A world of opportunity, but …

If you prefer stock picking over index investing, keep your ego in check

Iwon’t really discuss stock picking here — that activity tends to be part of fairly extensive generic processes.

For simple index investments, the JSE has exchange traded funds (ETFs) that are quite handy — they are simple, easy to trade on your local stockbroking account and they get the diversification job done. They are priced in rands, as is the case for any SA listing. However, this column is intended as a more generic how-to “implementation, tricks and traps” primer for those who want a bit more.

If you are going to indulge in stock picking over index investing, you need to be sure what your edge is or what your target niche is (that isn’t available on the JSE). It’s important to have your ego in check. I’ve seen academic studies that suggest local knowledge investors typically have a 2% return advantage over outsiders — so if you thought beating the JSE is tough, well, beating foreign locals (such as the S&P 500 on a US exchange) is tougher, hence my reference to niches.

Many SA stockbrokers offer offshore platforms. Some of them are white-labelled offshore offerings, others are a home-baked mix with an offshore partner. Quite a lot of them are asset-swap based, which certainly has its conveniences for certain categories of clients.

Asset swaps are not truly offshored assets. Sure, the funds are denominated in a foreign currency, but they are still domiciled inside the rand universe. Many of the homebaked versions will offer a number of the big-cap offshore stocks, but they tend to be quite poor in the arena of London’s investment trusts, which is what I like to work with.

You also find that the ETF range, while often seeming large, is nothing like the range offered by a truly global offshore offering. When I checked my offshore provider recently, I had a choice of 69,000 listed shares and 45,000 ETFs to work with.

As for costs, if you think stockbroking fees vary widely on the JSE, well, the offshore space has significantly more variation.

I tend to prefer the offshore one-stop shops. These are stockbroking offerings that provide access to many stock exchanges via a single website. Going directly to an individual stockbroker in another country, to be restricted to only that country, is likely to prove frustrating in the extreme. The providers of multi-exchange dealing remove that admin and guesswork. They also tend to structure their accounts as bank accounts, which is obviously convenient. The caveat here is: make sure you have tidy internet habits to prevent hacking. Also, your platform needs two- or threestep authentication — the level of security on typical local bank accounts is too low for international transacting.

You need to think about probate — will the providing bank/broker accept your SA will if you die? This is one reason I prefer Swiss providers over the Channel Islands.

But even if you trade through a one-stop shop, you still need to understand the geography of the country you are buying into. Some countries apply stamp duties on share transactions (in SA we call this marketable securities tax). Its not a common tax and the worst villain is the UK (at 0.5% on purchases), which compensates for its villainy by not charging dividend tax (except on real estate investment trusts).

Hopefully you are getting the picture here — the world is big and definitely not standard. The large international accounting firms’ global tax handbooks are a handy resource for zeroing in on national specifics.

Dividend tax (demanded by both the SA Revenue Service and the domiciling country) is thoroughly evil because it’s a double tax. While you may be able to claim tax rebates for dividends (available via double tax agreements) the onerous admin in relation to the amounts usually involved makes it a waste of time.

The nastiest potential surprise is nonresident estate duty that may be applied to investments held by deceased estates on US or UK exchanges. Hurdle rates are $60,000 and £325,000. This is why I tend to buy Berkshire Hathaway on Frankfurt, rather than the New York Stock Exchange. I will also never use a platform domiciled in the US or UK for this reason.

Going directly offshore opens your eyes to a world of possibilities — but do your homework! ●

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