Why invest offshore?
South Africa represents less than 1% 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.
Lastly, this strategy also offers protection against the devaluation of our currency because of political and low domestic economic growth.
How can I invest outside of South Africa?
There are two main options to get offshore exposure: through rand hedging or direct offshore investing.
What is rand hedging?
Rand hedging means protecting your investment against fluctuations in the currency.
If the rand continues to weaken against hard currencies like the dollar, as it has been doing over the past 30 years, it will erode the buying power of your rand savings.
To avoid this, you should have a portion of your portfolio in investments that will benefit from a weakening 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, such as Naspers*, Steinhoff, British American Tobacco, Richemont 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 and/or unit trusts.
Most of us investing in pension, provident and retirement annuities will already have exposure to rand hedge funds.
Most of the large companies on the JSE generate substantial 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.
You have two options when investing offshore: indirect or direct.
Indirect offshore investment:
This 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.
Direct offshore investing:
Individuals whose tax affairs are in order can take R10m a year out of the country, subject to tax clearance and Reserve Bank permission.
There is also a further R1m allowance for travel and other purposes (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 a virtually unlimited choice of investment options and products.
You have two options:
- Platform investing offshore. Investing by using a South African company with an investment platform in an offshore jurisdiction (for example in Bermuda, Isle 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 South African legislation into account.
- Do-it-yourself offshore investing. South African 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.
You must also 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. This method is far more complicated than using a platform offshore investment structure.
Wouter Fourie is a certified financial planner and a director of Ascor Independent Wealth Managers.
*finweek is a publication of Media24, a subsidiary of Naspers.