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The ABC of offshore investing

Michelle SteenstraOffshore investing is no longer a luxury available only to top-tier investors. It has become more affordable and accessible to the average investor and should therefore be considered when creating one’s investment portfolio.

When it comes to putting together an investment portfolio, we have all been warned not to “put all your eggs in one basket,” followed by the instruction to “take some funds offshore”.

As the immense world of offshore investing opens its doors, comfort levels drop, uncertainty sets in and one starts to wonder whether this is one egg better left in the basket. Suddenly currency decisions need to be made, foreign allowance constraints need to be reviewed and unlimited investment options become available. Will the advantages of offshore investing really outweigh the uncertainty and administration involved?

While there is merit in not putting all one’s eggs in one basket, it does not make sense to diversify just for the sake of it.

Why invest offshore?

  • Investors gain access to a wider range of companies, industries and investment opportunities than those locally available. It gives them the opportunity to diversify their portfolios and creates additional wealth, especially for those with a long-term view.
  • Over the past few years, the South African market has yielded very good returns. However, future valuations of global equity markets are generally more attractive than local markets.
  • South African investors may now invest up to R1 million offshore without SARS clearance, thereby making offshore investments even more attractive.

80/20 split – fact or fiction?

General consensus is that investors should have 20% of their investable assets offshore. This is a general rule devised many years ago and has become somewhat outdated. The ratio of assets invested both on- and offshore should be determined by investors’ immediate cash flow needs and their risk profiles.

Let’s assume you invested in dollars. Should the rand strengthen with 10% against the dollar, your cash flow income (in rand) may be 10% lower than originally planned. The rule of thumb is that the higher one’s immediate cash flow needs, the lower one’s offshore investment exposure.

If you are investing in offshore equities for capital growth purposes, the percentage invested overseas should be determined by where you will receive potentially higher returns. Higher returns can only be pursued within the means of your risk profile, hence your appetite for risk becomes the second factor in determining the offshore portion of your portfolio.

Mr Kokkie Kooyman, Head of Sanlam Global, explains this concept as follows: “Based on the fact that a Swiss, American or Australian investor would have a maximum of 5%, if any, of their assets invested in South Africa, why should SA investors have 80%?”

It clearly makes sense to diversify offshore for higher return possibilities, but only once all factors regarding one’s risk profile have been considered – and not at the cost of one’s cash flow needs.

How to invest

There are two ways in which a South African can invest offshore:

  • Direct investment: The funds are physically moved offshore. This investment option will utilise either an investor’s R1 million discretionary fund allowance or one’s R4 million offshore investment allowance. (See below for further information on foreign allowances.)
  • Swapping assets: Funds are invested in rands, but still allow the investor to gain exposure to foreign equity instruments. Once the investment is cashed in, the market value thereof is returned to the investor in rands. No foreign allowance is required for this form of offshore investing.

Products such as unit trusts, endowments and share portfolios can all be used when investing offshore, depending on investors’ profiles and needs.

Allowance constraints

Recent changes to exchange control legislation now allow individuals to take investment allowances of up to R5 million per year out of South Africa. This amount comprises a R4 million foreign and a R1 million discretionary investment allowance.

While the foreign investment allowance requires a foreign tax clearance certificate issued by the South African Revenue Service (SARS), no tax clearance certificate is required for the discretionary allowance.

South African investors have never had so many investment choices before, and should use the opportunity of investing legitimately and successfully offshore. However, lessons learnt from experience should be taken into account. Chasing temporary profits through currency fluctuations, and taking investment funds from one economy to another as economic data is released, will not result in long-term capital investment gains.

By the time an average investor reacts to market news, 80% of the damage has already been done. The solution is simple: create a portfolio that can be financially rewarding and that has been carefully designed within the means of one’s risk profile.

Trust your financial adviser to place your eggs in the right baskets; then stick to the programme. A well-diversified portfolio combined with an investment horizon of five years should be able to weather most storms.

For more information please contact Michelle Steenstra on 021 852 0382.