Investing offshore allows South African investors to gain exposure to global sectors and industries, the likes of which they may not have access to locally. For instance, while South Africans have access to a large mining sector, there is no local equivalent of Google, Facebook or Apple – making offshore investing, and the diversification it brings to one’s portfolio, particularly appealing.
An offshore investment effectively allows you to buy global assets outside of the South African market, and this can be done in a number of ways. The method you choose depends entirely on your personal circumstances and should always be done as part of a carefully crafted investment strategy.
Global diversification is really just another way to achieve a well-balanced portfolio, but before assuming that you need to physically move your hard-earned rands into an offshore bank account in order to benefit from global exposure bear in mind that, if you are currently invested, it is likely that you already have a fair amount of offshore exposure in your portfolio.
While global markets have recently performed better than South African markets, it is important that investors do not assume that past performance is an indicator of future performance. Offshore investments are not necessarily more profitable than local investments and there are simply no guarantees when it comes to the future returns of local or offshore investments.
Direct investing: foreign-domiciled funds
One method of investing offshore is to physically move your rands from South Africa into a foreign bank account, with your rands being converted into that country’s currency such as pounds, dollars or euros. For these purposes, the Reserve Bank allows South African tax-payers to use their single discretionary allowance (SDA) of R1 million per calendar year, as well as their foreign capital investment allowance (FCIA) of R10 million per calendar year, bearing in mind that the latter requires a tax clearance certificate to be obtained from Sars. All offshore transactions must be registered with the Reserve Bank and conducted through authorised South African banks. Generally speaking, direct offshore investments have higher minimum investments making the barriers for entry higher than if you were to indirectly invest offshore. In addition, direct offshore investments do not generally facilitate debit orders and you would therefore need to have accumulated the minimum lump sum upfront.
There are strict regulations that need to be adhered to should you wish to take rands directly offshore, starting with your application for a tax clearance certificate in respect of your foreign investment allowance. Generally speaking, if your tax affairs are in order, this process can take anywhere from three weeks to a number of months. Once you have your tax clearance, you need to set up a bank account in the country where you wish to invest, and then transfer funds into that money account. Once your money has been transferred into foreign currency, you are free to invest your funds in that country as you see fit. It is, however, important to do your research before transferring your funds across so that you have a clear idea of where and how you want to invest your money. If your funds remain deposited in a bank account for a long period of time, they may lose value and purchasing power.
Importantly, if you hold a direct offshore investment, you are deemed to hold a foreign asset and will need to check if the jurisdiction will accept and act on a South African will should you pass away. If not, it will require you to have a foreign will in the jurisdiction that you are invested in. If language is a barrier, this can add another layer of costs to your investment.
Direct offshore investing can be an excellent strategy for those intending to emigrate to the foreign country they are invested in, or if they have children who intend studying in that country. Bear in mind that if you don’t intend spending in the currency that you are invested in, you may expose yourself to the risk of currency fluctuations.
Indirect investing: rand-denominated funds
On the other hand, through indirect offshore investing, investors are able to invest in a local unit trust portfolio that has a mandate to invest in foreign assets and is a simple, convenient and cost-effective method of enjoying globally diversified assets. Indirect offshore investing means that your investment is made in rands, which the unit trust manager then reinvests in direct offshore funds via an asset swap. This method of investing means that you do not need to set up an offshore bank account and, as such, no tax clearance certificate from Sars is required as your investment is still a local domicile. Most reputable local investment houses have set up rand-denominated funds, often referred to as feeder funds, which are designed to make it easier for South Africans to invest in global assets.
If you have a pension, preservation, provident or retirement annuity fund, Regulation 28 of the Pension Funds Act restricts your direct offshore exposure to 30%, with an additional 10% permitted in non-South African assets. If you have a living annuity in place, such annuity does not fall under the Pension Fund Act and therefore your investments are not restricted by Regulation 28 and you are able to invest 100% of your assets offshore. However, you are not permitted to invest your South African living annuity directly into foreign funds. If you have a local living annuity but intend emigration formally from South African, it may be advisable to switch the local allocations in the annuity to offshore to protect against the local market and currency volatility. Any drawdowns will still need to be paid in rand to a local RSA bank account and then transferred to your new currency of residence.
It is also important to keep in mind that South African residents are taxed on their worldwide income, and any taxable income or capital gains produced by either a direct or indirect offshore investment must be declared to Sars.
Before making a rash decision as to whether to invest directly or indirectly offshore, ensure that you understand the advantages and disadvantages of each method in the context of your personal circumstances. Offshore investing is much more than a rand hedge: it should be a strategic decision that you take to achieve a pre-determined set of investment goals.