Selecting suitable offshore products for your needs

To take the analogy further, you might be based in a chilly Gauteng with clear blue skies, while elsewhere, our ‘world in one country’ offers glorious flowers in the otherwise dry Namaqualand, waving yellow grasslands in the Free State, hunting opportunities in the North West, and green mountains and winelands in the Western Cape. Different regions each have their own unique appeal, and the same is true for investments. With such variety on offer, let’s explore how to get your investments travelling!

Offshore products

There are various ways to access international markets or offshore-based investments. South African investors can gain exposure through a range of investment funds and offshore product wrappers. Let’s look at some of the choices at your fingertips.

Rand-denominated offshore funds (Feeder funds)

Feeder funds are local funds that invest directly into global unit trust funds. They are available through local investment platforms (LISPs), making them an easy and familiar option for investors. The investment returns and capital gains on these investments are denominated in rands and are therefore influenced by exchange rate fluctuations.

Direct offshore investments – ‘DIY’ brokerage accounts (Bonds, shares, and exchange traded funds)

Investors can also access foreign-domiciled assets directly through offshore securities platforms offered by local firms. These platforms allow you to ‘externalise’ your funds – i.e. to invest your funds offshore – using your annual R1 million discretionary allowance or R10 million foreign investment allowance granted by the South African Reserve Bank (SARB). Returns and taxes for these investments are calculated in the applicable foreign currency, which means that investments in these products may be liable for foreign estate taxes.

Offshore unit trusts

Offshore unit trust (sometimes referred to as offshore funds) can be accessed through offshore investment platforms and are subject to the same SARB foreign investment limits as those that apply to investments into feeder funds via a local investment platform. When investing via an offshore platform, you can expect similar product wrappers and services (such as reporting, compliance and administration) as would be the case for a local platform. 

Exchange traded funds (ETFs)

ETFs are listed investment instruments that track indices (e.g. S&P 500, MSCI World), sectors or asset classes. Investors can access ETFs via direct offshore accounts or through local platforms that offer offshore exposure. This product option offers low-cost, passive exposure to global markets.

Managed offshore share portfolios

For maximum control and customisation, these portfolios include direct offshore equities and are typically managed by a discretionary portfolio manager (DPM) or constructed by the investor with professional guidance – as in the case of a personal share portfolio (PSP).

Foreign property investments

Buying a property directly in a foreign country gives you exposure to that specific property investment market. These investments sometimes come with advantages such as residency or tax benefits.

Offshore bank accounts

Where allowed, and depending on the jurisdiction, this option is a useful investment tool for holding foreign currency and facilitating international transactions. They are often a starting point for offshore investments.

Considerations in choosing the appropriate vehicle

Just as we might not all be interested in spending a holiday searching for flowers or tracking a lone antelope on the hunting field, there is no one-size-fits-all option for offshore investments. Selecting the most appropriate option for your needs begins with considering what is important to you and what you feel comfortable with:

• Be honest about your level of knowledge and what you feel comfortable managing yourself. For those starting out, using a platform option – with or without a product wrapper – is an easy way to start gaining exposure to foreign markets and building experience.
• Direct options such as managing an offshore share portfolio or investing directly in property places most of the investment decision-making responsibility on the investor, including tax administration.

Reserve Bank limits

The SARB’s exchange control regulations limit the amount that South African investors can invest offshore per year. Two key limits should be kept in mind, namely the single discretionary allowance (SDA), which allows all South African investors to invest a maximum of R1 million offshore per year (including spending overseas or on foreign products or services), and the foreign investment allowance (FIA), which allows an additional R10 million to be invested offshore if the investor completes the Approval for International Transfer (AIT) application.

The AIT requirements have become more stringent in recent years, with a substantial increase in the amount of information and documentation required. For investments above R11 million in total, special clearance is required from the SARB.

As an alternative to using your own capacity through your annual SDA and FIA, funds can also be externalised using an asset swap facility offered by investment institutions. This means you are using the offshore capacity of that institution, which is also accountable for the administration of the investment. Although this option does come at a cost, it also relieves investors of the administrative burden of the AIT process.

Ready to venture offshore with a platform provider?

Various platform providers in South Africa offer the opportunity to invest in offshore assets, either via indirect investment or through direct investments in shares, bonds or unit trusts. When selecting a provider, investigate the compliance and tax support they offer and find out if they offer an asset swap capability. Finally, remember to check that cost structures are clear and disclosed transparently.