RETIREMENT
PLANNING
 
Best viewed IE 600 X 800
Copyright 2003-2004

NO ALTERNATIVE TO DIRECT OFFSHORE INVESTMENT (Personal Finance July 1998)

The recent turbulence in currency markets has proved what advisers have been saying for a long time: investors need a sizable portion of their investments offshore. One avenue being punted to achieve a hedge against the falling rand is via the numerous New Generation Guaranteed Products from the various Assurers. These are five year term investments and the growth is linked to one of, or a combination of, Overseas Stock Market indices, such as the S & P 500 which, like the JSE Overall index, measures the average performance of the top 500 companies in the USA. The actual growth on the index is then “geared” so that the investor is given say 150% (i.e. 50% extra) on what the actual growth is. Any appreciation of the Dollar (or other currency) against the Rand over the term is then added to the geared growth. In addition these products carry a guarantee on the full original capital invested.

An added advantage of these products is that although a rand hedge is achieved, the investor does not have to go through the rigmarole of utilising their R 400 000 offshore allowance. As a result, a lot of investors are purchasing these products as an alternative to going directly offshore in the understanding that they are achieving the same thing. Unfortunately they are not.

What many investors fail to realize is that the rand depreciation factor of the Guaranteed Product investment is only based on the growth portion of the investment, and not on the original capital invested. This dilutes the rand hedge effectiveness considerably and is one of the very reasons why the Assurers can offer such attractive gearing in the first place.

The following table illustrates the different ways in which a Guaranteed product on the one hand, and a direct Offshore Investment (utilising the R 400 000 allowance) such as an Offshore unit trust on the other hand, achieve their growth over one year. A 10% growth rate in the relevant stock market index is assumed , together with a 10% decline over the year in the Rand against the Dollar. The Guaranteed product is geared 150% and the Offshore unit trust is assumed to achieve the same 10% growth as the market as a whole.

  Starting Value at year beginning Add Stock Market Index Growth (10%) Add Gearing (150% X 10%) Add Depreciation of Rand Value at year end
Guaranteed Product 100 10 5 1.5(10% X growth + gearing only) 116.5
Offshore Unit Trust 100 10 not applicable 11 (10% X full capital including growth) 121


As can be seen, the Offshore unit trust achieved far more rand hedge protection than the Guaranteed product, resulting in better overall growth despite the gearing of the Guaranteed Product. A five year projection also confirms the better performance of the direct Offshore Investment (although the Guaranteed Product does fare better than over one year as the cumulative growth portion is larger).

Despite the above, the Guaranteed Products are not “all bad”. There is definitely a place for them in certain portfolios as they do offer a certain level of guarantee which unit trusts don’t. They can also be used to achieve added rand hedge protection where an investor has already exhausted their R 400 000 allowance. What is important to realise though, is they should not be looked at as an alternative to direct Offshore Investment, but rather as a complement. comment

back to top