“Never let a good crisis go to waste.” – Winston Churchill
These words were spoken during the bleakest moments of WW2, yet they hold so much truth and hope for me. In times of controversy and change, there is always opportunity. There certainly has not been a dull moment in the past three years, with a pandemic followed by a war, rising interest rates and, ultimately, the multi-decade high inflation scenario we are currently experiencing globally.
Offshore investing is a term often used, but I have realised that, globally, it might mean different things – which can lead to some confusion I hope to clarify. In some cases, investors refer to offshore investing as making use of tax havens around the world. However, in this article I want to focus on diversifying your portfolio by including offshore assets (either indirectly or directly as explained below) as part of your well-diversified portfolio.
Today, I would like to explain how, and why, offshore investing can and should be done, and is essential to any resilient ‘all-weather’ portfolio.
1. The first reason is diversification
Including offshore exposure in your investment diversifies risk across different economies by offering exposure to different regions, sectors, securities and fund managers. This aspect will always remain very important for any South African, as we are over-exposed to SA assets by virtue of living and earning an income here. Therefore, our property and income earnings are already RSA based, before even considering our investment portfolios. Locally, we have approximately 1 300 funds registered with the Financial Sector Conduct Authority (FSCA). Globally, there are more than 200 000 funds available. Looking at stocks, there are roughly 350 listed on the JSE’s main board, compared to 60 000 globally.
Just as asset classes behave differently in different market cycles, the same diversification of risk applies to different economies and regions – when one is under pressure, another might be soaring. You gain access to other types of fund managers and equities that are not available when using feeder funds (for example, Tesla, Netflix etc.).
2. Hedging against a weak rand
Protecting yourself against the longer-term depreciation and volatility of the rand is another benefit. Be sure not to try to time the market when investing offshore, as exchange rate movements (especially given the volatility of the rand) are very difficult to predict.
3. Utilising offshore investments when working or travelling abroad
With many people globalising their lives by either living or working (or both) abroad, structuring an offshore portfolio for your earnings and spendings offshore can be beneficial. More and more individuals are working remotely, or considering this option, and phasing your funds offshore will hold great value for your new lifestyle and accessibility required in different currencies.
How do we do this?
There are two ways to invest offshore. Do speak to a financial adviser to discuss which route is more suitable for your specific needs, as making the wrong decision can be costly and incur unwanted taxes if not researched properly.
Option one (having the best of both worlds) – asset swap
An asset swap is the offshore exposure most individuals have in their portfolios – this is the global exposure gained through local, rand-denominated investments. When going this route, you are benefiting from the diversification of the offshore exposure. But, essentially, your money is still domiciled in SA.
Pros:
- No SA Reserve Bank (SARB) approval needed
- No foreign allowance used
- Available within 48 hours
- Investment can be made into a local (SA) trust
- No executor issues
Cons:
Limited fund choices under the jurisdiction of the SARB.
Investment allowance:
Not applicable to this option, so there is no limit.
Access:
Locally, in rand only.
How to invest:
Asset swap funds are available on all major local investment platforms. Our preferred platforms in this regard are PSG, Allan Gray, Investec, Momentum and Glacier. It is available for both shares and unit trusts.
Tax:
Capital gains tax will be payable at your effective tax rate on the sale of assets. This can be discussed in detail with your adviser.
Estate implications:
Less complicated, as no foreign legislation needs to be considered.
Option 2 – direct offshore investing
A single discretionary allowance of R1 million per calendar year is available to all South African residents who are 18 years and older, and who is in possession of a South African identity document. This allowance may be used for any legitimate purpose, including for investment purposes abroad.
In addition, a foreign capital allowance of R10 million per calendar year is also available to South African residents, subject to first obtaining a Tax Clearance Certificate.
The Financial Surveillance Department at the SARB will further consider applications by private individuals via an Authorised Dealer to invest in different asset classes offshore in addition to the above-mentioned allowances.
Pros:
- No South African jurisdiction or authority over these assets. Foreign legislation will apply depending on where (which jurisdiction) the investment is made.
- A much larger investment universe available with more funds, stocks and fund managers to choose from.
- 100% diversification from your SA portfolio.
Cons:
- Involving more paperwork and requirements.
- Funds above R1 million per annum requires SARB clearance – often a time-consuming process.
- Potential probate, additional administration costs and foreign taxation may apply – it is important to consider these issues upfront, as investors tend to forget the other tax pitfalls when moving funds offshore.
Investment allowance:
For South Africans, the total annual allowance is R11 million.
How to invest:
Direct offshore investments – unit trust or equity based – can be made through a number of platforms. Discussing this with a financial adviser is advisable.
Tax:
Capital gains tax (CGT) is determined in the foreign currency before the gain or loss is converted into rands. As a result, currency movements over the investment term have no impact on CGT.
Estate implications:
Consideration must be given to local and foreign legislation. I would recommend speaking to a fiduciary specialist and tax practitioner and with multi-jurisdictional expertise.
Offshore investing is not only an opportunity but may be advisable in particular circumstances.
Elke Brink, Wealth Adviser at PSG Wealth, Western Cape
Affiliates of the PSG Konsult Group, a licensed controlling company, are authorised financial services providers. Visit www.psg.co.za for more information.
