RYK VAN NIEKERK: We continue with our discussion about offshore investments. Last week we discussed the difference between investments in asset swaps or feeder funds and actually taking money out of the country physically – so you invest directly in dollars, euros and pounds.
Albert Coetzee is the co-head of sales at Ninety One’s investment platform. Albert, thank you so much for joining me. Let’s talk about the key questions that an investor needs to consider when investing offshore, especially related to the instruments to invest in, and the investment vehicles to use. Let’s start with the instruments. What should an investor consider?
ALBERT COETZEE: Hello, Ryk. Thank you for the opportunity again. I think I can – before I answer that question – just reiterate to each of your listeners that there is no optimum one-size-fits-all solution for gaining offshore exposure. When, how much and how to invest offshore depends on your individual needs and circumstances, and what your existing investment portfolio looks like.
Last week we discussed a lot of the asset-swap and feeder funds. Now we’re assuming the client’s money is overseas already. If I think quickly of the overseas money, it could be that I’ve inherited money overseas. It could be that I worked overseas and left the money offshore, or it can be that I took the money out annually via my allowances, or I decide today I’m taking the money out of the country via my R1 million allowance, which is the discretionary allowance, or my R10 million foreign-capital allowance, for which I have to get Sars’s permission. Very important [is that] those allowances are [for] calendar years.
Now, once the money is overseas and I’m 18 years or older, the instruments to look at are, for example, do I place that money in an overseas bank account, do I place the money or invest the money in overseas unit trusts, share portfolios or, for example, in my mind, there are also various guaranteed structures that the client can look at or consider.
RYK VAN NIEKERK: Now, what are the advantages and disadvantages of those options?
ALBERT COETZEE: First of all, after I’ve looked at the instruments, the client, with independent advice or assistance from an advisor, needs to say, what is my risk profile? Because, if you look at, for example, unit trusts, in unit trusts I think there are over 30 000 options overseas. And, if you look at the unit trusts, you can look at, for example, money market, low-income [portfolios], low-equity portfolios, high-equity portfolios, general-equity portfolios, and specific regional or sector portfolios.
But, I think if you look at those, you need to ask, very important, what is my risk profile and what is my term of investment before I proceed further?
RYK VAN NIEKERK: Can you quickly take us through some of the options, the most common options people should consider related to the instruments?
ALBERT COETZEE: They are vast. It’s very important that the client or your listener must think and remember that, once I’ve taken the money out of the country, there are various components to consider. But also – I don’t want to scare them off because it’s complex – they have the option to say, do I invest into those instruments directly? For example, direct into a unit trust, direct into a share portfolio? Or do I look, say, at the vehicle? What vehicle will I use to invest those underlying instruments in?
So vehicles which we come across are investment platforms. I’m personally pro-investment platforms, as long as you partner with a reputable global provider that understands the complexity of offshore investing. And for me what is very important is also to understand me, the South African tax resident, because I think that once I take the money out of the country, we must remember, as South African tax residents, that we are taxed in South Africa on our worldwide income – unless there are certain exceptions that we take into account.
And what are those components? Those components, once I’ve decided on the instrument, once I’ve decided on my risk profile, once I’ve decided which investment vehicle I would use, I think, with the advisor, the client must also consider how does that divide, the platform, the vehicle assists me with income-tax reporting, capital-gains reporting, dividend-tax reporting, and, very important, capital gains tax on death, liquidity on death. Do I need an overseas will? Are executors’ fees on death applicable – yes or no? Then there’s estate duty and various other components which a client has to take into account.
RYK VAN NIEKERK: Yes, it is pretty complicated. Let’s talk about the investment platform. Ninety One obviously has an investment platform. Typically, how would it work? Say I would like to invest offshore, and I have absolutely no idea what to invest in – whether to use a bank account or invest directly into unit trusts. How would my investment via an investment platform work?
ALBERT COETZEE: Okay. We don’t give advice. So when the client needs an advisor to assist, the platform is a vehicle. You can have two types of platforms. You can add the investment platform, which is liquid and discretionary. You can place the money today and you can take it out tomorrow. But the advisor, with the client, after they’ve done the risk profile, will have to indicate to us which asset class the client will invest in. So, if you look at, for example, low-equity fixed income, you can look at the Ninety One Global Multi-Asset Income Fund. If you look at balanced funds, the Ninety One Global Strategic Managed Fund, or at equity, the Ninety One Global Franchise Fund.
Again, very important, the platform investment vehicle also offers other asset-management options to invest in. That’s the one option. The other option, which I would definitely recommend clients look at, and it’s becoming very popular, is the five-year policy rapid, like the endowment or the sinking fund option overseas, Mainly the same fund, same fees, all the same, but where it’s very important is it is actually very tax-effective for a South African tax resident – while I’m alive, but also when I die – and also from a succession-planning point of view; that would be the Ninety One Global Life Portfolio.
RYK VAN NIEKERK: Policies have been in the news for many years, and not always for the right reasons. They were very, very expensive in years gone by. What are the fees and costs involved with using such a policy wrapper?
ALBERT COETZEE: Good point. On an annual basis, I would say if you use a policy wrapper, it is the fund fee, the advisor fee, and obviously the all-over product structure fee. But I think also, Ryk, gone are the days – or maybe times have moved on – from where people would have said those are expensive or complex. But still, I think it can be complex because of the various taxes, which I’ve mentioned earlier. But about 70%, if I have to guess, of those taxes I mentioned earlier, the policy wrapper takes away from me as an individual, because quite a few things [related to] those policy wrappers [are] also exempt from paying [tax] – versus, for example, the investor. And I think it’s also very important that currently, you’ll find, if you look at the unit trusts, like if you look at the Ninety One Global Franchise Fund, or in the policy wrapper or the investment vehicle, nowadays you get a thing called ‘clean class’, which means it’s almost a cheaper fund fee versus, for example, if you would have invested in the fund directly.
So yes, there are fees to look at. And I think also the provider you choose – [you] must make very sure that that provider sets out those fees very clearly to the client. But, as I said earlier, I’m personally pro it, because in terms of income tax, capital gains tax, succession planning and estate planning overseas, there are two additional things which we don’t get in South Africa. The first is probate. Probate means if I die, do I need to appoint an overseas executor? And a policy wrapper, for example, takes that away from you if a beneficiary is nominated.
Another thing that you find overseas, which is not that well known in South Africa, is ‘situs tax’, or overseas inheritance tax, which, again, the policy wrapper takes away from you because the policy wrapper, depending on where it’s domiciled, is exempt from overseas situs tax – which can be as high as 40%. So yes, I think, to answer your question, it has moved on and there are definitely certain components which a person has to look at to compare.
RYK VAN NIEKERK: It seems very complicated to invest offshore, especially if you take into account those factors you’ve just used, and these structured options assist with taking away, as you say, a lot of the administrative burden. Can we invest in these policy wrappers via a trust, a company, or in our personal capacity? Can all those instruments use the wrapper?
ALBERT COETZEE: Yes. Remember, you’re overseas now. So I’ve taken the money out of the country. I’m 18 years or older, so I can invest it in my own hands. But depending on the size of the money – because overseas trusts can be expensive or are known to be expensive – you can invest in them if you, for example, donate the money or have a loan account between you the overseas trust. The overseas trust can invest in, for example, a policy wrapper. Just watch out – remember, the policy wrapper, even though it’s an overseas structure, is still governed by the South African Long-Term Assurance Act. So we need to make sure that, for example, inside the policy wrapper we deduct capital gains at a lower rate of 12% and that, for example, will suit the overseas trust, depending on where the overseas trust is domiciled. So, just to answer your question, yes, you can invest in your own name offshore in an overseas trust, in an overseas company name, but you must make sure that the investment vehicle you use corresponds, from a tax point of view, with the instrument or the entity you select to invest into.
RYK VAN NIEKERK: Albert, of course, Ninety One is only an asset manager. You don’t provide advice. And individuals or entities who want to invest offshore need to get proper financial advice. In your experience, how good is the advice South Africans get from the industry to invest in the right products and to structure them correctly?
ALBERT COETZEE: Ryk, it’s a good question. We, as the Ninety One investment platform, with our independent advisors, learn on a daily basis, I would say. As I mentioned earlier, it is a complex environment. I think step one is for all to acknowledge that it is a complex environment. That is step one because I think one of the days you take the money out of the country, and you just place it in the fund, and you just leave it there and ignore any other sort of scenarios around that. If you look at, for example, in the last year and year-and-a-bit, another dimension that comes into play is that the client takes the money out of the country, invests it, for example, with the Ninety One investment platform, but now emigrates – what is the tax scenario around that?
Or, for example, the client remains in South Africa but dies. Now the client’s children, for example, may live overseas. What is the tax scenario around that? So it’s difficult to answer your question; we learn on a day-to-day basis because, as scenarios or circumstances change, new complexities get introduced into the investment space, especially on the offshore side. So we try where we can, and independent advisors [do] as well.
But I think also if you look at advice, you find [advisors] specialising in certain areas of advice. Is it an offshore investment? Is it a local investment? Is it compulsory businesses or investments on the local side? I think the client can also look at, for example, where the expertise of the advisor lies.
RYK VAN NIEKERK: There are a lot of fiduciary experts as well. But Albert, investment platforms are therefore critical and form a critical part of any decision. There are many investment platforms in South Africa – how do you go about picking the right one?
ALBERT COETZEE: That’s a good question. I think first of all, as I mentioned earlier, you need to look at a platform that you can partner with, which is obviously reputable, and a reputable global global provider, which will help and also ease with the complexity of offshore investment. The client must look to see if the product is simple, flexible, and easy to manage. Is it easy to deal with? And, very important, the platform needs to be credible and trustworthy. One must look at the underlying investment options available, and whether those options are screened before the platform places it as available to the client; [it should] also assist, as I mentioned earlier, and take care of administration and tax.
But I think it’s very important also – and that’s almost like for me, assuming I remain a South African tax resident, an investor – does that platform I use understand me as a South African tax resident, regarding all the various taxes that I and my advisor have to report back, either in my lifetime or on my death?
RYK VAN NIEKERK: Is there a minimum amount an individual needs to be able to invest via such a platform offshore?
ALBERT COETZEE: Depending on the platform, there are minimums, but these minimums are actually lower than expected, or than the client would expect, depending on whether the client would invest directly in the unit trust or via the platform. So yes, there are minimums, but all platforms differ. I can maybe just add there’s an article we wrote, The Offshore Cash Conundrum, which you can maybe indicate to your listeners [see link below], where we compare, and take into account all these various components again – an overseas bank account with, for example, an overseas policy wrapper – because I think a lot of people take the money out of the country, leave it in overseas bank accounts, [for example] with my wife and I as a joint holder.
Read: The Cash Conundrum
I think component number one – when you look at that type of investment, or the placing of money in an overseas account – is to look at the liquidity or illiquidity on the death of the first [spouse]. That can actually create a lot of additional anxiety, potentially, for the remaining spouse. So yes, there are those little things which our clients can also look at. As I said, we did an article on that which we are happy to share.
RYK VAN NIEKERK: Albert, thank you so much for your time and insights today. That was Albert Coetzee. He’s the co-head of sales at Ninety One’s investment platform.
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