There’s a whole world out there, baby!

Access to overseas-based asset managers may be profitable, but the tax and other practicalities can be daunting

Ask the average retail investor in SA what Dodge & Cox, Baillie Gifford, Blackrock and Schroders have in common and they’re more than likely to return a blank stare. Yet these global asset managers make Coronation, Old Mutual and Allan Gray look like small fry.

So should they be a part of a truly diversified portfolio?

Dodge & Cox has been running investment funds since 1930 and has almost 100 investment analysts focused on its global equity fund alone. The active-only asset manager has Us$276bn (R3.6 trillion) under management, with a track record “second to none”, says Leigh Köhler, head of research at Glacier by Sanlam, which offers Dodge & Cox funds to SA investors.

Blackrock, the world’s largest asset manager, with $5.7 trillion under management, has an investment team of more than 30 on one of its balanced funds.

While a number of local asset managers have offshore capability — and in some cases international offices — that stack up well with their global counterparts, at the end of the day “many still view the world from a local perspective”, says Köhler.

Says adds Andrew Brotchie, MD of Glacier International: “South Africans are comfortable with the brands and companies they know, but there’s a wealth of expertise out there. SA investors don’t really understand how big the offshore asset management industry is.”

Alex Funk, CEO of Cinnabar Investment Management, which uses global asset managers to manage clients’ offshore assets, says: “The benefit of being on the ground and having oneon-one meetings with the management of the companies you’ve invested in makes a big difference. We’ve seen it in the returns.”

If you’d like to invest in a small Asian economy, say Vietnam, you’ll be hard-pressed to find an asset manager with enough knowledge of that market in SA, adds Warren Ingram, executive director at Galileo Capital.

He is quick to add, however, that while having access to offshore managers is a good investment strategy in principle, the practicalities are much more complex.

For a start, externalising assets above R1m by placing hard currency in an offshore bank account requires tax and foreign exchange clearance. Funk reckons a minimum lump sum of $250,000 (R3.2m) is required to make offshore investing cost effective.

It is also critical to understand where a fund is domiciled, says Ingram, because there are withholding-tax and estate duty implications.

For example, if you’ve invested $100,000 in North America and you pass away in SA, 40% of your investment above $60,000 ($16,000) will be claimed by US tax authorities as estate duty. The situation is similar in the UK, though estate duty is levied only on amounts above £325,000 (R5.5m).

Dividend-withholding tax is another consideration, as it will affect the level of income you ultimately derive from your investment, Ingram says.

“The other thing people forget about is their will. If you’ve got money in a fund listed in France, will the French authorities recognise an SA will? A lot of jurisdictions would require you to have a will there.”

The investment could complicate your annual tax return, too. Offshore managers might not package fund information in a format acceptable to Sars, requiring you to do the additional legwork.

“This is why a lot of South Africans who invest overseas still use local fund managers, because a lot of these intricacies are resolved for them,” says Ingram.

Offshore investing can be done using hard currency in an offshore bank account or by investing in rand via a feeder fund. Though more accessible, the latter can be a more expensive option, as fees are higher and feeder funds are subject to 18% capital gains tax on the rand gain.

Investors set on a non-sa asset manager should look at funds registered in Switzerland, Ireland, Luxembourg and the Channel Islands, as these are generally more Sa-friendly, advises Ingram.

Switzerland offers a bank account that operates as an administration platform from which you can buy shares and invest in mutual funds.

Fortunately, fund management fees are favourable. Dodge & Cox charges 0.6% for active asset management, while a tracker fund with Schroder’s, the UK’S second-largest asset manager, can be had for an investment charge of just 0.27%.

Baillie Gifford — which, according to Köhler, is one of the world’s best multi-asset fund managers — has an actively managed fund charging a management fee of 0.4%.

The total investment charge on these funds is not out of line with the domestic market, with an actively managed offshore investment available for 1.5% all in, Köhler says.

Naturally, this should be weighed up against tax and other financial planning implications. A number of these funds would have fund minimums, limiting the extent to which South Africans can effectively diversify their offshore investment across a spread of funds.

While access to offshore asset managers is undoubtedly attractive, investors should be prepared for complexity.