Particularly in times of heightened negativity, South Africans are encouraged to move their wealth offshore, although negative sentiments should not be the driving force behind offshore diversification. The decision to invest some of your funds offshore should always be taken as part of your overall investment strategy which includes a clear-cut set of objectives. If you are contemplating channelling some of your funds via indirect offshore investments, here are some key considerations.
The investment world is a big, big place and it is only natural to want to mitigate your investment risks through global exposure. That said, keep in mind that JSE-listed companies generate around 65% of their revenue from global markets which means that, if you are invested on the JSE, you automatically have some offshore exposure in your portfolio. However, the JSE has shrunk significantly in the past few years and is now dominated by a few key shares, including Naspers, BAT, Richemont and Glencore, and it does make sense for investors to look for investment opportunities that are not locally available. Further, given South Africa’s unique social, political, and economic challenges, exposing your funds to a different set of risks is another form of investment diversification. From the recent political turmoil on Capitol Hill in America, however, it is evident that social, political, and economic challenges are endemic, and money invested in any country is exposed to that jurisdiction’s particular set of challenges and risks.
The mechanisms of indirect offshore investing
Through indirect offshore investing, you effectively invest in a local unit trust portfolio that has a mandate to invest in foreign assets – a relatively simple, convenient, and cost-effective process. As an investor, you will invest your rands with a unit trust management company who will then convert your investment into foreign currency on your behalf, referred to as an asset swap, using their foreign exchange capacity. Local fund managers are permitted by Sarb to hold a maximum of 35% of their retail assets under management in foreign assets. Generally speaking, indirect offshore investments are referred to as feeder funds or rand-denominated unit trusts.
From a tax perspective, note that indirect offshore investing does not affect your foreign investment allowance of R10 million per calendar year as you are effectively leveraging on your fund manager’s foreign allowance. In addition, no tax clearance certificate is required from Sars in order to invest indirectly offshore. This means that should you wish to invest directly offshore at a later stage, you will still have your full annual foreign investment allowance available to you. Remember, as a South African resident, you are taxed on a residence basis meaning that you will pay tax on your worldwide assets including any income declared on your indirect offshore investments.
Investment performance and reporting
All rand-denominated funds are priced in rands and all reporting, performance and valuation are done in local currency. Further, when realising units, your funds will be converted back into rands and paid directly in your South African bank account.
If you want to expose your retirement funds – being provident, pension or retirement annuity funds – to global markets, keep in mind that these funds are regulated by Regulation 28 of the Pension Funds Act. This means that all Regulation 28 funds are limited to investing 30% in offshore markets, with an additional 10% into Africa, whereas non-regulated funds have no limit on foreign exposure.
Living annuities do not fall under the scope of the Pension Fund Act and are therefore not subject to Regulation 28 and, as such, there is no limit to the amount of foreign exposure you may hold in your living annuity. Please note, however, that funds held in a living annuity cannot be invested directly offshore, which means that if you want to achieve greater offshore exposure in your living annuity you will need to do so via an asset swap, or feeder fund.
Unlike direct offshore investing, you are not required to draw up a foreign will for your offshore assets as they do not fall within a foreign jurisdiction. Funds invested offshore via asset swap are not subject to foreign probate laws and inheritance tax, and you can provide for the distribution of these assets in terms of your South African will.
Contrary to common misperceptions, investing indirectly offshore is neither complicated nor expensive, and can be done through any reputable fund manager platform. The minimum investment amounts are generally lower when it comes to indirect offshore investing, and regular investment contributions can be set up via a debit order system. Because your investment does not form part of either your foreign discretionary or investment allowance, there is no limit to the amount you can invest in this manner and, because reporting is rand-based, it is generally easier to place your investment in the context of your overall investment portfolio.
Global diversification should form part of your overall investment plan, bearing in mind that the location of your assets has tax consequences, and it is important to fully understand these before simply investing offshore. Further, depending on your circumstances, direct offshore investing may be more appropriate especially if you are planning to emigrate or work abroad or, for instance, if your children intend to study abroad.
Simply put, if your primary reason for diversifying your assets in an offshore portfolio are not aligned with your specific financial objectives, you need to question what you are hoping to achieve. If you are unsure how to proceed with offshore diversification, take time to consult with an experienced, professional, investment advisor.