 17%) and Worldwide Multi-Asset Flexible (93 funds with three-year performances ranging from 5% to 21%).

Advantages: Like most other unit trusts, these funds offer a simple, easy way to get exposure to a diverse portfolio. Registered funds in SA are approved by the Financial Sector Conduct Authority (FSCA), so you have some regulatory and compliance oversight. They are liquid – you can buy and sell quickly, transaction costs and fees are transparent, and performances are reported daily.

Disadvantages: There are lots of funds to choose from, and as you can see from the summary above, performance differs widely. Even though you have offshore exposure, you do still have rand-priced assets, so this could be a disadvantage if you are looking to physically externalise assets.

Overseas rental property via an offshore company

I am not quite sure whether this option involves buying a physical property, or whether the investment you are considering is a portfolio of physical properties where the managers select, buy, manage and maintain the portfolio of properties in return for a management fee.

Advantages: If structured correctly, property investments offer diversification away from other listed assets which could ‘smooth’ your total investment returns.

Disadvantages: Without knowing more details, we 100% share your misgivings about whether investing in a ‘rental property via an offshore company’ is safe. Venturing into a (possibly) unregulated world with an investment – which, in addition to any other risk, may be difficult to sell – might be the beginning of a nightmare. I would advise you very strongly to take the investment documents to a lawyer and ask them to help you understand the small print, explain the risks, the downside costs, the term of investment and any other liability that you might be exposed to before committing to such an investment; this will be money well spent. A further concern is that a ‘single property investment’ (if this is what you are considering) would constitute very concentrated exposure.

Summary

Rosebank Wealth Group is in favour of diverse investment opportunities, transparent fees and easy to understand underlying investments. We also think long-term investors should demand a premium for having a long-term outlook.