How to invest offshore

Last updated on 12th December, 2017 at 04:37 pm

The world market offers broad opportunities for investment without the economic and political risks currently at play in South Africa.

The ramifications of the vote for Britain to leave the European Union (EU) are likely to continue for some time, impacting markets, currencies and commodities around the world. But this will not necessarily change the South African charge for offshore investing, says Glacier International MD, Andrew Brotchie.

“For one, there is the solid argument for diversification: investment opportunities around the world are far broader than in South Africa, giving investors access to a whole range of growth opportunities. Many of these won’t disappear simply because certain industries or sectors are currently affected by Brexit volatility. The underlying fundamentals of industries are still very strong.”

How much should you park offshore?

Research indicates that ideally between 20% and 40% of an individual’s investments should have offshore exposure, which will both increase growth prospects and lower risk. If you have offshore liabilities, you may prefer to invest more money offshore, as you won’t want to cover these with rand-based assets, which depreciate over time, explains Brotchie.

Alternatively, you may want your children to enjoy tertiary education abroad, so it makes sense to save in the currency where they will be studying. And if you’ve got enough funds, you could pass on a legacy for your children in a hard currency.

Individuals who have inherited or earned money overseas only need to disclose this fact; they are not required to bring it back to South Africa. As South Africa effectively has a residence-based tax system, people are taxed on their income worldwide. So if you want to leave money abroad, you have to go through the tax clearance process.

Retirement restrictions

Besides exchange control regulations and Regulation 28 (which sets limits to how much a retirement fund may invest in any asset class), an individual’s investment in a pension and retirement annuity fund has a 25% limit on what can be invested by the fund managers offshore.

Most people, within their pension funds, have already got the full exposure of what they are allowed in terms of offshore assets, so the only way they can extend their offshore exposure is through their discretionary savings, Brotchie explains.

Before taking the plunge

First, look carefully at your total investment portfolio, including your exposure to property. While you may have 25% offshore exposure in your pension fund, in terms of your total portfolio it may be far lower.

The factors people need to take into consideration are extensive, says Brotchie, therefore the vast majority of clients opt for flexible balanced types of funds where the fund manager will pick the region, sector and asset class and manage these towards a certain outcome. Clients also tend to be biased towards investments in developed markets, but this is bound to change when developing markets come back into favour, he adds.

Investment structure

The investment structure or vehicle you choose needs careful consideration as it may have important ramifications on how the assets are treated from an estate planning and tax point of view.

Besides investing in the assets (shares) directly, investors can use structures that offer a number of advantages and efficiencies from a financial planning point of view. Becoming increasingly popular are model portfolios or wrap funds where the investor selects a suitable risk profile and a professional manager then manages the underlying assets.

The implications of estate duty also need to be borne in mind when structuring an offshore portfolio. “In certain jurisdictions, estate duty applies regardless of the fact that you are not a tax resident in the country. This may be higher than in South Africa,” warns Brotchie.

Exchange control regulation

If you wish to personally take your money out of the country, you need to go through Exchange Control. Currently, every South African can take out up to R1-million a year without obtaining a tax clearance certificate from the SA Revenue Service (SARS).

Provided your tax affairs are in order, a tax clearance certificate from SARS allows you to take out a further R10-million per annum. So effectively, an individual can take R11-million out of the country each year.

Offshore investments can be done as lump sums or a monthly debit order. They can be housed within investment vehicles such as unit trusts, endowments or pension funds (subject to restrictions and limits).

If you prefer not to go the direct route, you can invest via an ‘asset swap’. This means you invest in rands with a local asset manager or institution, which has been granted offshore capacity by the Reserve Bank. Your money is invested overseas, and the return is dependent on offshore market and currency movements. Any redemption on the money must happen in SA and in rands, so you can’t withdraw the money and put it in an overseas bank account.

“Fearing the unknown is probably the biggest hurdle for potential offshore investors, but there is nothing to be overly scared of,” Brotchie concludes. “While the rules of the game may differ, worldwide investment philosophies and principles are the same.”

By Wilma de Bruin