ALTERNATIVE TO DIRECT OFFSHORE INVESTMENT (Personal Finance
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.
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