A long-term offshore investment strategy

Finmonitor

For a brief period, during May and June of this year, the rand strengthened
to below R14.00 to the dollar. Most commentators believe that the local currency is trading below its long-term average US dollar exchange rate and therefore offers an opportunity to investors to increase diversification through offshore investment exposure. A strong global demand for commodities (referred to as a commodity ‘boom’), strong agricultural exports, a weaker dollar, and a more positive domestic political environment have all contributed to a strong local currency measured against developed market currencies.

We believe that a view of the rand exchange rate should not be the dominating factor in an investor’s strategic allocation to offshore assets. Besides an offshore investment portfolio protecting you against a weakening rand, there are other important advantages to offshore investing, such as:

• Gaining exposure to shares and sectors not available in South Africa.
• Protection against country-specific risk and political turmoil.
• Diversification across geographical regions.

There are various ways in which an investor can obtain offshore exposure, and each of these routes have their own set of advantages, disadvantages and costs.
The two most popular options of obtaining offshore exposure within your investment portfolio are discussed below. The first is to invest in quality or blue-chip international companies listed on the JSE All Share Index, such as Naspers, Richemont and Anglo American.

This route is cost effective and can be implemented as part of your local share portfolio.

The second option, and probably the route most
South Africans are familiar with, is via a rand-denominated South African unit trust fund. These funds can typically be identified by the reference to ‘feeder fund’ in the name.
These feeder funds are fully invested offshore and feed directly into their offshore equivalents. These days, there
are a few hundred feeder funds to choose from, ranging from low-risk money market funds to high-risk equity funds.

Both the abovementioned routes provide a good hedge against a depreciating rand and offer diversification across economies and geographical regions. Neither option requires the client to expatriate the funds offshore, thus avoiding the process of applying for tax clearance.

Today, South African investors do not only have access to the many prominent South African fund managers who offer a range of offshore unit trust funds, but also to a number
of foreign domiciled international asset managers such as BlackRock, Fundsmith and Franklin Templeton. These ‘offshore’ funds are offered in a range of international currencies such as US dollar, pound sterling and euro.

When selecting to invest in these unit trust funds, South African residents above the age of 18 have access to an annual R1 million discretionary offshore allowance (also referred to as a travel or an education allowance). Any amount exceeding R1 million requires tax clearance and is capped at an additional R10 million per year. This means R11 million per annum can be taken offshore within a calendar year.

An even more direct involvement in offshore listed securities is a bespoke offshore investment portfolio. This alternative allows an investor access to a broad universe of shares and debt instruments listed on exchanges around the world.

One advantage of a bespoke investment portfolio is the low management fees compared to those of an offshore unit trust fund. Furthermore, investors can customise their
selection of securities to suit their personal preferences and long-term investment plan. Investors need to apply for tax clearance for offshore investments exceeding R1 million
per year.

The offshore allowance of R11 million per year is only available to natural persons. Trusts and other legal entities can also diversify offshore by using the asset swop mechanism. However, it’s important to bear in mind that the funds invested via an asset swop cannot remain offshore indefinitely and would need to be repatriated to South Africa and converted back to rand as and when withdrawals or distributions are made.

It’s important for an investor to consult with their auditor to establish the tax and estate planning implications of offshore investments. Foreign interest and dividends need to be declared in South Africa.

Some countries (e.g. the UK and US) also impose estate duty when the foreign assets held in that country exceed certain thresholds (also known as situs or inheritance tax).

An investor, in consultation with their financial adviser or portfolio manager, should carefully consider the various offshore investment options and make sure their needs, risk profile and long-term goals are matched appropriately. Be cognisant of exchange rates, but don’t let the rand exchange rate keep you sitting on the side-line, as you might be missing out on excellent investment opportunities abroad. And lastly, always ensure you invest in high-quality investments and stick to your well-designed investment plan.

The opinions expressed in this document are the opinions of the writer and not necessarily those of PSG and do not constitute advice. Although the utmost care has been taken 2
in the research and preparation of this document, no responsibility can be taken for actions taken based on information in this article. Always remember the prudent way is to
consult your portfolio manager before investing. PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728