Simply put, offshore investing is when you invest in a currency and a country outside of South Africa. Over the past decade, the opportunity-set for offshore investment has become increasingly good with a variety of choices on offer that provide investors with flexibility, transparency, accessibility, and cost efficacy.
As a private wealth manager for NFB Private Wealth Management, I advise my clients on most of the practices around offshore investment. Examples include buying a listed instrument on a recognised exchange or a unit trust (mutual fund).
We have seen a growing trend within our client sphere for requests around discretionary investment advice on offshore exposure. But like all good investment choices, it is important to remember that the decision to invest needs to be practical, not emotional and must meet the investor’s circumstances for the best results to be achieved.
Let us talk about the three routes to offshore exposure:
1) Investing in a feeder fund:
A feeder fund is ZAR-priced and is a South African-based unit trust that ‘feeds’ into an offshore version of that fund. Examples of this are the Investec Global Franchise Fund and the Nedgroup Global Equity Fund which have direct offshore (need foreign currency to invest) and feeder versions (need ZAR to invest). Albeit through a South African vehicle, these investments give you exposure to foreign investments, in the denominated underlying currency, and strategies like cash, bonds, property equity, or combinations thereof depending on what fund/s you have chosen.
2) Using your foreign investment allowance:
Taxpayers over the age of 18 can invest directly offshore via two allowances:
- Single Discretionary Allowance - up to R1 million per annum; and
- Foreign Discretionary Allowance - up to R10 million per annum to be accompanied by a tax clearance certificate for foreign investments. So long as your tax is in order the application is largely a formality, although it does require some supporting documentation.
Investing in either or both these allowances opens the opportunity to invest offshore where your money is physically externalised, and you retain your funds offshore if/when you redeem your investment. Foreign investment allowances provide the most diverse set of investment choices.
3) An asset swap:
Trusts and corporates do not have the option to invest via allowances. However, certain local financial institutions are granted permission to invest a percentage of their assets offshore. When they do not need their full allowance, they sometimes sell it on. This is called an asset swap. This type of offshore investment has characteristics of both a feeder fund and a foreign investment allowance investment. It is important to note that while the money is physically offshore, it will have to be repatriated to South Africa upon redemption. Remember, individuals can also use asset swaps.
Whilst all three options mentioned above enjoy offshore exposure and a similar opportunity set, if you happen to be an individual with specific circumstances, the best probable methods to invest offshore are through a Single Discretionary Allowance (SDA) or a Foreign Investment Allowance (FIA).
Pros and Cons of an SDA (Up to R1m per annum) or an FIA (up to R10m per annum):
- Your return is taxed in hard currency (ditto for an asset swap). A feeder fund is however taxed on the ZAR gain. A simple example would be if you invested $100 (R10/$) and redeemed your investment three years later with a 10% investment return and at an exchange rate of R15/$. Your taxable capital gain would be R150 ($10*R15/USD). In comparison, if the same parameters were applied to a feeder fund, you would realise a R650 capital gain.
- When you sell your offshore investment, you may retain your funds offshore. However, in a feeder fund or asset swap, your investment must always be repatriated to South Africa.
- The fees for foreign investments can be higher than local counterparts. If you do not have enough capital, you may be better off paying the lower fees in a feeder fund versus the higher fees with a lower tax rate in an investment held directly offshore.
The avenues to get foreign exposure are of course not limited to these options. There are things such as inter alia, ETFs, gold, Rand Hedge Shares, and JSE-listed shares that only buy foreign assets.
Once you have decided your preferred route to get offshore, you then need to spend time on your next investment decision. This should encompass your allocations to cash, bonds, property, equity, structured products, and so on.
The next step is assessing the benefits of either a direct investment or one through a wrapper.
An area that is often overlooked when investing directly abroad is the potential impact and complications around your Estate upon your death. These can come in the form of extra Estate Duty (Situs) as well as Estate administration complications (probate). Make sure you ask questions around your Estate before committing your funds.
When the time comes to convert your Rands to your preferred currency, you need to be reasonable but not greedy. Wait until the exchange rate is at a level deemed reasonably appropriate. You must always balance sensibility and cost.