International assets, an essential component of a well-balanced investment portfolio

Ninety One’s Albert Coetzee discusses the right and wrong reasons for investing offshore.

RYK VAN NIEKERK: The prospects of poor economic growth and the uncertainty of what the future will hold for South Africa have caused many local investors to look internationally for investment opportunities.

On the line is Albert Coetzee, the co-head of sales at Ninety One’s investment platform. Albert, thank you so much for joining me. We have been talking about foreign investments for many years, but there are right and wrong reasons to invest offshore. What are the right reasons to consider?

ALBERT COETZEE: Hello Ryk, and thank you for the opportunity. Yes, we feel that international assets are definitely an essential component of a well-balanced investment portfolio. The moment you talk about offshore investing, you will use or hear the words ‘diversifying’ and ‘diversification’. We feel this is important because to diversify your wealth outside our borders can make a significant difference to the long-term outcome of your portfolios. But unfortunately, with offshore investing you do come across some knee-jerk reactions, some emotional reactions, which we do feel are sometimes not the right reasons to invest overseas.

Yes, diversification – you hear that word quite often. But I think it’s very important because, when you invest for the right reasons overseas, you look at diversifying your risk away from South Africa. For example, away from the South African economy, away from the political scenario environment, and investing in the developed markets. But also diversifying away from, for example, the South African currency when investing overseas. So, I think those are the right reasons when you look at investing overseas for your portfolio.

But we also think that, because it can be quite a complex environment, you have to look for professional personal advice, which is critical for successful offshore investing.

RYK VAN NIEKERK: Yes. I think the most important thing you’ve said was “don’t invest based on emotional decisions”. If you were living on Mars, for example, and you had to invest on Planet Earth, you wouldn’t put all your money in South Africa; you would really diversify across the planet, and in different investment markets.

But, Albert, the investment universe in the world is immense. It is absolutely massive compared to what the options are in South Africa. So, once you’ve taken a decision that, listen, I really want to diversify, I want to access other growth markets around the world, how do you go about choosing the products you will invest in?

ALBERT COETZEE: That’s a good question, Ryk, because, as I said, sometimes people decide because of an emotional event, like “there I go, let me go and invest offshore”. For me, overseas investment from a South African tax-resident point of view can almost be broken up into two large components.

The one component is: Where do I take the money? I always tell my independent financial advisors that, when I take the money physically out of the country versus allowances, or I look at, for example, feeder funds or asset-swap funds, when I invest South African money into overseas funds or markets, the performance and the payout one day comes back into rands. So, I think when you have those two components in mind – because those two are very important and also different – tick the correct box.

But I think, secondly, also from a South African investor’s point of view, you have to be cautious, depending on the entity owning the asset. Is it me, the individual, Albert Coetzee? Is it me, my South African trust. Or is it my South African company? The answer differs according to the owner of the entity. So, I think that is also very important to take into account.

And then the third component. Before you can say, what do I do to go and invest offshore, I have to ask the question as an investor: “Where is the money currently?” Depending on where the money currently is – if, for example, the money is currently in my bank account as me, Albert, then my options are vast, or wider than normal. Or, if the money is currently in my Ninety One retirement annuity, there the options are not as wide, because we’ll then automatically have to look at asset-swap or feeder funds, and I cannot take the money physically out of the country.

So, I think, just to come back to your question, Ryk, how do I go about this and what are the options? To reiterate, first of all, which entity currently owns the money in South Africa, and where is the money?

Another example is if I am a 60-year-old investor but the bulk of my money lies, for example, in a living annuity, then obviously the living annuity will determine what my options are. If the money in my earlier scenario is in a retirement annuity, immediately Regulation 28 will also determine what I can and cannot do because a retirement annuity is governed by the Pension Funds Act, which again gives me different options – but not as wide as if the money was in my own hands.

RYK VAN NIEKERK: I find it very interesting that you say that your decision making should be influenced by the entity or who owns the money. Can you quickly talk to how you should think about foreign investments differently if the money is owned by an individual, a trust or a company?

ALBERT COETZEE: As I said, when you think offshore investing, the one component is that you can take the money physically out of the country. But that component is available only to individuals 18 years and older. So, if I am Albert Coetzee and I’m older than 18, I have two options per annum. I can use my discretionary allowance, the R1 million every year – there you don’t need South African Reserve Bank or [South African] Revenue Service approval – I can take that annual R1 million out of the country, or I can take R10 million annually out of the country as part of my foreign-capital allowance. There I have to get South African Revenue Service approval.

So my option there is I can either take the money out of the country, using those allowances, or I can say, “I don’t have enough money or I am retiring in South Africa, and I’m going to live in South Africa,” or “I don’t want to, let’s say, diversify my money too much overseas. I’m happy to use an asset-swap or a feeder fund”. And in the Ninety One space, you can look at the Ninety One Global Multi-Asset Income Fund or the Global Franchise Fund – very popular funds which are asset-swap funds or feeder funds which feed into the overseas version – but the money always pays back into South Africa. So that is as an individual.

But say, for example, the money is in a South African trust. That allowance, the R1 million or the R10 million I spoke about earlier, is not available to a South African trust. So, if a South African trust has money to invest, one has to look at feeder funds or an asset-swap sort of capacity to swap overseas into overseas funds; there the payout comes back into South Africa, into rands. That’s for South African companies, where that allowance – that R1 million or the R10 million – is not available to South African companies.

RYK VAN NIEKERK: Interesting. So, if you have taken the decision to invest offshore, what are the steps you need to take to make it happen?

ALBERT COETZEE: First of all, get financial advice; make sure that [it] forms part of your combined portfolio. If I’m taking offshore – good question again there, Ryk – if the money is available in my retirement annuity, my pension fund, my provident fund, my preservation/pension/provident fund, where I resigned from an employer in the past or, for example, in my living annuity, then obviously I would make use of asset-swap or feeder funds. And if the product I am in at that moment is governed, for example, by the Pension Funds Act, where there’s Regulation 28 to take into account, or the product is governed by a living annuity, where the Long-Term Insurance Act applies, I need to have those rules and regulations in place. To summarise, the answer to your question is that I would then make use of feeder funds.

If I am an individual and I have money in the bank, or flexible discretionary money, then I need to ask: “Is it enough or is it worthwhile taking the money physically out of the country, or can I also invest into feeder funds?” But say, for example, I now want to take the money out of the country physically. Then, if it’s part of my R1 million allowance, I can just go to my bank, and the bank can assist me in making sure that it swaps R1 million into a foreign currency, and pays it into a foreign bank account, depending on where I want to invest.

But, if the money is R1 million or more, as part of the R10 million cap per year, then you would use your foreign-capital allowance. And there, with the advice of a financial advisor, or an authorised dealer, you will need to get South African Revenue Service approval to take the money out of the country. And once the money is out of the country, you then have to decide, okay, that is step one.

Now the client would ask: “Where and what do I invest in since the money is now in a foreign currency?”

RYK VAN NIEKERK: Just lastly, we are living in uncertain times. Are you seeing South Africans taking money offshore, trying to diversify risk? What are the trends currently?

ALBERT COETZEE: Good question, interesting. Once I’ve made the call to take the money out of the country or invest it offshore via a feeder fund – it’s maybe not as relevant, I’m referring more to taking the money out of the country – my view is that, if I decide to do that, assuming I need to proceed because I feel that’s long-term investing, even in this year alone, you’ll find that, with the rand slightly strengthening and weakening, for a person, either the advisor or the client, [the decision] is very much determined by currency movements.

The moment the rand strengthens, you can immediately pick up that there is an increased flow of overseas investing. And, when the rand weakens, then you can see a slight slowdown. Even though the paperwork is prepared; there’s definitely a slowdown in overseas investing.

But I think, in general – not looking only at this year – you have found that clients are definitely looking overseas to diversify their portfolios. And another component you need to take into account, which sadly happens, is emigration. People are also looking at that, and that affects overseas investing.

But I think for clients to take the money out of the country, apart from the facts which I shared earlier about diversification, they also have to look at where they’ll be retiring one day, and in which currency they will in future pay their living expenses. Emigration is important. Clients also have to look at those components, apart from just diversification, when they take money physically out of the country.

RYK VAN NIEKERK: Albert, thank you so much for your time today. That was Albert Coetzee. He’s the co-head of sales at Ninety One’s investment platform.

Brought to you by Ninety One.

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There is one question all of these investment vehicles do not ever answer – If I sell out of their vehicle can I have the funds externalized in a foreign country. This does not happen if you sell the funds are brought back to SA so in essence you as an investor never had international assets in your own name. So many of such articles are misleading when talking about international assets

“If I sell out of their vehicle can I have the funds externalized in a foreign country.”

Yes, you can via their Global Platform.

End of comments.

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