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By Kieron McRae*
Much has been written and said in South Africa in recent years about diversifying one’s investment portfolio. One of those options is investing offshore to access international assets and as a hedge against rand-denominated and South African political risk. As an investor you may have followed this advice by utilising any of a number of what you believe to be offshore investment options. But are you truly invested offshore? Will you actually achieve the benefits and protection you require?
Investing ‘offshore’ versus ‘being truly offshore’…at first glance the question may seem frivolous: but it’s definitely not. There are distinct differences and not knowing them could deny you achieving the investment outcome you desire in terms of diversification, protection, growth, tax efficiency and above all, really being invested in an offshore jurisdiction in a stable foreign currency such as pound sterling, US dollar or euro.
At Carrick Wealth, as leading specialists in providing advice on offshore tax-efficient investment structures in hard currency for mid to long-term investments, we have often found that people confuse the two concepts. Often they believe they are ‘truly’ invested offshore, when they are not.
The main differences lie in being indirectly invested offshore but still in rands, through unit trusts for instance; or being directly and truly invested offshore in a foreign hard currency where you can access the assets without having to bring them back into South Africa. Different requirements and qualifying criteria apply to the two types.
Why invest offshore
The most common reasons for South Africans wanting to invest offshore are to diversify the risk associated with an exclusively South African-based investment portfolio; to have their investments hedged or protected against local currency devaluation, political risk and low economic growth; to take advantage of global investment opportunities that are more attractive than those that are locally based; or to be invested in more stable, high-growth and more tax efficient jurisdictions and structures. You may require this for purposes such as retirement planning, tax-efficient estate planning, providing for international education, transacting in foreign currency or acquiring structured foreign-based investments among others.
Investors living in developed economies typically hold around 40% of their portfolio offshore, or rather truly offshore. In South Africa, a developing economy, the figure is typically much smaller. The risk or downside of this becomes patently clear when considering that South Africa represents less than 1% of the global economy, which may leave you with little or no exposure to many of the biggest, most successful global businesses, growth industries and markets.
In addition, with little or no offshore diversification, you will be exposed to rand depreciation. Historically the rand has devalued at an annual rate of approximately 6% against the currencies of developed economies over the last 10 years. In 2015 alone, it lost 26% of its value within 6 months after Fitch Ratings revised down the sovereign rating to one notch above “junk” status against the backdrop of weak economic prospects due to external and domestic headwinds along with the famous Nenegate debacle in which we saw three different Finance Ministers in a few days. Clearly, as a South African investor you need to hedge against such currency depreciation.
Let’s take a closer look at the key differences between an ‘offshore’ and a ‘truly offshore’ investment.
Rand-based ‘offshore’ investment
Most asset managers in South Africa offer a range of rand-based global mutual funds, or unit trusts, in which investors can collectively invest and withdraw in rands. Your capital, together with that of the other investors, is invested into these global assets using the asset swap allocation of the fund concerned, indirectly giving you a measure of global diversification and foreign currency exposure.
But the investment is priced in rands, your invested rands never actually leave the country, and your gains are earned and drawn in rands.
According to the Association for Savings & Investment SA, unit trusts are very popular in South Africa with some 1,500 to choose from. However, of these only about 105 funds offer an offshore option. They have to be approved by the Financial Sector Conduct Authority (FSCA), which replaced the Financial Services Board (FSB) on 1 April 2018. This leaves you with little choice in what your investment is invested in.
‘Truly offshore’ investment
To invest in a ‘truly offshore’ fund you will have to structure your investment so it is not rand-denominated or based in South Africa. You will not be investing in South African rand, but in a hard, foreign currency such as GBP, US dollars or euros.
In terms of South African foreign exchange regulations, R1-million per annum can be taken offshore without the need for a tax clearance certificate from SARS. Any amount higher than that up to the allowed R10-million per annum will require such a tax clearance certificate. For amounts over R10-million per annum a tax clearance certificate from SARS plus approval from the Financial Surveillance Department of the South African Reserve Bank is required.
In a truly offshore investment structure, your investment is housed in a highly regulated and often tax-efficient jurisdiction that is safe and politically stable. Your choice of investments is not restricted and you can have access to Discretionary Fund Managers that have a global footprint and can manage your portfolios to a target risk and return using not only traditional asset classes but also real assets such as infrastructure, private equity, property and commodities.
Like any major investment decisions, investing offshore is not a decision to be made lightly and requires the advice and assistance of qualified Wealth Specialists with experience in the (true) offshore arena. At Carrick we take a client-centric approach when ensuring that clients’ overall long-term investment portfolios are structured in ways that will maximise benefits such as tax efficiency, grow their investments and protect them from unnecessary risks.
To learn more about how you can truly invest offshore in hard currency, contact Carrick Wealth at [email protected] to arrange for one of our qualified Wealth Specialists to call you.
- Carrick Wealth is a registered South African financial services provider specialising in South African and international financial planning. Carrick is also licensed in Zimbabwe, Botswana and Malawi, and holds three global licences in Mauritius. Carrick at all times maintains its independence with regard to product providers and asset managers, providing bespoke risk assessment, financial planning and other services to high net worth individuals (HNWI). Through our own qualified and experienced wealth specialists, as well as through partnerships with industry leaders in the fields of foreign exchange, tax, international property, offshore bank accounts, trusts, wills and estate planning, Carrick is able to provide the highest levels of service for your financial planning and investment requirements, both offshore and domestic. This communication is intended solely for information purposes for the use of designated recipients and is not an offer, recommendation or solicitation to transact. While it is based on information available to the public and from sources believed to be reliable, Carrick makes no representation that it is accurate or complete or that any returns indicated will be achieved.
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