Investment Principles
Understanding offshore investment products
Real-time access to investment research, trading data advice at the click of a button and an array of online trading platforms have made investing offshore more accessible than ever before. While the basic principles of investing still apply, digital innovation has broken down many of the barriers previously preventing investors from accessing offshore markets in their own capacity. In particular, access to online trading platforms has made it possible for ordinary South African investors to access and invest in global markets with relatively limited initial capital.
“Investing offshore should align with your investment goals and risk appetite and should be guided by advice from a qualified financial adviser.
Investing in foreign markets, assets or currencies from South Africa can be done through investment in globally listed shares and exchange traded funds, offshore unit trusts, foreign property and specialist investment structures.
Offshore investment wrappers
While offshore investment can be attained through direct offshore investing, this generally requires significant administrative effort and knowledge of the markets, as well as the associated costs and processes. Exposure to offshore markets can also be gained through offshore product wrappers or by way of feeder funds. Offshore product wrappers are structured investment vehicles – typically an endowment, life wrapper, or policy – that are designed to hold offshore investments in a tax-efficient and estate-planning-friendly structure. Feeder funds are local funds that provide investment exposure to an offshore equivalent fund.
The table below compares the different characteristics, risks and suitability of the main approaches investors can use to access offshore markets. These approaches should be considered on the basis of one’s investment goals, currency perspectives, comfort with administrative requirements, language barriers, diversification needs, regulations, and legislation and relative costs incurred.
Features | Direct offshore investing | Offshore funds of funds | Offshore product wrappers |
How it works | Rands are converted to foreign currency and used to buy offshore assets directly through an offshore investment account in the investor’s name | An investment vehicle with a stated objective that pools money from investors and invests in offshore funds (indirect investment) | Tax-complaint investment wrappers such as endowments or life policies that allow individuals to invest in global portfolios |
Risk involved | Exchange rate fluctuations, political risk, liquidity risk, limited access to high-quality information and different regulations | Counterparty risk and investment risk | Market risk and regulatory complexity |
Diversification | Dependent on investors’ choices, but can be limited | High diversification from multiple funds | Depends on the chosen investments underlying the product |
Access, control and flexibility | Full control. The investor chooses the offshore investments. | Medium-low. The fund manager chooses the offshore investments. | Medium. The investor may have a choice in the investments underlying the product. |
Cost | No investment platform fees applicable, lower direct investment costs, and possible tax advantages | Costs include fund management fees. Convenient and cost effective. | Product and administration fees apply |
Expertise required and level of complexity | Self-managed. Investment expertise is required of the investor. | No investment expertise required of the investor. Managed by professional fund managers. Simpler than direct offshore investments. | Professional advice is recommended to avoid unintended consequences and maximise the benefits. The provider handles the product. |
Tax | Capital gains tax (CGT) liability is triggered based on the profit/loss in the foreign currency. 40% of the gain is added to taxable income | Taxed on income earned from indirect offshore investments. CGT applies on disposal. | Taxed at corporate rates if under endowment product. Rate is preferential to investors taxed at higher marginal tax rates. |
Regulatory requirements | Allowed to invest up to R10 million a year subject to tax clearance from the South African Reserve Bank (SARB). | Depending on the type of investment product used, there could be limitations on offshore exposure. | High degree of regulatory complexity due to the structural complexity of the product |
When is it most appropriate? | Suitable for experienced investors. Most suitable for investors who intend to access their money offshore. | Suitable for investors seeking diversification and professional management of their investments. | Most useful for tax planning and estate planning |
Administration | High. Investor is responsible for managing. | Minimal. | Simpler administration. No annual personal tax reporting in the case of an endowment product wrapper. |
Selecting products that align with your goals
Offshore investment may seem like a must-have, but don’t be tempted to invest in a product or market simply because everyone else is doing so. Investing offshore should align with your investment goals and risk appetite and should be guided by advice from a qualified financial adviser. As the investment landscape becomes increasingly complex, and with greater regulatory oversight covering areas ranging from maximum allowances to cybersecurity risks, it pays to work with trusted providers and advisers who will help you navigate the world of offshore investing.
Share
