A Fin24 reader planning to buy a Golden Visa in the next two years, seeks the advice of an expert as he considers investing in a money market.
I am slowly sending money offshore to buy a Golden Visa at some stage in the next two years.
Can you advise where I could park this money until I have sufficient funds?
I was thinking in terms of a money market ETF where I could get a reasonable guaranteed growth and a relatively safe investment. Unfortunately the research I have done so far shows that growth rates are negative.
Debra Slabber, Business Development Manager at Morningstar Investment Management South Africa responds:
Cash is unfortunately a very tricky asset class globally. Due to a prolonged low interest rate environment, your capital might be eroded by inflation if you remain in cash for lengthy periods. You do have alternative options in the event you don’t want to earn a zero return on your investment for the next two years.
- You can invest in a unit trust fund with exposure to other fixed income instruments, for instance, Global Investment grade bonds, which offer a good yield pick-up from pure money market exposure.
- The other option is a low equity portfolio (which has a maximum equity exposure of 40% of the total portfolio allocation) which provides sufficient exposure to cash, fixed income assets as well as some equity for a diversified blend of exposure but with limited downside.
There are great options available to externalise money with a good, active investment manager to manage the underlying asset allocation on your behalf. Morningstar Investment Management SA runs a Global Cautious model portfolio that is incredibly cost-efficient, has a great track record and with the objective of providing investors with conservative capital growth. Feel free to reach out to your financial adviser to discuss how to get access to this portfolio.
What are my options if I want to invest offshore?
If an investor wants to increase their offshore exposure, the two most common methods include:
- Option 1: Get capital clearance from the Reserve Bank and change Rands to Dollars. These funds, now in Dollar currency, sit in an offshore bank account from which the investor will be able to allocate to most USD denominated funds. You can invest up to R1 million abroad without a tax clearance certificate.
- Option 2: Invest in a Rand feeder fund. This process works the same as allocating to any unit trust in South Africa - except the underlying investments are all offshore based. The returns of this portfolio will be generated offshore and subject to the currency movement over that period. So you invest in Rands and will be paid out in Rands but the underlying investment is 100% offshore.
Other key considerations:
- Exchange rate – be mindful that you are not panic buying dollars (or other foreign currency) at a time when the exchange rate is not optimal. Not only will you erode the value of your hard-earned Rands, but you could be buying in at such a high level, that your return might never beat what you initially invested.
- Rand-Dollar cost averaging - consistent currency-cost averaging can result in a lower overall price for offshore shares (in terms of the price at which the share is listed for and is purchased at) and the currency rate at which you purchase the shares (in other words, how many Dollars you get per Rand amount spent).
- Tax efficiency – tax rules differ depending on how your offshore investment is structured. With that said, you will remain liable to pay capital gains tax on all gains, tax on interest and dividends earned, and foreign dividends will be included in your taxable income – to name but a few.
An investor must consult their financial adviser when faced with these types of questions. An adviser has the ability and insight to view a client’s portfolio holistically and assist with the asset allocation. The most important part is determining the investor’s goals at the outset. Without a clear goal, it is impossible to decide on the optimal asset allocation.
*This commentary does not constitute investment, legal, tax or other advice and is supplied for information purposes only. It is recommended that you consult your financial adviser.
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