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Offshore is a yes, but what?

Pointers on whether to choose a unit trust or stockbroking account.

The last article I wrote for Moneyweb was titled Offshore is a yes, but how?, and discussed the various ways to externalise your funds with the focus on two different product options. The aforementioned was kicked off with the assertion that, almost always, it makes sense to have a degree of non-rand and non-JSE assets. It is important to reiterate that offshore investing must be a rationale decision and not an emotional decision; the latter very often leads to disappointment.

Once your money is offshore, assuming either via foreign allowance or asset swap, and you have decided on the appropriate product, the next step is to invest the funds. This decision is not made easy in a current global environment of political, market and economic uncertainty. The decision is further complicated when you add to the mix developed market interest rates are at or close to zero percent and approximately $12 trillion of negative yielding sovereign debt, this is unprecedented.

The departure point in the investment decision is to pinpoint your risk profile and cross-check this with your return objectives; for example, you cannot have a cautious risk profile and a return objective of inflation+5%. When the risk-profile and return objectives are finalised you can move on to an appropriate asset allocation, which is the split between cash, bonds, property an equity. Once you have an asset allocation, you can then opt to make your allocations via unit trusts or stockbroking services – offshore is a yes, but what?

Stockbroking, sometimes referred to as custodial services, has become increasingly popular due to improved accessibility. It is worth spending some time on the differences between unit trusts and directly held assets. Let us assume that the stockbroking portfolio in the table below is managed on a discretionary basis and is able to include the various asset classes.

 

Unit Trust

Stockbroking Portfolio

Minimums

>$10 000

Assets are pooled with other investors. You buy units in a fund which then have proportionate exposure to all the underlying assets. 

> $100 000

As you are buying individual assets the minimums are typically higher than unit trusts as you need to be able to buy a well-diversified portfolio. For example, if you want to buy 50 different counters at cost of $75 each, and 25 shares of each counter you would then need $93 750.

Liquidity

Typically liquid  – try avoid funds that  that are too small.

Typically liquid – try stick to shares and bonds that have reasonable trade volumes. Unlike a unit trust you can sell individual shares, bonds etc. instead of units which would have proportionate exposure to all assets. 

Tax

In most offshore funds any interest earned is capitalised thus tax efficient.

Interest earned will be taxed annually. Foreign dividends are subject to Income Tax although certain exemptions usually apply resulting in an affective 15% rate of tax.

Cost

Can include funds with fixed fees and performance fees.

Often cost effective especially on larger investments.

Transparency: cost

Fees and costs are usually very transparent due to legislative reporting requirements on Minimum Disclosure Documents (MDD’s).

There are costs beyond just management fees, like brokerage and safe custody, which need attention. This is not a bad thing, but you need to understand the different costs and timing thereof.

Transparency: holdings

Usually, only the top ten holdings are disclosed.

Complete transparency.

Accessibility

Variety of access points either directly or through platforms and products.

Direct investment is easily done with less alternatives when accessing via a product or platform.

Diversification

This is mandate dependent but generally speaking there is good diversification.

This is mandate dependent, but generally speaking, there is good diversification.

Access to corporate and sovereign assets

Good as large amounts are able to be invested due to the pooling of many investors cash.

Depending on the size of the portfolio you may be limited. For example, some US government debt trades in increments of $1 million per bond.

Nimble

The ability of the fund to move quickly in and out of positions as well as access mid and small cap stocks is often a function of the size of the fund.

Ability to enter and exit positions quickly.

Personal choices

You are not able to impart personal views when selecting a unit trust other than the selection of the fund itself.  

Even when going in to managed solutions you could for example, instruct the broker not to include any shares with gambling exposure. It is important to note that stockbrokers have model portfolios as it is impossible to run a unique portfolio for each and every client.

The table above hopefully illustrates that there is no wrong or right decision when choosing between a unit trust or stockbroking account. There are in fact many instances when incorporating both solutions in a portfolio makes sense.

Changing tack slightly, we would include ETFs and index funds in the unit trust column above as they are unitised. Globally, most markets are looking expensive on the basis of current PEs versus the long-term averages; this leans to considering having a higher than normal active allocation as this is not necessarily the time you want to broadly buy into an overpriced market. Furthermore, and given the high PEs and other uncertainties, we would suggest phasing-in any new investments into high equity propositions.

As always, good luck.

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ADVISOR PROFILE

Stephen Katzenellenbogen

NFB Private Wealth Management

COMMENTS   8

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please explain why you are using intermediaries for your off shore investing? more costs and more time to get out. you want to be able contact the overseas broker direct and instruct them. I do all the time in aus thru pershing llc. – minimum brokerage

As they say, follow the money. The writer works for NFB and it would be highly unusual if he said that one does not have to use an intermediary.

Bob, please explain why you are STILL trolling SA web sites!??

This article borders on the line of almost being useless. Its like asking a barber whether you need a haircut. The author tries to sell unit trusts without explicitly saying so… What a waste of time

The one thing that intermediaries consistently excel at is reducing your returns.

All you bright sparks need to read the latest Dalbar survey. Go and Google it.
It shows that people who invest their own money are particularly bad at it and earn half the returns than people who use advisors.

Not one mention of SITUS, which is pretty critical when it comes to offshore investing.

TD Ameritrade – they open a US broker account for you if you can legally enter the US (read passport or Visa)

You do have to complete a US Tax form (W8) which establishes you an a non-resident for tax purposes – resulting in withholding taxes.

But you have commission free trading of ETF like Vanguard S&P500 etc.

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