Does it seem like wherever you look at the moment someone is telling you to invest offshore? But what precisely is an offshore investment? Why should an offshore investment be part of your portfolio? What countries and currencies should you consider?
The following article outlines the benefits of investing offshore and what to consider.
Investing offshore allows you to diversify by spreading your risk and allowing you to benefit from a broader global universe of industries, companies, geographical regions, currencies and investment ideas. Offshore investing, in my opinion, should form part of your long-term investment plan but the idea of investing offshore can be intimidating to many.
Currently, South Africa only represents an estimated 1% of the global financial markets which essentially means that with only being invested locally you are giving up on 99% of the global market opportunity.
South Africa is an emerging market country and I would encourage individuals to diversify and invest part of your assets in developed economies. These developed markets can assist in providing your investment portfolio with more stable growth, a choice of different currencies, different asset classes and the fund managers may adapt different investment strategies.
The rand is a volatile currency and very often tends to overreact to economic, political and social unrest. International investing may also offer a hedge for individuals and investors who fear the depreciation of the rand.
Here are some key points to take into consideration when investing offshore:
- Investment terms: It’s advisable to have a long-term investment objective. I encourage no less than five years in order to assist the portfolio to rebalance if there is economic or market volatility.
- Risk appetite: Offshore investing can be risky, so investors need to have an appetite for high risk as the investment may be influenced by the market and currency fluctuations.
- Goals and objectives: Investing offshore may make it easier to fund any international liabilities and help you meet your international goals. You may have future plans that involve emigrating, travel or children wanting to attend an international university.
- Currency: Offshore investing allows you to invest in many different currencies such as the US dollar, the euro, the pound and many more. The currency you invest in will depend on what you want to achieve.
- Foreign exchange control regulation: There are certain limits on the amount of funds that can be taken offshore per calendar year, these limits are:
- If you are a South African resident, you can utilise your individual offshore allowances of up to R11 million.
- R1 million single discretionary allowance: You can take up to R1 million offshore annually without having to apply for tax clearance.
- R10 million foreign capital allowance: You can utilise a further R10 million a year, but you will be required to apply for tax clearance from Sars.
If you want offshore investment exposure, there are various ways to achieve this goal. Here are some of the offshore investment products that are available:
Offshore Unit Trust:
There are two ways to invest in an offshore Unit Trust:
- Invest in a rand-denominated offshore unit trust offered by a local manager.
- Invest directly in foreign currency unit trust funds through an offshore platform.
The options above have different benefits and criteria and it is critical that you consider these options carefully before investing:
|Rand-denominated offshore unit trust||Foreign currency offshore unit trusts|
|Investment Description||Invest in rands and the fund manager takes on the responsibility to convert the funds and invest in offshore asset classes.||
The investor invests directly in offshore funds that are denominated in offshore currency.
|Investment Currency||Rands.||Foreign currency (US dollar, euro, pounds etc).|
Investment is made in rands.
Within the allowable offshore limits, the rand will need to be converted into the offshore currency you are investing in.
|Offshore Allowance||Make use of the relevant offshore investment company allowance.||Make use of your own individual allowances. You may also use funds that are already situated offshore.|
|Withdrawals||It will be disinvested and paid in rands.||
It will be disinvested and paid out in the currency you are invested in. It is your decision should you wish for the funds to be converted back into rands or paid into an offshore bank account in the name of the investor.
|Exchange Control Approval||No exchange control required.||First R1 million discretionary allowance does not require tax clearance, anything above this up to R10 million requires tax clearance before moving the funds offshore.|
This product offers South African investors a tax-efficient way to invest internationally for a minimum period of five years.
Some of the key features of the structure of an offshore endowment:
- You are invested directly in offshore funds.
- Minimum investment term of five years.
- The investment is taxed in the hands of the investment company.
- Beneficiaries can be nominated, and the following can be selected:
- Ownership can be transferred to a spouse to continue the investment on the death of the principal investor.
- The endowment can be paid out to nominated beneficiaries on death and payment can be made to an offshore bank account as long as the account is in the name of the beneficiary.
Offshore Guaranteed Structured investments:
Individuals are keen to diversify offshore but at times want some level of capital protection during periods of market uncertainty and volatility when downside risk is high. There are now structured products available that provide a guaranteed pay-off while offering protection against loss. Unlike traditional investments such as unit trust, they provide a level of protection against negative returns at maturity of the investment. These investments products do hold a minimum investment term.
Living Annuity with Offshore Exposure:
A Living Annuity is a flexible post-retirement investment that allows you to participate in the market during your retirement, with the added benefit of choosing a personalised drawdown rate (between 2.5% and 17.5%).
Certain investment companies have made it possible to invest your post-retirement savings directly offshore. The key benefit of this option is you are not required to get tax clearance, as the funds are allocated using the investment company’s limits.
These funds track’s a specific market index or a segment of the market. These indices are not actively managed and are based on the market capitalisation of the underlying stocks. The funds will give you a return which is very closely linked to the market. They are often cheaper than your actively managed fund as there is not much human intervention.
Offshore Bank Account:
You can also consider opening an offshore bank account but developed economies often have much lower interest rates and therefore your investment in an account will have a close to zero growth.
Diversifying your assets both domestically and globally brings benefits to one’s overall portfolio and results in improved risk-adjusted returns over the long term.
With the vast amount of options available, many investors are hesitant and unsure where is best to place their assets in the global markets. It’s advisable to stick to the investment companies and platforms you recognise and seek the advice of a financial specialist with a good track record in offshore investing.