Some readers have asked me about the various ways in which one can invest in offshore shares. Say, for example, that you want to buy some Twitter Inc shares. Twitter is listed on the New York Stock Exchange (NYSE).
One of the first options is to move your money overseas and convert it to foreign currencies. If you want to buy Twitter shares on the NYSE, you will therefore need to convert your South African rand into US dollar.
To convert your rand into dollar and then move it abroad to buy some Twitter shares, you can choose one of the following options:
Option 1: You want to invest up to a maximum of R1m in offshore shares and do not want to repatriate your funds to South Africa. You can use your single discretionary offshore allowance of R1m, which does not require tax clearance from the South African Revenue Service (Sars). Keep in mind that this allowance resets every calendar year, meaning that every year you can use your allowance of R1m.
Option 2: You want to invest more than R1m, and up to R10m in offshore shares and do not want to repatriate your funds to South Africa. You can use an offshore allowance of R10m. You will need to get a tax clearance certificate in respect of your foreign investments from Sars. Keep in mind that this certificate, once issued, is only valid for 12 months.
Option 3: You want to invest without the administrative requirements of applying for tax clearance and you’re willing to repatriate your funds when you withdraw your investment. An asset swap account allows you to invest offshore without using your offshore allowance. Such an asset swap account is also available to trusts, companies and partnerships. This option comes with other requirements.
Who can help me with this?
Any bank, or any other institution with an international payment functionality can assist you with any of the mentioned options. Choose an institution that can seamlessly assist you with the administrative requirements involved when taking your money abroad. Keep an eye on costs.
It might be easier to use a local asset manager to invest in offshore funds on your behalf when investing larger amounts. It might also be less expensive this way.
Once you’ve decided on your option and actioned the applicable requirements, you will need to open an account with an international stockbroker. Of course, many different international brokers are available, but always ensure that the broker you choose is licensed and is a regulated broker.
Regulated brokers are registered as members of various regulated financial institutions, such as our domestic FSCA (Financial Sector Conduct Authority).
The reference to such an FSP (Financial Services Provider) will indicate that they are regulated and are bound to abide by rules and regulations. If you are unsure, please contact these authorities to verify the existence of such an FSP.
And again: Always make sure of trading costs as it will be quoted in the foreign currency.
Take note that a minimum deposit amount is required to open such a trading account. The same is applicable with the asset swap account.
Consider the risks
Investing offshore may enhance your returns and reduce risk by diversifying your exposure to a specific currency or country. However, you must understand the risks associated with such a portfolio of offshore shares.
Firstly, you’ll need to consider currency risk. A stronger rand can offset any gains on your offshore share portfolio. It is important to move your money out of the country at times of rand strength. The perfect scenario will be to bring your money back to South Africa when the rand is weak and when you have substantial gains on your account. If you are uncomfortable with the volatility in the markets, do not attempt investing offshore.
Remember that South Africa remains an emerging market and is small in comparison to the international markets. Our currency remains volatile.
A long-term view is also required to fully benefit from offshore investing.
It is advisable to approach a tax expert because of the perceived complexity of applying tax and Reserve Bank clearance to offshore investments and the capital gains when disinvesting.
The actual trading of offshore shares occurs through an online trading platform whereby you have direct, real-time access to international stock exchanges. Once you’re all set up, you’re only left to decide what share you will be trading.
Keep in mind that while you can construct your own portfolio of global shares and exchange-traded funds (ETFs), you can also choose to have your portfolio managed by a team of advisers and expert analysts. Most local share brokers can assist you in this regard.
Peet Serfontein is a director of Phoenix Investment Analytics.