Go into off­shore en­dow­ments with your eyes wide open

Off­shore in­vest­ment poli­cies from life as­sur­ers give you ac­cess to for­eign funds that are not reg­u­lated by the Fi­nan­cial Ser­vices Board, writes

Weekend Argus (Saturday Edition) - - FRONT PAGE -

Be care­ful be­fore in­vest­ing in a life as­sur­ance prod­uct that gives you ac­cess to off­shore in­vest­ment funds, be­cause the funds you choose may be more risky than you think.

An off­shore en­dow­ment pol­icy is one way to in­vest a rea­son­ably large amount (typ­i­cally, about R300 000 or more) off­shore. These poli­cies, which are of­fered by the ma­jor life com­pa­nies through their off­shore op­er­a­tions, have a num­ber of ad­van­tages com­pared with in­vest­ing off­shore di­rectly (see “Ad­van­tages of off­shore en­dow­ments”).

How­ever, you should have your wits about you if go into such an in­vest­ment. The poli­cies ac­cess a large range of for­eign in­vest­ments, many of which fall out­side the am­bit of the lo­cal reg­u­la­tor, the Fi­nan­cial Ser­vices Board (FSB).

Off­shore col­lec­tive in­vest­ment schemes ( unit trust funds and ex­change traded funds) that have been ap­proved by the FSB to be mar­keted in South Africa must com­ply with the FSB’s strict cri­te­ria re­gard­ing what they can in­vest in and how the scheme is gov­erned. With non-FSB-ap­proved schemes, on the other hand, there is no such over­sight.

A re­cent rul­ing by the fi­nan­cial ad­vice ombud, Nol­untu Bam, high­lights the dan­gers of buy­ing an off­shore en­dow­ment pol­icy with­out ap­pro­pri­ate ad­vice (see “Ombud rules for pen­sioner”).

The fact that the poli­cies are sold by well-es­tab­lished, rep­utable com­pa­nies may lead you to be­lieve that the un­der­ly­ing in­vest­ments cho­sen by you or your fi­nan­cial ad­viser are above board. How­ever, if an un­der­ly­ing in­vest­ment col­lapses, as hap­pened with the in­vestor in the case that came be­fore the ombud, you may have re­course only against your ad­viser, if he or she did not alert you to the po­ten­tial risks be­fore you in­vested.

Old Mu­tual, Mo­men­tum and San­lam, among oth­ers, have off­shore op­er­a­tions and of­fer this type of prod­uct. The rea­son they can of­fer prod­ucts with un­der­ly­ing in­vest­ments that have not been ap­proved by the FSB is that life as­sur­ance prod­ucts are reg­u­lated by the Long Term In­sur­ance Act, not the Col­lec­tive In­vest­ment Schemes Con­trol Act (see “FSB and the life com­pa­nies”).

In the case that came be­fore the ombud, the en­dow­ment pol­icy was of­fered in South Africa by African Har­vest Life As­sur­ance Com­pany, which was later bought out by Syg­nia. Tr­isha Jorge, the head of re­tail sales at Syg­nia, says African Har­vest did not mar­ket the poli­cies; it “merely pro­vided the sav­ings wrap­pers, which fa­cil­i­tated ac­cess to an off­shore [in­vest­ment] plat­form of­fered by [United King­dom-based as­surer] Royal Lon­don with a range of unit trusts on of­fer.

“All the pol­icy doc­u­ments made it clear that the re­spon­si­bil­ity for the ap­pro­pri­ate­ness of the fund se­lec­tion rested with the client. African Har­vest re­stricted the list of unit trusts avail­able to those man­aged by rep­utable in­sti­tu­tions. How­ever, it did not re­strict clients and their fi­nan­cial ad­vis­ers in terms of the as­set classes they wished to in­vest in,” Jorge says.

She says Syg­nia no longer of­fers off­shore en­dow­ment prod­ucts. “Af­ter Syg­nia bought African Har­vest Life, the range of funds avail­able was re­stricted to FSB-ap­proved for­eign unit trusts, and sub­se­quently, in 2011, this prod­uct range was closed to new in­vestors en­tirely. Syg­nia does not of­fer off­shore funds, other than FSB-ap­proved funds, to re­tail in­vestors on its plat­forms or through it wrap­pers,” she says.

Although they are not bound by lo­cal reg­u­la­tions on col­lec­tive in­vest­ment schemes, it is in the best in­ter­ests of the life as­sur­ers that do of­fer these off­shore poli­cies to vet non- FSB- ap­proved funds them­selves.

An­drew Brotchie, the manag­ing direc­tor of Glacier In­ter­na­tional, part of San­lam, says a qual­i­ta­tive due dili­gence, led by the Glacier Re­search team, is un­der­taken when new funds are con­sid­ered.

“The team seeks to en­sure that we have a good un­der­stand­ing of the fund and how it is man­aged, as well as the po­ten­tial risks. Funds se­lected by rep­utable fund re­search agen­cies are also con­sid­ered, sub­ject to the same cri­te­ria.”

Brotchie says an op­er­a­tional due dili­gence is also con­ducted to en­sure that the fund can be ef­fi­ciently traded. He says Glacier In­ter­na­tional of­fers about 240 funds. Of these, about 140 are FSB-ap­proved.

Brotchie says the main rea­son for of­fer­ing the non-FSB-ap­proved funds is to pro­vide wider in­vest­ment choice.

“The FSB-ap­proved funds tend to be of­fered pre­dom­i­nantly by South African- based as­set man­agers, often in con­junc­tion with their lo­cal funds, and we feel that there are a large num­ber of ex­cel­lent off­shore non-FSB-ap­proved funds man­aged by very rep­utable, glob­ally renowned as­set man­age­ment firms that can en­hance the in­vest­ment options for South African in­vestors.” He says these funds tend to be dis­qual­i­fied by the FSB for tech­ni­cal, rather than qual­ity, rea­sons.

“We [ re­alise] that in­vestors se­lect­ing these funds are not nec­es­sar­ily so­phis­ti­cated, and we try to en­sure that the funds are ap­pro­pri­ate in terms of as­set type and as­set mix­ture, and are from fund man­agers with strong rep­u­ta­tions and good track records. We also try to cat­e­gorise the funds into group­ings that South African in­vestors would be fa­mil­iar with, so that they can ap­ply the same type of logic when con­sid­er­ing them,” he says.

Brotchie says the fact sheets of all the funds are avail­able for in­spec­tion, and Glacier “en­cour­ages ad­vis­ers and in­vestors to ask ques­tions, both of us and of the fund man­age­ment com­pa­nies, if they are un­sure of any­thing”.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.