Nearly 10 years after the introduction of the offshore investment allowance (which started at R200 000 and is now R2m), the offshore unit trusts, which are registered with the Financial Services Board (FSB), have gathered R38,4bn in retail assets.
Not so long ago it was hard to give away offshore funds, as local equity and property investments provided superior returns. But it is evident from Association of Collective Investments (ACI) statistics that the tide has turned.
WHAT IT MEANS
 Nearly R40bn has gone to offshore funds
Life wrappers offer more choice
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According to the ACI, foreign collective investment schemes (FCIS, as foreign unit trusts are officially called) had a net inflow of R2,42bn.
Investors show a clear preference for equity funds, which account for 71% of FCIS assets.
It is still quite a narrow universe of funds. There are now 366 FSB-approved foreign funds. When it comes to fund schemes, the line-up is dominated by those international funds that have a tie-up - Orbis Global is the largest scheme, with R13,4bn under management, Sanlam is second with R12,8bn and Investec International third with R8,9bn.
But these figures do not include what is undoubtedly the market leader in the sector - Old Mutual International (OMI), which is considered for regulatory purposes as a life insurance product (though no life cover is offered).
In terms of retail flows, no collective investment scheme has come close to its R2,3bn in new business last year.
Marcel Bradshaw, head of OMI's SA distribution, says OMI's main product, the Life Account, offers access to a wide range of offshore markets and assets. The competitive advantage is not so much in the wider range of managers - though it does offer funds from companies such as Thames River, HSBC and Skandia, which are not registered with the FSB.
The main competitive advantage is in its five asset-class funds, which have become well accepted by the financial advisers who are happy to subcontract all asset allocation decisions to OMI.
The two most popular funds are not FSB-registered. They are both managed by Global Asset Management (GAM), a London-based multimanager - the Diversified Plus, which aims for cash plus 2%, and the Growth Plus, which aims for cash plus 4%.
The Opportunity Plus, which targets cash plus 6%, is managed by Old Mutual Asset Management (OMAM) UK and is an increasingly popular option.
Demand for equity funds outside life wrappers has been muted. Many investors, especially those who invested in December 2001 when the rand was at its weakest, have been disappointed.
Offshore investment is not an easy sell but it has not stopped some people making a renewed effort to market it.
Investec Securities, for example, argues it is time to turn the lousy experience around that South Africans have had when it comes to offshore investments.
Apart from poor performance, many investors have seen their assets held in inappropriate or costly structures. Investec Securities investment expert Raymond Goss says given the limited value (in international currencies) of our offshore allowance, SA investors end up at the bottom of the feeding chain and consequently the most basic service levels have been hard to come by.
To rub salt in the wound, SA has a growing stature among foreign investors as an emerging investment destination of choice. In addition, we have experienced significant capital appreciation on our local assets over the past few years. As a result, and given that we understand the nuances of our domestic market, many investors now question the rationale of venturing offshore at all.
Goss says we have learnt that the old paradigm of investing offshore to protect ourselves against a fast-depreciating currency is a thing of the past. In fact, it now appears that we should put currency weakness aside when making offshore investment decisions. We have also allowed the confusing array of mutual funds from which we can select to cloud our judgment, he says. "As a result, when faced with making an offshore investment, we tend to freeze in the headlights."
The reality is that offshore investing should not lead to a state of paralysis and must be done for the right reasons. If we return to the basic principles of investing, it would mean that before even considering an underlying investment, we must grasp the issue of top-down asset allocation.
The choice of investment must be made taking structure, tax, fees and liquidity into account.
Investment theory tells us that 85% of returns are based on decisions about asset allocation - about being in the right place at the right time.
Identifying which portion of your assets will be invested in one of four basic asset classes - cash, bonds, equity and alternative investments (private equity, hedge funds and property) - is critical.
Goss and Bradshaw both say the most effective way of dealing with asset allocation is to diversify assets among a range of asset classes and regions.
B uying mutual funds with a mandate to invest funds globally across geo-graphic regions is the first step. Then tactical asset allocation decisions (such as going overweight a particular region or asset class) can be made through the purchase of a more focused mutual fund.
Though investing in mutual funds "over the counter" is costly in terms of initial and management fees, these funds become effective from a tax perspective by reducing capital gains paid by the investor since all trades take place within the mutual fund.
If you find it too complicated picking the funds yourself, there are a number of multimanager funds that can perform the task of blending managers on behalf of investors. Expectations of performance must be tempered - you will never outperform the "hot" share or mutual fund that your neighbour always seems to be talking about. But then, your overall risk profile is commensurately reduced.
If you want to select stocks yourself, Goss says, direct equity investments can be made through a host of global stockbrokers.
If you have sufficient assets, you should consider a discretionary managed segregated portfolio, in which Investec Securities, Sanlam Personal Investments and Barnard Jacobs Mellet are the leading firms.
Though a lot more exciting with increased volatility levels, this type of service can be complicated to administer and tax inefficient. (As a reminder, transactions are taxable and foreign dividends are not tax exempt.)
When it comes to selecting an underlying currency, this often amounts to a fool's game. Most wealth managers will suggest maintaining a broad exposure to a basket of reference currencies. Remember that the period of time over which you are investing, as well as the requirements of bringing assets back, will influence the currency risk you are taking.
For example, a person facing retirement and needing capital to meet daily living expenditures would face capital risk due to the volatility of currency movement over the shorter term. In this instance, the investor should view his or her wealth in rand terms, and would have to weigh the risks of being in any other currency outside of the rand accordingly.
Goss says that even though the sun is shining brightly in SA at the moment, don't be blinded by the glare. It is important to appreciate the importance of offshore diversification to mitigate the unintended risk of having the majority of your assets in an emerging market.
Approaching offshore investments with realistic objectives, getting the basics right and limiting unnecessary fees should provide a far happier experience.
