Offshore exposure: no one-size-fits-all solution

Albert Coetzee looks at the intricacies of offshore investing and the implications for deceased estates.

RYK VAN NIEKERK: We continue our discussion about offshore investments with Albert Coetzee, the co-head of sales at Ninety One’s investment platform. We previously discussed various aspects investors should consider when they invest offshore. However, we have received several emails from listeners saying it seems to be a lot more complicated and even [more] confusing than the popular perception. Albert, thank you so much for joining me. Can you just give us a quick recap? What are the key principles investors need to consider when they want to invest offshore?

ALBERT COETZEE: Hello, Ryk, and thank you again for the opportunity. As I discussed with you twice previously, I think we agreed, and we mentioned, that international assets are definitely an essential component for a balanced portfolio. I think we agreed on that. We also said that it’s very important that they are not a one-size-fits-all solution to gain offshore exposure. Each and every client must look at their individual needs and the circumstances in their own portfolio when investing offshore. But definitely, what we have also seen is that exchange-control regulations have relaxed over the years and that clients have definitely invested more and more money overseas.

But as I mentioned in the first session, when I decide that I want to have offshore exposure, you need to ask me in South Africa, if I am an individual or a South African trust or a South African company because South African trusts and companies can only make use of feeder funds. A feeder fund means you invest in a fund today, you feed into the real fund overseas, but the payout one day will come back to South Africa. That is for a South African trust and a South African company.

For me, an individual, there are definitely more options available. I can invest in multi-asset funds like the Ninety One Managed Fund or the Ninety One Opportunity Fund, where the portfolio manager can make those calls on my behalf. But, very important, those funds are capped at 30% offshore.

Or the individual can say, let me invest into a feeder fund. Again, similar to the South African trust and company, where I invest South African money, feed it into overseas funds like the Ninety One Global Multi-Asset Income, or the Ninety One Global Franchise Fund, but the payout one day will be in South Africa.

I also think South Africans need to look at what investment vehicle in South Africa you are invested in. Like, for example, a retirement annuity, my pension fund at my company, my provident fund, preservation funds, if I have left my company before that – because all of those products are governed by the Pension Funds Act in South Africa; and the pension fund tells me, or guides me, that I cannot have more than 30% offshore exposure. So you can use multi-asset funds, you can use feeder funds, but capped at 30%.

And then the last version is as a South African investor. If you are maybe 55 years and older, and invested in a living annuity, normally the product needs to cap you at 40%. But if there’s capacity available into the life company that owns that living annuity at your provider you can have up to 100% offshore exposure. So if the money is in South Africa you get offshore exposure. But I think this is very important: that money will always pay back into rand.

RYK VAN NIEKERK: Can I summarise? If you invest offshore, but you invest in rands, when you disinvest you receive rands. So if you want to then convert it to foreign currency, you will have to do it after you’ve disinvested?

ALBERT COETZEE: Yes. You can say, for example, I’ve got two pots of money. The one pot is a retirement annuity. I invest it via a feeder fund or an asset-swap fund because I can’t take the money physically out of the country because it’s stuck in a retirement annuity. The balance, or my other pot of money, is my bank account. And I own a discretionary investment. I decide to take that money and go physically out of the country.

Now, if I’m a South African trust, I don’t have that second option. If you are a South African company, you don’t have that second option. I know South African companies can invest up to, I think, R1 billion a year offshore, but that is for business purposes. South African companies, at least according to me, are registered as institutional investors, and can’t take money out of the country to invest as a passive investment.

So taking the money out of the country is only available to an individual 18 years and older. I saw that one of your readers said “Yes, I hear you, but that money must also come back to South Africa” – which is not correct. The moment you take the money out of the country versus either your annual calendar-year discretionary allowance, which is R1 million a year, or R10 million foreign capital allowance, if you’ve done that, and if you say “One day, two years from now, Ninety One, I want to redeem some money” we are happy to pay that money overseas. Or, if you place the money with us, and you die, we are very happy either to transfer the investment over to the beneficiary, or the beneficiary may be the daughter in Australia, and she says “Give me the cash”, then we will pay the money directly to the daughter in Australia. Why? Because the individual client 18 years or older has taken the money out of the country via their allowance money.

But I think this is also important. I saw a client yesterday who wants to take money out of the country. Fine. But she only wants it to go to a bank account or to the money market, which means she will get absolutely no yield on those investments. So I think, like in South Africa, unfortunately, clients have to take note that to get a return they have to take some risk. Now, this client does not want to take any risk. But she also indicated that, in three years’ time, she needs the money back in South Africa to use as part of her ‘pot’ sort of investments, to look at her retirement. So the only thing she will bet on in the next three years by doing this investment is that she would hope that the rand would weaken in the next three years. My view, to be honest, is that that doesn’t make sense.

RYK VAN NIEKERK: Yes. Don’t invest just with the motive or the strategy of trying to hedge your risk against the exchange rate. It may be dangerous. But what type do you think are the biggest mistakes investors make when they invest offshore?

ALBERT COETZEE: I think that, for example, we can start with that scenario, Ryk. That is one of them. I also said, I think in my first discussion with you, watch out for knee-jerk reactions, watch out for emotional reactions. A client yesterday just wanted the money out of the country. But in the end – and I mentioned that as well – you also have to look at your long-term investment sort of plan here. Is the money to be out of the country for a long time, for my children and my grandchildren, for long-term investing. Where am I going to retire one day? Am I going to retire overseas? Then it may make sense. Am I going to retire in South Africa? And if I retire in South Africa, do I have enough money to pay my expenses after I retire, or even now, or must I bring the money back to South Africa?

So I think you need to look at those things. But I also think – I come from a legal background – and I mentioned this to you last week, once you are out of the country you need to look at, for example, which vehicle do I invest in? We need to look at your risk profile. But what for me, which I’m very in favour of, and that’s my point coming from a legal background, is that I think of the other components which you need to take into account: those are, for example, income tax, capital gains tax, dividend tax, capital gains tax on death, situs tax [overseas inheritance tax], probate [meaning I have to appoint an overseas executor on my death], succession planning, and liquidity. I find sometimes that clients go for the instrument, because the instrument may be cheaper than maybe placing it on a platform and ignoring those other components. [So] that also, once you’re out of the country, I think you need to take into account. Because, as I said, a South African tax resident is taxed in South Africa on worldwide income, unless – [well], there are one or two exceptions. So, when I take the money out of the country, I mustn’t go only for a fee. I need to look at the whole component.

But I think whichever vehicle you use, whichever offshore provider you use, it is important that that vehicle and that provider understand me as a South African tax resident.

RYK VAN NIEKERK: Albert, I know it’s not easy to invest offshore. There are a lot of things you need to consider, but it still sounds very complicated to me. Whose job is it to advise a client? Would it be a financial advisor? Would it be a tax consultant? Would it be an expert in estate planning, or would it be the investment platform? Where should somebody go to actually get the best advice?

ALBERT COETZEE: If you look at our business Ryk, we don’t give advice. We work via independent financial advisors, and the advisor will guide the client at the moment: do I take the money out of the country or is the money out of the country? Now, let’s look at the vehicle, let’s look at the instruments, look at the risk profile, look at the product vehicle to use. As I said, I think it’s a bit unfair to expect [that] from the advisor, because there are so many moving parts [that one needs] to be an expert in every single component.

But also I think if, as long as the advisor and you are aware of certain components, as long as you tick the box, and are aware [that you should] look out for certain components when investing offshore, advisors can always pull in certain fiduciary specialists to assist there.

But also, if you look at the vehicle – as I said last week, you can have a normal discretionary investment vehicle – the money is liquid. You place the investment today in it with your various asset management houses and funds, and you can take it out tomorrow. But the negative to that is all the taxes are in my own hands while I’m alive, and we look at the will on death. I’m very – as I said to a competitor last week – pro policy wrappers like an endowment and a sinking fund because in about 70% of those components which I mentioned earlier the product structure takes away from me. So the advisor and the client can focus only on that other 20 or 30% outside of the product structure, which immediately makes everybody’s work less and less complicated.

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

Brought to you by Ninety One.

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The only entity that is off share is the funds not the individual – so there is no life raft here should our economy implode

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