How to invest offshore, an easy guide
By Wouter Fourie CFP®
FPI Financial Planner of the year 2015/2016
Director of Ascor® Independent Wealth Managers
You can invest indirectly or directly – both have various options.
Why invest offshore (outside South Africa)?
South Africa represents less than one percent of the world economy and restricting yourself to local investments means you will lose the opportunity available to invest in some of the biggest and most successful businesses and markets in the world. International investing will give you access to regions and industries not well represented locally and assist in spreading your risk, also referred to as “not having all your eggs in one basket”. And of course, protection against the devaluation of our currency because of political and low domestic (internal) economic growth.
How can I invest outside of South Africa?
There are two major options when investing outside South Africa including Rand Hedging or Offshore.
What is rand hedging?
Rand hedging means protecting your investment against a weaker currency over time. If the rand continues to weaken, as it did over the past 30 years, it will erode the buying power of the rand and even put pressure on local inflation. To avoid this, you should have a portion of your portfolio in investments that will benefit from a weak rand.
How can I use rand hedging?
Pure rand hedging can be achieved through JSE-listed companies that sell products and services outside South Africa or have big foreign operations. i.e. Naspers, Richmond, and most of the mining companies.
Access to investing in JSE listed companies that provide you with rand hedging options can be obtained through;
a private client share portfolio or
as part of a unit trust fund.
Most of us investing in pension, provident and retirement annuities will already have an exposure to rand hedge funds. This is obtained by the fund managers investing in companies on the JSE that provide rand hedging. The biggest portion of the large companies on the JSE generate most of their income from outside South Africa thus providing some rand hedging. This can be observed when the value of our currency depreciates and the JSE all share index rises.
How can I invest offshore?
You have two options when investing offshore, indirect offshore or direct offshore.
Indirect offshore investment allows you to invest in offshore assets (also known as global assets) without the money physically leaving South Africa. This is done by a process called “asset swaps”. No tax clearance is needed and the investment performance and value is reported in rand value. These investments are simple to understand for investors.
Indirect offshore investing has two options:
Rand-denominated offshore equity funds investments.These are local unit trusts that invest in a fund of funds that are managed in another country (feeder funds). You invest in a “basket of funds” with exposure to more than one fund manager in one fund.
Asset allocation offshore investment funds.The main benefit of these funds is that the manager takes care of the decision of how much offshore exposure and into which assets and region should be invested. It is a single fund that focuses on asset allocation and not a “fund of funds” approach. You can be more region and/or industry, trend specific i.e. more Japan and USA and less on China in the portfolio or more on IT and less on resources.
What about Regulation 28 requirements?
Pension, provident and retirement annuities investment portfolios are regulated (Reg.28) and can only have 30% offshore exposure, plus another 10 to Africa. Non-Regulation 28 investment portfolios have no limit on foreign exposure.
Direct offshore investing. Individuals whose tax affairs are in order can take R10 million a year out of the country, subject to a tax clearance and reserve bank permission. There is also a further R1 million allowance for travel and other purposed (no tax clearance needed). The money is moved from a South African bank account to a foreign bank account from where you can invest in virtually unlimited choice of investments options and products.
Direct offshore investing has two options:
Platform investing offshore.Investing by using a South African company with an investment platform in an offshore jurisdiction (i.e. Bermuda, Ilse of Man etc.). It provides the investors with peace of mind dealing with a South African company but having your investments offshore. The investments are specific to the needs of South African investors, including tax administration and reporting and managing estate duties taking existing SA legislation into account. “Life wrappers” also offer additional tax (lower CGT rate) and estate administration savings. These investments are very popular and provides various option including actively managed diversified funds, bespoke portfolios including shares, ETFs and bonds.
Do it yourself (“DIY”) offshore investing. SA investors who have earned money overseas or have taken money offshore can use any offshore service provider of choice to invest with. However, if you are still a South African resident for tax purposes, you must handle your own tax administration and estate duties and have a separate offshore last will and testament to address how these offshore assets will be dealt with should you pass away. You also need to take note of possible higher estate duty tax payable in the country you are invested in. It is far more complicated than using a Platform offshore investment structure.