Investors wanting to get offshore exposure in their portfolios can either take their rands offshore and invest (for example by buying the S&P 500 exchange-traded fund on the New York Stock Exchange) or invest locally in a rand denominated offshore investment (like the CoreShares S&P 500 ETF on the JSE). In theory, the returns from either investment option should be exactly the same with a slight difference in taxes and tracking error from the ETFs. In the case of the latter option though, your returns from the investment are still in rand, with your rands never actually leaving the country.
Rand-denominated investments are also not affected by exchange controls, which limit the amount you can take offshore. In short, South Africans are currently allowed to take up to R10m a year offshore subject to tax clearance, and up to R1m without a tax clearance certificate. For a normal investor, this should not pose a problem, and the current exchange control limits would only affect the very wealthy. There is of course a risk that the government can reduce the exchange control limits overnight.
These days most major South African financial institutions (like Glacier, Investec, Liberty and Momentum) have offshore investment platforms in tax havens like Bermuda, Guernsey and Jersey. Although you can deposit your rands directly with them to invest on their offshore platforms, I recommend you rather open an offshore bank account and then deposit your funds from that account into your chosen offshore investment platform. These days you can open a US dollar bank account electronically with a reputable bank within five days. Having an offshore bank account provides investors with the following benefits:
As this is the first step in the offshore investment process, it gives you more time to do homework on where and how you want to invest while you’ve already locked in the exchange rate. It is not recommended you just leave your money in a foreign denominated bank account for an extended period as interest rates offshore are low.
While most offshore investment platforms would have minimums with regard to initial and top-up investments, there are no minimums involved with converting your rands to your offshore bank account. Investors who therefore don’t have enough funds available to invest on an offshore platform or in a specific offshore investment vehicle can use their offshore bank accounts to save until they have enough to start or increase an offshore investment.
Some offshore bank providers would provide you with a rand- and a foreign denominated currency bank account which are both in your name. The investor would then first pay their rands into their rand bank account with this institution. This can be done by just creating and paying a beneficiary via your local online banking platform. Once the rands are deposited, the investor just contacts their conversion agent to convert their rand payment and put it into their foreign denominated currency bank account.
There is a cost involved with converting your rands to a foreign-denominated currency. The conversion fee is mostly a percentage-based fee and is collected by adding a few cents to the price you’re paying for the foreign currency. For example, if the rand/dollar exchange rate (as quoted in media) is R13.50 per US dollar, you will pay R13.58. In other words, you pay eight South African cents more for every US dollar you buy. The process is however very transparent, and your conversion agent will quote you the spot and the all-in price and it is up to you as the investor to accept it or not.
Having an offshore account allows you to stagger the conversion of your rands into a foreign-denominated currency. With the volatility of the rand, we recommend investors to stagger their buying of foreign currency and not convert all at once, as no one knows whether the rand is at that point at its top/bottom. Contrary to popular belief, there’s no real benefit in converting big amounts compared to small amounts. Only the SWIFT fee of about R250 is fixed per conversion transaction.
Once your funds are offshore in your own offshore bank account, you can invest in multiple financial institutions and are therefore not tied to one specific institution. You can also use your offshore bank account for debtors, creditors or other expenses you might have outside the country.
Magnus de Wet is a director at Vista Wealth Management, a representative under supervision of Accredinet Financial Solutions.This is part of our cover story on offshore investing, which is brought to you by Investec. It originally appeared in the 18 May edition of finweek. For the rest of this story, you can buy and download the magazine here.