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What are your offshore investment options?

A look at how to manage your foreign currency once it has been converted.

“More people should learn to tell their dollars where to go instead of asking them where they went.” ~Roger Babson

From a South African point of view, I would say that also applies to people’s rands …

No matter where you live in the world or what currency you operate in, this quote rings true – if you don’t take control of your money and investments, you may find yourself in trouble before long. And in telling our rands where to go, a great tool for diversification is always offshore exposure.

In my previous article, What you need to know about foreign exchange, I focused on the forex process and how you can invest directly offshore. In this article, we will be focusing on how to manage your foreign currency once it has been converted.

 So now that you have converted your rands to foreign currency, what do you do with it?

Let’s start at the beginning – when you choose how your investments will be structured, there are two components that need to be addressed:

  1. What type of product you will be utilising; and
  2. What type of underlying instrument/asset class you will be investing in.

What is an investment product?

The investment product is the basket in which your investments are held. This basket determines the accessibility and flexibility of your investment, the tax implications on your investment and how your investment is treated in your estate. Examples of offshore investment products include offshore unit trusts and exchange-traded funds (ETFs), offshore share portfolios, life wrappers and structured products.

Firstly, an offshore unit trust works the same as a local unit trust, where investors pool their funds together and purchase units in a portfolio consisting of a single or various underlying asset classes.

The unit trusts you choose can either be actively or passively managed and the cost thereof varies.

Similar to unit trusts are ETFs. The main difference is that ETFs are bought and sold via a stock exchange like a share. However, unlike a share, which focuses on one company, an ETF tracks a basket of shares, or an index, or a specific asset class.

An offshore share portfolio works the same as a local share portfolio but instead of only having access to shares listed on the JSE, investors have access to the full spectrum of globally listed companies.

Important to note, is that from a taxation and estate planning point of view, offshore share portfolios can be extremely expensive and ineffective if accessed directly. An offshore life wrapper can help negate these problems.

An offshore life wrapper works very much the same way as a local endowment or sinking fund and you can still access offshore shares, unit trusts and ETFs via the life wrapper. The life wrapper provides you with a fixed tax rate within the product on the growth and proceeds generated.

The life wrapper also assists with effective succession planning as it provides protection against offshore inheritance taxes and executor fees at death.

What one should keep in mind is that there is less flexibility with a life wrapper as there are limitations and restrictions when making additions to or withdrawals from your life wrapper.

A structured product is an investment product innovation that has gained increased traction over the last few years as a supplement to traditional unit trusts, ETFs and share portfolios. These products are pre-packaged, fixed-term investments that offer investors easy access to equity markets, but with the added benefit of a pre-defined and pre-packaged risk and return profile.

Once you have decided which investment product to utilise, how do you decide on the underlying investment structure?

As part of our investment consulting and advisory services, we assist clients to construct an underlying investment portfolio that is suited to their personal investment goals and risk profile. The most important component of your underlying investment is that it must be well diversified.

Diversification can be done in various ways:

  • Across different currencies (like US dollars or euros);
  • Across various geographical areas (both developed and emerging markets);
  • Across different investment funds (different unit trusts and ETFs);
  • As well as various asset classes (like shares, bonds, property, and cash) and investment themes, like megatrends and disruption portfolios.

You can find out more regarding these megatrends and disruption portfolios on our website.

We want to assist you to optimally combine your investment products and underlying assets – to structure your portfolio in a way that enables you to reach your investment goals.

We encourage you to engage with our team of experts in structuring your own offshore investments as part of your larger, well-diversified investment portfolio.

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