Investing offshore remains a hot topic of conversation, mainly because it enables you to diversify your portfolio and access market sectors and securities that are not available in South Africa.
Before you take the plunge, however, make sure you understand your motivation for investing offshore, as well as the implications of your choices. It should be a strategic decision taken with the construction of your overall portfolio in mind and as part of a carefully crafted, holistic financial plan.
One of the first choices you need to make is between using a rand-denominated offshore feeder fund (“asset swop”) facility and investing directly in offshore unit trusts. The best option (or combination of options) is the one that will most suit your needs and that will best complement your overall financial plan.
You should not view investing offshore primarily as a rand hedge. Although this the main reason many people invest offshore, investors already gain substantial rand-hedge exposure through JSE-listed companies that generate their earnings abroad. Keep in mind that, because your expenses are priced in rands and are linked to South African inflation, moving too much of your portfolio offshore could result in a number of problems.
Rand-denominated offshore investments are ideal if you don’t necessarily want to expatriate your capital but want to take an investment view.
Various rand-denominated offshore (feeder fund) unit trusts are available. Typically, this is the cheaper and more easily accessible option when diversifying your portfolio offshore.
When investing in a feeder fund, you are taking advantage of your fund managers’ offshore allowance instead of using your personal offshore discretionary investment allowance. Generally, you can invest smaller amounts than when you invest directly offshore, and you can invest by setting up a debit order.
You may want to consider investing directly offshore if you plan to access your money offshore – for example, if you plan to emigrate, have offshore liabilities, live overseas part of the year, or expect that your children will study abroad.
This involves 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 a foreign currency by using the offshore capital investment allowance granted to the authorised dealer by National Treasury and the South African Revenue Service (Sars). There is a range of options, from shares to offshore unit trusts and 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 R10m per 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 the option you choose.
Jac de Wet is the national head of sales at PSG Wealth.