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Investing offshore can be a “very daunting exercise”, and it is vitally important to make use of the correct vehicle and underlying investments in order to maximise the effectiveness and growth of your offshore investment, advises Magnus de Wet, director of Vista Wealth Management.
He explains that the reasons people invest offshore can vary: “With SA currently only contributing 1% of global GDP, other markets can provide investors with access to industries and sectors that are not well represented by the SA economy.”
Examples include the biochemical, aerospace and medical device sectors.
Tamryn Lamb, Allan Gray’s head of retail distribution and Orbis in South Africa, agrees. She says South Africans need to make sure they are investing offshore for the “right reasons”.
These include the need to diversify your portfolio and broaden your exposure and not a weakening rand or negative news headlines, she cautions.
“Investing offshore should never be a knee-jerk reaction to events, but rather a decision taken as part of an overall financial plan,” she says.
Sonia du Plessis, investment planner at Brenthurst Wealth, stresses that most important is that the investor’s risk profile allows for offshore investments. Brenthurst Wealth recommends an investment horizon of eight to 10 years ?for offshore investments, as these can ?be “volatile”.
As an investor you have two options when you want to invest offshore: You can either take money out of the country by converting it into hard currency such as pounds, euros or US dollars, and then invest it overseas, or you can choose a rand-denominated investment via a South African unit trust, says Maarten Ackerman, chief economist and advisory partner at Citadel.
The investor’s money is placed in a rand-denominated asset-swap fund, with the unit trust using that money to invest offshore.
The money has to be repatriated to SA eventually and will be paid out in rand.
Du Plessis says that investors who are dealing in large amounts tend to use the hard currency exchange, while investors with smaller amounts tend to go the rand-denominated route via a unit trust.
Political uncertainty and the exchange rate may also have an influence on whether investors pick direct or indirect offshore investments, adds De Wet.
“Politically risk-averse investors will prefer to make use of direct offshore investing, as with this option the investor never has to repatriate or convert their investment back to rands,” he says. “With a weakening rand, direct offshore investing would be the preferred investment approach.”
According to De Wet, in theory, the returns from either investment option should be the same, with only a difference in cost and capital gains taxes when you dispose of the investment.
“The difference in the capital gains tax between a direct and indirect offshore investment lies in the method that is used to translate the capital gains or losses into rand,” he explains.
If you opt to go the hard currency route, it’s important to note the exchange control limits.
South Africans are allowed to take R1m out of the country every calendar year without a tax clearance certificate, and up to R10m a year with tax clearance.
I WANT TO INVEST R500 A MONTH OFFSHORE. ARE THERE ANY OPTIONS AVAILABLE?
Most foreign-denominated currency investments have a minimum investment requirement of $10?000 or more, leaving those who want to set aside small amounts every month forced to invest in a rand-denominated offshore product, says Magnus de Wet, director of Vista Wealth Management.
In addition, investing offshore using a debit order is difficult and expensive, as you’d have to convert rands into US dollars every time your debit order goes off, explains Warren Ingram, executive director of Galileo Capital. The transaction costs will make up a larger percentage of the money you’re investing.
A rand-denominated offshore investment is therefore much more user friendly if you want to invest as little as R500 a month, Ingram says.
De Wet says that investors who have R500 a month to spare can set up a debit order investment on a linked investment service provider platform.
“The investment can be a normal discretionary investment or even a tax-free investment account,” he adds. The current annual limit on tax-free investments is R33 000 per tax year, and no interest, dividend or capital gains tax is payable on the product.
“The underlying investment vehicle in the above discretionary or tax-free accounts can be a rand-denominated feeder fund, fund of funds, index fund or an exchange-traded fund,” De Wet says. “These vehicles in turn could have 100% exposure to foreign equity, commodity, real estate, bonds and/or money market instruments.”
This article is part of the cover story that originally appeared in the 12 April edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.
