With more South Africans considering investing offshore to protect their wealth, we thought we would present the idea of offshore investing in this article.
According to Statista, South Africa merely represents 1% of the global economy and financial markets therefore, limiting your investments locally results in a concentration of investment risk.
Purpose of investing offshore
Prior to investors achieving enhanced investment returns or increasing their wealth, the primary principle should be the protection of wealth. This is achieved by diversifying your portfolio, commonly described as not having all your eggs in one basket. Investing offshore is one of the ways to achieve portfolio diversification.
South Africa is an emerging market and can be seen as higher risk, this is because emerging markets are often very volatile while established markets offer the potential for steadier growth. By investing offshore investors can participate in developed markets and have exposure to hard currencies.
There are several other reasons why South Africans should invest offshore being:
- Increased investment prospects: investing offshore enables investors to select from a much wider universe of funds than available in South Africa.
- Exposure to hard currency: Investing offshore allows the investor to be invested in hard currencies such as the US dollar, British pound and the euro. This can increase the return on the overall investment in rands when the rand weakens against these currencies as it is expected to do going forward.
- A balanced portfolio: Offshore investments do not always outperform a local investment portfolio in the short term. However, over the long term, an investment portfolio with adequate offshore exposure should outperform a purely domestic portfolio. Therefore, investing a portion of your funds offshore automatically balances your overall investment portfolio in the long term.
How can South Africans invest offshore directly?
A South African can take up to R11 million offshore per annum, subject to tax clearance from the South African Revenue Services (Sars). The clearance will generally be granted to any person whose tax affairs are in good standing with Sars.
Funds can be transferred offshore by, i) using the single discretionary allowance and ii) using the foreign capital allowance.
|Single discretionary allowance||Foreign capital allowance|
|R1 million per calendar year||R10 million per calendar year|
|The first R1 million may be taken offshore without prior tax clearance from Sars.
|The R10 million over and above the discretionary allowance may be taken offshore subject to tax clearance approval from Sars.|
|Please note: If the funds are already offshore, you do not need to repeat the clearance process.|
Offshore investment options
You are able to invest in a direct offshore investment such as a unit trust portfolio, interest-bearing accounts, structured note products, whisky casks, property, exchange-traded funds, shares, cryptocurrency etc.
Below are explanations of how a few of our favourite direct offshore investment options are structured:
- Unit trust investment portfolios: investing in well-managed offshore unit trust funds is a basic way of investing offshore. Investors simply invest in offshore unit trust funds through an investment platform.
These offshore unit trust funds are usually managed by professional fund managers, who continuously monitor the funds and make necessary changes at appropriate times in line with market fluctuations to optimise the fund performances and mitigate risk.
- Structured note investments: where investors are not comfortable with market volatility structured note products are the solution. Structured note products are invested in underlying indexes with a predetermined coupon where an investor has to remain invested for a specified term, with the possibility of early termination.
The underlying indexes only need to be flat or slightly up, for the predetermined coupon to autocall and once the coupon autocalls the note matures. It is to be noted that structured notes have a limited amount of downside protection.
- Whisky cask investments: these are exciting investment opportunities for investors who are interested in a physical offshore investment option with reasonable entry levels and excellent upside potential.
Whisky casks are tried and tested maturing assets and the longer the whisky matures, the greater the potential value. Whisky casks are a store of wealth and are increasingly sought after as a reliable hedge against economic uncertainty.
Consider an alternative to investing directly offshore
When investors do not meet the prescribed minimum investment amounts for direct offshore investments, investors can allocate a portion of their local investment portfolio to offshore markets through rand-denominated offshore funds. This can be done via a local unit trust portfolio or a tax-free savings investment.
Please note some South African investment platforms are imposing restrictions on offshore exposure within local discretionary investment products as the South African Reserve Bank requires these product providers to comply with the exchange control regulations.
If offshore investing sounds like an investment strategy you have been looking for, we recommend that you consider contacting our experts at Global & Local Investment Advisors for further information and guidance in terms of the options available to you.