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The why and how of investing offshore

28 May 2020

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by Anchor

We highlight that the rand is one of the world’s most volatile currencies and is prone to dramatic moves. At this time, we believe the rand is very undervalued and there is every prospect that it could go back to R15/$1. So, from an immediate timing perspective, it might be worth getting the paperwork in place and waiting for some rand strength, although the actual offshore investing strategy depends on your personal situation and we encourage investors to seek advice from their financial advisors and planning a strategy prior to making any offshore investment decisions.

South African (SA) investors have many investment options available to them. One of the most attractive, important, and perhaps least understood is international investing. Offshore investing is an important way to diversify your investment portfolio and it provides protection against a currency that should gradually weaken over time. Below, we look at the process and requirements to invest outside of our borders, as well as the risks and options available.

The first question to look at is why one would consider investing offshore. Diversification and protection from a weakening currency are the two primary reasons for having offshore exposure. SA is less than 1% of the global economy. By focusing all your investments locally, you are missing out on some of the best businesses in the world. Diversification is not only about taking advantage of opportunities; it is also about managing risks. A portfolio with exposure to various economic regions (for example emerging markets [EMs] and developed markets [DMs]), more than one currency and multiple political regimes is a better portfolio than one focused only on any one of these factors.

Key to SA investors is our currency. Over time, the exchange rate of the rand should weaken against major currencies, especially the US dollar. Therefore, if our wealth remains rand denominated, we may be getting rand richer, but we are certainly getting dollar poorer. Externalising money helps to protect investors against this!

So how does a SA investor invest offshore? The following options are available:

Externalise your money

This is the best option but, unfortunately, given the cost of externalisation and investing offshore, it is also the most expensive. Here, investors would utilise their R1mn personal allowance or apply to the SA Revenue Service (SARS) for clearance (since SA still has exchange controls) over and above that amount (to a maximum of R10mn p.a.). Money is transferred out of SA and invested in foreign asset classes such as equities (for example, those equities in the MSCI World Index, which represent large and mid-cap equities across 23 DMs), bonds, cash, etc. An offshore bank account is generally necessary, although some SA banks have options to assist with this.

Invest in rand-denominated funds with offshore exposure

Where externalisation is not possible, investors can invest in rand-denominated funds which then invest in foreign assets. While these are rand investments, the underlying investments are foreign currency assets, which means that as the currency weakens, the rand value of the assets grows accordingly. The disadvantage here is that any depreciation in the currency, which results in an appreciation of the rand value of the foreign assets is included as a taxable gain – this is not the case for direct offshore investments. This option does not require clearance being obtained from SARS as no money leaves the country and your investment is paid out to you in rand.

Utilise an asset swap facility

Some financial institutions allow their clients to utilise their balance sheets to gain offshore exposure. Much like investing in rand-denominated funds, while these are rand investments, the underlying assets are foreign currency assets, so as the currency weakens, the rand value of the assets grows accordingly.

Beyond determining how to invest offshore, investors also need to ascertain which assets and asset classes are the most appropriate. Investors will have access to offshore equity markets, offshore unit trusts and a variety of low-risk options such as bonds and cash-like instruments. Depending on the asset, lump sum and monthly investments can be made. The decision around which assets and asset classes to invest in should be made in consultation with your financial advisor. But, remember that diversification is hugely important. When investing offshore, SA investors are often looking to manage those SA-specific risks which we live with on a day-to-day basis, so a prudent, lower-risk option is often appropriate.

Money invested in retirement products (such as a retirement annuity) can get some offshore exposure. Although we note that this is limited to 30% (or 40% since individuals are allowed to invest a further 10% in other Africa markets as well) of the total investment value, in terms of Regulation 28.

Risks and requirements

Clearance from SARS is required to externalise money and most financial advisors will be able to assist with this process.

Owning assets offshore comes with risks – particularly around estate/death duty taxes and estate planning. It is important to get advice from an experienced financial advisor to ensure that these risks are managed, and investors do not become liable for unnecessary estate/death duty taxes. The use of an endowment product can greatly reduce the administrative burden, as well as the estate planning and tax-related risks of offshore investing.

In summary, SA investors should be looking to have their rand expenses and cashflow requirements catered for with rand assets. Beyond that, we should all be looking to get exposure to a range of markets, businesses, and currencies, across the globe. Consulting your financial advisor and investing through an institution with capabilities to access global markets is key.

Anchor has a wide variety of offshore investment solutions and the capability and experience to ensure your global investments are appropriately structured and relevant to your personal needs.

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