Offshore Diversification: What It Actually Protects Against

It’s Not Just About the Rand

The rand depreciation argument is the one most South African investors hear first. It is also the one that causes the most confusion — because it frames offshore investing as a currency trade rather than as sound portfolio construction.

The long-term numbers are real and consistent. Over the past decade, the rand has depreciated against the US dollar at approximately 5.9% per annum on average. The structural drivers of this — inflation differentials between South Africa and developed economies, fiscal pressures, commodity price sensitivity, and political uncertainty — are not new, and there is little in the current macro environment to suggest they are about to reverse permanently.

For a South African investor holding only rand-denominated assets, this depreciation represents a permanent return headwind in global purchasing power terms. If your portfolio earns 10% in rand terms while the rand loses 6% against the dollar, your real purchasing power in global terms has grown by roughly 4%. Over 20 or 30 years, this compounding gap is substantial — and it affects everyone who spends money in a globally-priced world, whether on travel, education, imported goods, or simply the cost of emigration optionality.

But the rand case, taken alone, leads to a specific mistake: treating offshore allocation as a timing decision. Investors try to move money offshore when the rand is weak, hold back when it is strong, and spend considerable mental energy trying to pick the right moment. This is market timing under a different name, and it suffers from the same problem market timing always does — the rand’s short-term movements are unpredictable, and the opportunity cost of waiting is real.

The stronger case for offshore allocation is structural, not tactical. It has nothing to do with where the rand is trading today. It is about building a portfolio that does not depend on a single country’s economic and political trajectory for its long-term success.

A SA-Only Portfolio Is a Concentrated Portfolio

South Africa is a well-developed financial market by African and emerging market standards, and the JSE has a long and credible history. But investors who hold a purely domestic portfolio should understand clearly what they own — and what they are missing.

South Africa represents less than 1% of global investable market capitalisation. The JSE All Share Index, despite covering hundreds of listed companies, sees its top 40 constituents account for approximately 80% of total market cap. Those 40 companies are themselves heavily concentrated in three sectors: resources, financials, and consumer staples — with Naspers/Prosus adding a significant technology overlay that, paradoxically, derives most of its value from Chinese internet assets rather than the South African economy.

A domestic-only portfolio gives very limited exposure to the sectors and companies that have driven global wealth creation over the past two decades. There is no meaningful access to US technology, European healthcare, global infrastructure, Japanese industrials, or Asian consumer growth — all of which represent genuine diversification relative to a resources and financials-heavy emerging market index.

This is not a criticism of the JSE. It is a description of what it is: a good market for what it covers, and structurally incomplete for everything it doesn’t.

“I Bought a Global Index” Isn’t Always What It Sounds Like

A growing number of South African investors are accessing offshore markets through index funds and ETFs — S&P 500 trackers, Nasdaq-100 funds, and MSCI World products. This is a meaningful improvement on a purely domestic portfolio, but it introduces a concentration risk that is less visible and therefore more easily overlooked.

The S&P 500 is currently dominated by a handful of mega-cap US technology companies. The top 10 holdings account for over 35% of the entire index — meaning a fund that sounds like it represents 500 companies is, in terms of actual return drivers, heavily dependent on a small cluster of the same names. The Nasdaq-100 is even more concentrated.

The MSCI World Index, which sounds genuinely global, is approximately 65–70% weighted to the United States. Its top holdings largely overlap with the S&P 500’s, and its sector composition is similarly technology-heavy. An investor holding an S&P 500 fund and an MSCI World fund alongside each other has not achieved meaningful diversification — they have bought more or less the same underlying exposure twice.

This does not make index investing wrong. Low-cost, broad market exposure remains a sound foundation for most portfolios. The point is that “diversified” and “indexed” are not synonyms, and genuine diversification — across geographies, currencies, sectors, and styles — requires some intentionality about what is actually in the portfolio and where the return concentration lies.

Offshore Doesn’t Mean More Risk — It Means Different Risk

A common hesitation among investors considering offshore allocation is the perception that foreign markets are unfamiliar and therefore riskier. This confuses familiarity with safety — which are not the same thing.

In a well-constructed portfolio, adding offshore exposure typically reduces overall portfolio volatility rather than increasing it. The reason is correlation. SA equity, SA bonds, SA property, and the rand are all influenced, to varying degrees, by the same set of local factors: SARB interest rate decisions, load-shedding, government fiscal policy, commodity prices, and SA-specific political risk. When these factors deteriorate — as they periodically do — most domestic asset classes tend to move in the same direction simultaneously.

Offshore assets, held across different currencies and economies, respond to a different set of stimuli. When local conditions are difficult, well-diversified offshore holdings often provide a degree of insulation — not because foreign markets are immune to stress, but because they are stressed by different things at different times. The combined portfolio is structurally more resilient than either component on its own.

There is one genuine short-term risk that offshore allocation introduces: currency volatility. In any given year, a stronger rand will reduce the rand value of offshore holdings, and investors will see negative currency returns even if the underlying assets performed well in dollar or euro terms. This is normal, expected, and does not alter the long-term case. Reacting to short-term rand strength by reducing offshore exposure is usually a mistake — and one that tends to be made at exactly the wrong moment.

It’s More Accessible Than Most People Think

The perception that offshore investing is exclusively for high-net-worth clients is largely outdated. Access has broadened considerably over the past decade, and most investors — regardless of portfolio size — already have meaningful offshore capacity available to them that they are underutilising.

For investors with retirement funds — retirement annuities, pension funds, or preservation funds — Regulation 28 permits up to 45% offshore exposure within those vehicles. Most SA investors’ retirement funds are nowhere near this limit, which means the single most practical step for many is simply to review the current offshore allocation within existing retirement structures and bring it closer to the permitted maximum where appropriate.

Living annuities sit outside Regulation 28 entirely, giving retirees full investment flexibility over their portfolios. In practice, some platforms impose their own offshore capacity limits due to SARB allowance constraints, which means available offshore exposure can vary by platform. But the regulatory ceiling does not apply — a well-structured living annuity can and should hold a meaningful offshore allocation to provide the long-term real growth that a 25 to 30-year retirement demands.

For discretionary savings outside retirement vehicles, the landscape ranges from simple to sophisticated. Rand-denominated offshore unit trusts — available on standard SA platforms, no exchange control approval required, accessible at low minimums — provide full offshore market exposure in a familiar wrapper. Offshore endowment structures offer direct foreign currency exposure with additional estate planning benefits. And direct offshore platforms (EasyEquities USD account, DMA, Interactive Brokers, and others) allow South Africans to buy individual foreign-listed shares and ETFs directly.

The last option has become popular — and for good reason. The accessibility and low cost of platforms like EasyEquities and Interactive Brokers have made direct foreign investing genuinely easy. But ease of access is not the same as ease of management, and direct offshore investing through a stockbroking account introduces risks that are not well understood by most retail investors.

Two Risks Most DIY Offshore Investors Haven’t Considered

The growth of direct offshore platforms has made it easier than ever for South Africans to invest abroad. Open an account, fund it via your SARB single discretionary allowance, and within minutes you can own Apple, an S&P 500 ETF, or a global infrastructure fund. The convenience is real. So are the risks that tend to get overlooked.

The first is situs tax. US-listed assets — individual shares, US-domiciled ETFs — are considered US-situs property for estate tax purposes. This applies to any non-US person who holds them, regardless of residency or citizenship. On death, US assets above approximately $60,000 in value are subject to US estate tax at rates of up to 40%. For an investor who has accumulated, say, $200,000 in a US-listed S&P 500 ETF held on a direct platform, the US estate tax exposure is significant — and most are completely unaware of it.

This risk can be managed. Offshore endowment wrappers, for example, hold the underlying assets in the name of the assurance company rather than the individual investor, which removes the situs exposure. Irish-domiciled ETFs, which track the same indices as their US counterparts but are domiciled outside the US, are another practical solution. But managing it requires knowing it exists in the first place.

The second risk is tax non-compliance. South African tax residents are taxed on their worldwide income and capital gains, regardless of where assets are held or where income is earned. Foreign interest, dividends, and capital gains from offshore accounts must be declared on your annual tax return. SARS has made significant progress in recent years on cross-border data sharing, and the assumption that offshore accounts are invisible to the South African Revenue Service is both legally incorrect and increasingly unrealistic in practice.

In our experience, a meaningful proportion of investors who manage their own offshore accounts are not reporting correctly — not necessarily through deliberate evasion, but through genuine uncertainty about what is required. Getting this right is not complicated once the obligations are understood, but the consequences of sustained non-compliance are not trivial.

Both of these risks are manageable with the right structure and proper advice. They are not reasons to avoid offshore investing — they are reasons to approach it thoughtfully rather than simply opening the most convenient app and buying an index.