South African (SA) investors have many investment options available to them. One of the most attractive, important and perhaps least understood is investing offshore. Offshore investing is an important way to diversify your portfolio and it provides protection against a currency that should gradually weaken over time. In this article, 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. SA is less than 1% of the global economy. By focusing all of your investments locally, you are missing out on some of the best businesses in the world. Diversification isn’t only about taking advantage of opportunities, it’s also about managing risks. A portfolio with exposure to various economic regions (for example emerging and developed markets), more than one currency and multiple political regimes is a better portfolio than one focused on any one of these factors.
Key to SA investors is our currency. Over time, the rand should weaken against major currencies, especially the US dollar. If our wealth remains in rand, we may be getting rand richer, but we’re certainly getting dollar poorer. Externalising money helps to protect against this.
So how does a SA investor invest offshore? There are three options available:
- Externalise 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 over and above that amount (to a maximum of R10mn per year). Money is transferred out of SA and invested in foreign assets (shares, 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 into rand-denominated funds which then invest in foreign assets. While these remain rand investments, and thus do not protect us against a weakening currency, they do get investors exposure to foreign assets. 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 for clients to utilise their balance sheets to gain offshore exposure. However, much like investing in rand-denominated funds, this does not protect against a weakening currency (as the investment remains in rand), it does, however, give an investor offshore exposure.
Beyond determining how to invest offshore, investors need to ascertain which assets and asset classes are the most appropriate. Investors will have access to shares, 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 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 25% 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.