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What’s the best way to invest offshore?

Reader’s question answered.

CAPE TOWN – In this advice column Damian Johnson from Citadel answers a question from a reader who wants to put his money to work overseas.

Q: I would like to take funds out of the country, going through the regular channels and obtaining tax clearance, to invest with an offshore bank or banks that have a platform for investing in overseas markets.

What options do I have as a South African investor for doing this? What is the best way to secure an offshore investment?

There are a number of issues to confront in this new year, not least Eskom load shedding, public-sector wage talks and a depreciating rand. Against this backdrop, the gaining of access to offshore markets remains high on the agenda for many South African investors.

The decision to invest offshore can however be a daunting one due to the sheer size of the investment universe, made up of various products, asset classes and service providers, coupled with the associated risks and regulations. There are government rules and restrictions on buying offshore assets, there’s the risk of currency swings, and there’s the challenge of figuring out what assets to buy. Navigating all of this can be a challenge, but it can be done and warrants consideration for most South African investors.

My advice to begin with, is to engage an independent, fee-based investment professional or certified financial planner who is focused on your best interests and can provide impartial advice. Ideally, you should seek the advice of a local advisor who has a sound track record in this field and who represents a local institution that can give you access to offshore markets.

If you want to expatriate your assets, you can invest using your offshore investment allowance. The most simple and cost-effective route is to invest in foreign currency offshore unit trusts through an offshore platform operated locally by a recognised and reputable provider.

Besides giving you access to mutual funds and exchange-traded funds, some locally-based providers can now also give South African investors access to offshore share portfolio’s which are managed and reported on locally. Your provider should also be in a position to assist you with the processing of your offshore tax clearance.

South Africans are permitted to invest up to R4 million offshore every year, subject to tax clearance from the Reserve Bank, and up to R1 million a year without tax clearance through your single discretionary allowance. Such an investment would still need to be registered with the Reserve Bank.

You’ll need to invest through an authorised dealer, but since all South African banks and many other institutions meet this standard, this is simple enough. If you have more than R1 million to invest in a given year, you should talk to a specialised financial adviser.

If you value simplicity, and don’t particularly want to expatriate your assets, there are a number of rand-denominated offshore unit trusts accessible locally. The advantages of this route include lower entry levels in terms of how much you have to invest and relatively few administrative requirements.

You can also invest without the need to use your offshore investment allowance, which means you don’t need to buy foreign currency or get tax clearance from SARS. The investor gains access to offshore markets through an asset swap mechanism, although they are still exposed to currency fluctuation.

You are generally free to invest in funds that are based anywhere in the world, but only funds that are approved by the South African regulator, the Financial Services Board (FSB), can be marketed in this country. Investing in an FSB-registered fund reduces your investment risk, because these funds are subject to some measure of oversight by the local regulator.

Diversify your portfolio by investing offshore

Offshore investing is not only within reach of the average South African, but absolutely should be part of their investment strategy. It should however be done for the right reasons and form part of a long-term financial plan.

Allocating a portion of your investment offshore spreads your risk across different economies and geographic regions and opens up the possibility of earning returns under different conditions. A diversified portfolio should be considered in aggregate and not on a geographical basis.

The selection of assets in a portfolio is also a function of an investor’s risk appetite and particular requirements. The motivation for offshore investing cannot be made simply due to a negative local currency outlook, and in isolation of other factors.

As with any investment, you need to have an objective and a time-frame in mind, with an understanding of the risks involved. Unless you are investing in cash, you should have a longer time-frame in mind due to the dual volatility of the currency and the market. In addition, try to invest in funds that are approved by the FSB as they will have had their legitimacy vetted. And avoid investing in unregulated schemes!

The offshore investment landscape

Offshore assets and particularly equities, are likely to remain an asset class of choice for South African investors. Our current investment view is that global equity offers better potential returns than South African equity on an absolute and risk adjusted basis.

A continuation of the global recovery, coupled with lower rates for longer, should support company earnings. Despite the fact that many equity markets are hovering around all-time highs, current valuations suggest that most markets are still trading at a discount. Given favourable valuations, we are still overweight global equities with a preference for selected emerging markets.

South African investors have never had it better in terms of choice and access to offshore investing: they have the best chance in a generation of investing legitimately and successfully offshore.

Many learnt a painful lesson in the early days of democracy. People rushed money offshore in the face of a currency seemingly on a one-way decline, only to see the rand strengthen and decimate their offshore holdings.

Lessons learned from that experience should be taken and used to build a portfolio that is carefully structured. The biggest enemy is always the one within. As before, engage an independent investment professional or wealth manager to stand between you and your emotions and help you navigate these waters as part of your overall investment plan.

Damian Johnson is an advisory partner at Citadel in Durban.

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