“My financial advisor promises me 20% p.a. growth on my local investments with minimal risk.

WILL I GET THIS?”

Can fantastic returns be guaranteed?
Yes to an extent, but not really.
Let me explain.

Kirk McArdle, independent financial consultant, on South African mainland investments.

When I talk to potential clients about their local investment portfolios, I am given figures of huge returns that clients see each year and they seem taken aback when I say that from a well balanced and diversified offshore portfolio they should look to achieve between 8 – 10% p.a. To begin with, these potential clients do not see the benefit of going offshore when the growth figures differ so drastically. Well, let me just break a few things down for you.

Interest rates:

Here in South Africa you start with 6% interest from the Reserve bank, but in tax-exempt jurisdictions there is 0% interest. Thus your base 6% is already “built” into the above 20% figure so in reality this then becomes nearer to 14% (I am going to round figures up for ease of following me here!).

Inflation:

Again, here in South Africa as a member of the emerging markets, there is an inflation rate of somewhere between 4.5 – 5% based on the official figures. I am not going to go down the route of the unofficial ones, but if you live here, you will know that this is higher than this!
As Austen Morris Associates only sources investments from Isle of Man, Guernsey and Luxembourg, the inflation rates there are between 0 – 0.5%.
So including these figures your S.A. investment growth figure is nearer to 10%.

Currency fluctuations:

The impact of your investment being denominated in ZAR instead of a hard currency (USD, GBP, EUR) is one that should not be underestimated. The fact that ZAR > USD exchange rate has dropped significantly in the time that I have been here cannot be argued.
I have already written in a previous article on this website about these fluctuations, but to recap:
In January 2014, 1 Million ZAR = $96,000 USD.
Today, 1 Million ZAR = $72,500.
So even the South African currency has dropped over 25% against USD and we expect it to continue to fall away.

Assets:

This doesn’t have any actual bearing on performance figures, but a local South African investment portfolio can only invest into assets listed in this country. i.e on the Johannesburg Securities Exchange (JSE). The JSE equates for less than 1% of all the global markets.
But by having an offshore investment, there is the ability to access these global markets. So you are not just limited to the 472 listed companies at the JSE. Some local investments will offer a portion of the portfolio as “offshore assets” but typically these are property based.

Conclusions:

So you can see from the above that a local 20% growth portfolio can be beaten by an asset allocation, risk balanced & sector diversified offshore portfolio that looks to return around 8% p.a.

And if you do happen to stumble upon an offshore advisor that says he can achieve 20%, run away!

PS:
At Austen Morris Associates we specialize in helping individuals reach their personal financial targets, and there is no one investment that fits everyone. That’s why we like to sit down and talk to our potential clients about their own private situation and to see if we can be of benefit.
If you would like an introduction to Austen Morris Associates and to find out how we can help with asset planning, then please do contact me on +27 11 514 0745 or at kirk.m@austenmorris.com

Kirk McArdle, independent financial consultant at Austen Morris Associates (AMA).

About Kirk McArdle

Kirk is an avid football fan and has successfully managed to steer his son, Luke 10, into supporting his team, Everton. Kirk also enjoys driving cars and drinking a cold pint of Guinness. Not both at the same time!

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