How to invest offshore to reduce risk and expand opportunities
• Choice of rand-denominated unit trust fund or direct investment depends on investor’s needs
Since the sacking of finance ministers Nhlanhla Nene and Pravin Gordhan and the subsequent investment downgrades the pace of offshore investment has undoubtedly increased.
Investors are diversifying their investments offshore to protect themselves against increased political and economic risks as well as to fairly limited opportunities in SA.
Investors can obtain exposure to offshore investment markets in two ways: randdenominated international unit trust funds or direct offshore investment. It is important to make a decision that’s appropriate for your circumstances.
In terms of the rand-denominated international unit trust fund option, the investor buys a rand-denominated international fund through a South African financial institution. The unit trust company then uses its foreign capacity allowance to invest the funds offshore.
It is important to note that the proceeds of the investment are always payable in rands (the proceeds will need to be paid into a South African bank account). If you have a retirement fund, up to 25% of your capital could already be invested offshore in this manner, as 25% is the maximum in terms of the prudential investment guidelines applicable to retirement fund investments.
This method is ideal for investors who do not feel the need to physically move their funds offshore but would like to benefit from investing in overseas markets through the rand depreciating in value, the offshore investment appreciating in value, or a combination of both. In the case of certain legal persons such as South African trusts, this method is the only way to obtain offshore exposure.
Rand-denominated international investments tend to have lower investment minimums and are less onerous in terms of regulation and paperwork. Most investment management companies have flexible investment options that allow monthly contributions that can be increased or decreased.
The South African Reserve Bank’s foreign investment allowances do not apply to these investments. In addition, investors do not need to decide on the currency in which they wish to invest. The choice of currency will be decided by the investment management company based on the returns it perceives are offered by different currency markets.
With a direct offshore investment an investor buys into a collective investment scheme (such as a unit trust) through a foreign financial institution. The foreign institution then invests the money directly in foreign assets and the returns are payable in foreign currency and do not require repatriation to SA. Other examples of direct offshore investments include buying a share portfolio or a property. Direct offshore investments are suited to investors who want investments outside the jurisdiction of the Bank.
These investments require higher investment minimums. The investor must decide on the jurisdiction and fund currency. The investment must be authorised by the Bank and the investor’s foreign investment allowance applies.
Investors are allowed to take up to R11m offshore per calendar year. For amounts greater than R1m, investors will require a tax clearance from the South African Revenue Service and approval from the Bank. Only natural persons older than 18 years (not legal entities, trusts or firms) are entitled to use the foreign investment allowance.
Direct offshore investments will form part of your estate and you may be liable for estate duty in the jurisdiction in which you invest. Offshore endowment structures are useful for these investments as this will negate the need for probate or an offshore executor.
You may nominate beneficiaries, which means that at your death the investment can either continue offshore or will be paid out in foreign currency to the beneficiaries.
The two investment options are treated differently from a capital gains point of view. In the case of direct offshore investments the foreign loss or gain has to be calculated first before it is translated into rand.
Rand-denominated international investments are always reported in rand, so it is possible to have a capital gain where there has been no offshore asset growth and only a depreciation in the rand.
Like all financial decisions, offshore investments need to be tailored according to your needs. Factors that may play a role include the status of the investor (natural person or trust), family requirements (for example, you may have children living overseas you may want to visit, or if you are able to afford to leave children an inheritance, then it would make sense to base that inheritance in the currency where they are living) and the purpose of the investment (for example, whether you need to draw an income).
Engage an independent, feebased certified financial planner who will focus on your best interests and provide impartial advice. If you do not have a certified financial planner, visit the website of the Financial Planning Institute on www.fpi.co.za to select one.
Bezuidenhout is director and investment planner at Netto Invest (morne@netto.co.za).