How to decide on offshore investment
OFFSHORE investment remains a hot topic, primarily for its diversification benefits and access to sectors and securities that are not available in South Africa.
Before you take the offshore plunge, make sure you understand your motivation for doing so, as well as the associated implications of your choices. Offshore investment should be a strategic decision taken with the overall construction of your portfolio in mind, and as part of a carefully crafted, holistic plan.
Deciding between using a rand-denominated offshore feeder fund (“asset swap”) facility or investing directly in offshore unit trusts is one of the first choices you should make.
The best option (or combination of options) will be the one that is most suitable for your needs and that best complements your overall financial plan.
You should not view offshore investment primarily as a rand hedge.
Even though this is a big driver for many to invest offshore, investors already gain substantial rand hedge exposure through companies listed on the JSE from earnings generated from abroad.
Keep in mind that since your expenses are priced in rands, and linked to South African inflation, moving too much of your portfolio offshore could present a number of pitfalls.
Direct versus rand-denominated investment: What to consider
Rand-denominated offshore investments are ideal if you don’t necessarily want to expatriate your capital, but rather want to take an investment view.
Various rand-denominated offshore (feeder fund) unit trusts are available to invest in.
Typically, this is also a cheaper and more easily accessible route when it comes to diversifying your portfolio offshore.
When investing in a feeder fund you are taking advantage of your chosen fund manager’s offshore allowance rather than using your personal offshore discretionary investment allowance.
Generally, you can also invest smaller amounts than when investing directly offshore and you can invest via debit order.
If part of your bigger plan is to access your money offshore – for example, if you want to emigrate, have offshore liabilities, live overseas part of the year, or if you anticipate your children will study abroad – you may want to consider the direct offshore route.
This involves physically taking money out of South Africa, which needs to happen via an authorised dealer.
Once the money is physically out of South Africa, it can be invested in offshore markets in the foreign currency by using the offshore capital investment allowance granted to the authorised dealer by the national Treasury and the South African Revenue Service (SARS).
There are a vast range of options available, from shares to offshore unit trusts to a foreign bank account.
Investors can use their personal single discretionary allowance of R1-million per taxpayer per calendar year (which does not require tax clearance from SARS) or their foreign capital investment allowance of R10-million a taxpayer per calendar year (which does require tax clearance from SARS).
Taking the plunge and investing offshore makes sense for many investors – provided you are clear about your reasons for doing so, and understand the advantages and disadvantages of your chosen route.