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Offshore investment key to offset rising costs of education in South Africa

8th March 2016

  

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deVere Acuma  (0.04 MB)

No one disputes the link between education and economic development, or that the best way to improve a country’s education level is through efficiently run, state-owned, schools and universities. But many parents choose to rather rely on the local private sector, and on overseas education. Both of which can be expensive.

The current weakness of the Rand is forcing many South Africans to reconsider how certain aspects of their lives will be funded in the near future. The Rand is not the only route of payment when it comes to funding the educational needs of our children. 

Whether investing abroad to fund studies locally or investing for future studies abroad, Divisional Manager of deVere Acuma Greg Stockton says it’s wise to save in multiple currencies – especially when it comes to something as serious as education.

“As a father of a 3-year-old girl, I love South Africa and I am happy for my daughter to grow up here. However, her university education is likely to be in the United Kingdom – where I’m from - so saving into a GBP education plan is sensible due to the uncertainty of future exchange rates. I started Gracie’s education plan, for example, just 3 months after she was born. You have to think ahead,” Stockton said.

According to international Investment Strategist for the deVere Group Tom Elliott, when considering school and university fees (and, indeed, any large future expenditure), it pays to put money aside sooner rather than later thanks to the effects of compounding.

“JP Morgan Asset Management, in its 2016 Long-Term Capital Market Assumptions, is assuming the average nominal rate of return of 7.5 percent per annum over the next 10 to 15yrs for global equity markets, and 2.75 percent for World Government Bonds (both in USD).  If an investor has a standard balanced portfolio of 60 percent global equities and 40 percent world government bonds, we get an average return of around 5.42 percent per annum,” explained Elliott.

“To put this in perspective, if our goal is to have a nest egg of USD100k to pay for five years of a child’s secondary education, and the JP Morgan Asset Management assumptions on our 60/40 portfolio prove to be accurate, we will need to put down $50,500 today to have that $100k on the child’s 13th birthday. If we want the same figure sum to pay for three years university education from the age of 18, we need to put down $39,000 today,” he added.

It was tertiary education that took the spotlight in South Africa in 2015. When the #Feesmustfall student protests erupted from two of the country’s biggest and best higher education institutions last year – University of Cape Town (UCT) and the University of the Witwatersrand (Wits) – it was no great shock that South African students had grown weary, and downright angry, at the rising costs of education.

“The protests drew the eyes of the world’s media, but it’s to the world that students’ parents should watch when it comes to investing in their education,” said Stockton.

“South Africans are increasingly looking internationally in terms of education, therefore it makes sense to invest in strong currencies such as the US Dollar or Sterling and not just the Rand,” Stockton further explains. “But even if you’re not considering an overseas education for your children, there is merit in investing in a balanced portfolio of offshore investments to be able to fund the ever-increasing cost of education in South Africa.”

The government has made it clear that it wants to see an improvement in the country’s educational attainment levels, and has backed this up with generous spending compared to other African countries.

South Africa’s developmental blueprint, the National Development Plan (NDP), states that “Improved education will lead to higher employment and earnings, while more rapid economic growth will broaden opportunities for all and generate the resources required to improve education.”

And, refreshingly, the government acknowledges that the disappointing outcomes from the educational system require reforms to the way schools and universities are run. More money is not the only solution.

Minister of Education Angie Motshekga, in her keynote address in January on the Basic Education sector, added “this national imperative will be stillborn if we continue to do the same things as before but hope for different results”.

But until reforms in the state sector raise educational attainment levels for all, South Africans will continue to look at the private sector and at overseas education as a solution for their children’s needs. Maximising savings will be crucial in order to pay for education, which means paying attention to currency exposure.

“Buying a basket of global assets is good long-term strategy,” adds Elliott.

“From an investment point of view, a global multi-asset exposure works best especially with the variety of funds around the world that are themselves exposed to different currencies. This is the savings strategy most likely to be beneficial for your child’s education,” Elliott concluded.

Edited by Creamer Media Reporter

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