Investing offshore as a South African – Why, How & Where
By Candice Paine*
South Africans are always juggling the offshore investment ball and events over the last few weeks of 2015 have made this decision increasingly significant.
The reasons to take your hard earned rands to foreign shores have not changed from an investment viewpoint. SA contributes (probably now less than) 1% to global GDP. This is a staggeringly low number when considering exposing 100% of your capital to it. South African companies are for the most part excellently run, but we have little or no exposure to so many global growth industries both emerging and established.
Over time, share prices rise because companies grow their earnings. If you don’t know by now that the SA economy, the consumer, the rand etc. are struggling, then you live under a rock. This makes growing earnings and hence share prices tricky. The net result is muted stock market performance going forward and low growth for your wealth.
Add to this rand depreciation. The rand has historically depreciated against developed market currencies at a rate of 6% pa. 2015 shocked most by delivering 30% depreciation. In dollar, pound or euro terms your money is being devalued even faster than you think.
As a South African you need to hedge against currency depreciation. So many of our liabilities are priced in developed market currencies that being able to afford these things going forward is going to become increasingly onerous. Think offshore education, travel, German cars, American phones etc, etc.
And then there is the political risk. I don’t need to expound or explain this. It exists and you need to take notice.
So, what are your options when making these offshore investments?
Broadly, you have two options:
OPTION 1 : Physically taking your money offshore i.e. going through the exchange control process, opening up an offshore bank account and sending rands overseas into a currency of your choice.
OPTION 2 : Investing in rand-denominated investment options. Your investment and currency exposure is foreign, but you invest in rands and get paid out in rands i.e. your money does not physically leave South Africa.
Which option you choose depends on your circumstances.
OPTION 1 – Physically taking your money offshore
An individual is allowed to take a maximum of R10m a year offshore subject to SARS tax clearance and a maximum of R1m without tax clearance. The R1m will however need to be registered with the reserve bank. You would then need place the transaction through an authorised dealer. Most SA banks are authorised dealers. A list of these appears on www.resbank.co.za.
(More of your questions may be answered here https://www.resbank.co.za/RegulationAndSupervision/FinancialSurveillanceAndExchangeControl/FAQs/Pages/Individuals.aspx)
Once the money is offshore, you may do with it as you please i.e. leave it in a bank account in your name or invest it in unit trust funds, stocks etc. This may be a daunting decision so consult with a certified financial planner to get assistance.
Having investments offshore still forms part of your estate and you will be liable for estate duty in the jurisdiction in which you invest. Certain SA investment providers offer offshore endowments which negate the need for probate or an offshore executor. You may nominate beneficiaries which means that at your death the investment can either continue offshore or be paid out in foreign currency to the beneficiaries. These options can be exercised separately from the estate process.
The tax advantages of using an endowment structure are also very beneficial as CGT is paid at a lower rate than for individuals and calculated using the offshore currency and not rands. All tax administration is taken care of in the endowment wrapper.
This type of investment (as with all stock market investments) requires a long term mind set as you are locked in for 5 years. There is some flexibility with respect to additions and withdrawals but there are limits too.
Also note, that whilst these products will save you executor fees and hassle on death, they do require quite large lump sum minimums (approx. $20k – $25k); there are no debit order facilities and the paperwork is quite onerous. Despite these headwinds, they are still worth considering.
OPTION 2 – Foreign rand-denominated funds.
Most asset managers in South Africa offer offshore unit trust funds. These funds are priced in rands, but your capital is invested offshore which gives you the global diversification and foreign currency exposure you’re after.
You don’t need SARS tax clearance to invest in these funds as your investment is made in rands and paid out in rands on disinvestment in South Africa. You are also able to set up a debit order and the lump sum minimums are a lot lower than in OPTION 1 above.
Another consideration is offshore ETF’s (exchange traded funds). If you have a stock broking account, you can simply redirect some of your capital to ETFs which invest offshore. Once again you are investing in rands and will be paid out in rands.
Remember that by contributing to a pension fund or retirement annuity you may very well have offshore exposure in your underlying investment choice. Regulation 28 which governs how pension funds are to be invested stipulates that a maximum of 25% of your capital can be invested offshore.
So what should you consider?
Whilst investing offshore should primarily be about global diversification, accessing different industries, interest rate and inflation regimes and stronger economies, for South Africans it is about much more.
If political risk is your primary concern, you need to consider OPTION 1 and actually move your capital offshore. Investing this way means you never have to repatriate or convert the investment back into rands unless this is your choice.
If you don’t have a large lump sum, but still want a rand hedge investment option then Option 2 is the way to go. You can always save in this vehicle until you reach the minimums for Option 2 and then move the capital offshore.
Whatever your concern, as a South African serious about your financial wellbeing you need to consider a portion of your total portfolio being invested offshore. And always remember, stock market investing is a long term game (5-7 years minimum).
- Candice Paine CFP®, CFA is an independent financial advisor and an asset management consultant. @CandicePaine