Is it time to invest offshore?

Is it time to invest offshore?

Published on 25th August, 2020 at 01:16 pm

With a murky outlook for our local economy, could investing offshore be the key to growing your wealth in the long term? We asked the experts.

How seriously should you consider investing offshore?

While South Africa has its share of world-class companies to invest in, it is always good to have some offshore exposure to diversify your portfolio, says Helena Conradie, CEO of Satrix. The country’s downgrade to junk status, the weakening of the rand and the murky outlook for economic growth support the argument for offshore investing. “Investors should always have a portion of their portfolio exposed to offshore investing,” she says. “There are many industries, economic regimes and currencies you are simply not able to access by keeping all your capital in domestic markets. It would be remiss of you not to consider diversifying a portion of your assets offshore, and mainly into developed markets.”

Andrew Brotchie, MD of Glacier International, concurs, adding: “Offshore investing is sought after by individuals who want access to investment opportunities that aren’t available locally – 99% of the world’s listed investment opportunities are outside of South Africa.”

Your offshore options

Short-term
“Bank accounts, money market funds, and low-volatility cautious funds are all available as offshore investment vehicles,” says Brotchie.

Keep this in mind

  1. Don’t panic when you notice fluctuations in your investment. Brotchie explains: “These investments are held in different currencies, and currency movements can make movements in your reference currency feel as though the underlying asset is more volatile than it actually is.” Instead, judge the performance of your investment based on the currency you’re invested in.
  2. With money market and cautious investments, Brotchie also notes, “The interest rates on hard currency accounts are much lower than those experienced in South Africa – and in some cases, are even negative.” So instead of receiving interest, you’ll be charged to hold that investment.

Long-term
As with short-term options, there’s an array of long-term investment options available in the offshore space. Think multi-asset funds, equity funds and sector/regional/specialist funds.

Keep this in mind

The landscape of longer-term offshore investment options can be rather intimidating for the South African investor, owing to the vast range from which to choose. It’s for this reason that Brotchie advocates contacting a financial planner and/or a discretionary investment manager to assist with the investment selections. Book a meeting with a Sanlam financial planner today to start the conversation.

“On the plus side, you can get access to regions (developed markets, emerging markets, different parts of the globe exposed to different growth prospects), sectors (think technology, pharmaceuticals etc. that aren’t available in South Africa) and a large number of Environmental, Social and Governance (ESG) funds, which are becoming a far stronger investment theme internationally,” he adds.

If you’re looking to invest directly offshore via Satrix, the platform has six rand-denominated global ETFs and one unit trust covering the MSCI World Equity index, the S&P 500, the Nasdaq 100, MSCI China and the MSCI Emerging Markets index and global bonds.

ETFs and unit trusts – what’s the difference? Find out here.

MSCI World Equity Index facts & figures

“The index is tracked in a Satrix feeder fund unit trust, ETF and a true offshore UCITS (Undertakings for the Collective Investment in Transferable Securities) fund domiciled in Ireland,” says Conradie.

Markets: 23 developed markets
Stocks: 1 600
Focus: large and mid-cap companies

“The index covers 85% of the free float-adjusted market capitalisation in each country – in a single trade and at low cost,” says Conradie. “This has to be a consideration when choosing where to invest offshore.”

Free float-adjusted capitalisation refers to the method for calculating market capitalisation by only including the true number of shares available for purchase.

Satrix Emerging Markets ETF facts and figures

“This tracks the MSCI Emerging Markets Index in ZAR,” says Conradie.

Regions: 5
Countries: 26
Companies: 1 100+

“If you believe global growth will be driven by emerging economies in years to come, this is a must-have allocation in your portfolio,” says Conradie.

I want to invest offshore – what are the rules of play?

International investments present a different ball game, so playing within the boundaries involves careful portfolio structuring. Brotchie highlights some factors worth consideration:

  • Accessing the appropriate funds in the appropriate jurisdictions
  • How you hold assets impacts how your investments will be treated for tax and probate purposes.
  • Legal obligations to the Reserve Bank in terms of declarations and approvals for holding offshore assets that may be required when it comes to exchange control regulations
  • Transaction times of international investments (these differ from South Africa) owing to foreign exchange transactions that may need to take place
  • Differing investment settlement timings and protocols

Tax rules unpacked
Conradie explains that there are two options for gaining offshore exposure, and the tax implications thereof:

Physically take your money offshore

Step 1: Follow the exchange control process.
Step 2: Open an offshore bank account.
Step 3: Deposit rands overseas in a currency of your choice.

Limitations: You can invest R1 million without tax clearance, and a further R10 million with tax clearance.

“All interest from foreign investments is fully taxable,” says Marc Sevitz, co-founder of TaxTim. “Most foreign dividends are taxable, subject to exceptions, but the maximum they are taxed at is 20%. This is to keep the tax in line with the South African dividends withholding tax.”

Use TaxTim to submit your tax return correctly and efficiently. Reality Club, Core, Plus and Health members get free access to the tool as part of their Wealth benefits.

Invest in rand-denominated offshore investment products

With this option, you invest in Rands, so your money doesn’t physically leave South Africa. Because of this, you don’t need SARS tax clearance, as your investment and payout upon disinvestment is done in Rands. An added bonus: you can set up a debit order, and the lump sum minimums are a lot lower than when you physically take your money offshore, says Conradie.

She also cautions investors about the exchange rate risk, which is the risk that your investment value changes due to fluctuations in the currency exchange rate.

Read this for more tips before you invest offshore.

Striking a financially healthy balance

“A blend of assets does allow investors to try and match their rand liabilities with rand investments from their South African portfolio, which can offer a different investment profile, and access to higher interest rates to those offered internationally,” says Brotchie.

“Blending that with international investments allows investors access to a broader range of different investment opportunities and return profiles, while acting as a hedge against currency depreciation.” This is crucial, as it can create a healthy counterbalance to domestic returns, while positioning the overall portfolio more optimally for longer-term growth, he concludes.

To make sound investment choices in line with your risk appetite and long-term wealth goals, book a meeting with a financial planner, who is best positioned to advise you about your financial decisions.

Glacier Financial Solutions (Pty) Ltd and Sanlam Life Insurance Ltd are licensed financial services providers.

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