12 important money questions for South Africans who want to invest offshore – Dawn Ridler

South Africans have a strong appetite for investing offshore amid concerns about the economy. At the BizNews Finance Friday Noon webinar last week, more than 500 people signed on to put questions to two independent investment advisors – Magnus Heystek of Brenthurst Wealth Management and Gareth Leonard of Netto Invest (links to podcast and youtube recordings below, if you missed it). This week, Dawn Ridler of Kerenga Wealth Ecology and Wynand Gouws, wealth manager at Gradidge Mahura Investments, are available to answer your questions about global assets as well as your domestic savings, with a special focus on how to pay less tax when you retire. Free, but you must register: https://register.gotowebinar.com/register/6646694434270030861. – Jackie Cameron

Investing offshore – at all costs?

By Dawn Ridler*

Dawn Ridler on investing offshore. Important considerations to help you make the most of your money.

There is a pervasive attitude out there that investing offshore is pessimistic and unpatriotic, but this is just not true – for most investors. Sure, there are always going to be people who want to emigrate for a whole bunch of reasons: personal experience of crime; job opportunities (for themselves or their children); closer to family and the perception that there is no future for them or their family. Most people will quietly leave, and there will always be the moaners, conspiracy theorists and complainers. Social media has become a seething pustule of negativity and has become largely irrelevant. 

For those not wanting to emigrate but just invest offshore, take the hype, scare mongering and pessimism out of it. The most successful investing is done without messy emotions. Have a clear investment objective and then invest. Often having an advisor help you make those choices takes the emotion out of it. 

Thanks to the ten lost years of the Zuma Error, followed by the indecisive dilly-dallying of Ramapostponer our economy pre-covid was already stagnant, but 8 months into the pandemic when the whole world is in a similar place and a weaker dollar making things a little easier for all of us. There are some glimmers of hope that the Zondo commission will result in convictions and we can claw back some our lost dignity.  

Emigration is a huge, very personal decision with emotional and wealth consequences, and beyond the scope of this piece (please discuss at length with a trust advisor), but investing offshore can (and perhaps should) be done by anyone at any time – without being ‘unpatriotic’. 

Some tips for South Africans investing offshore

1. Flat local market

Our local stock market has been flat for 6 years and post-pandemic hanging on tightly to US sentiment.  Once you factor in fees etc, most portfolios have gone backwards, especially if they were in ‘growth’ portfolios. Even ‘balanced’ unit trusts (compliant with Regulation 28 in accordance with the Pension Fund Act) still have a large chunk of stocks (75% is the maximum). Some of the ‘boring’ fixed income instruments (cash, bonds) in the last 3 years have actually underpinned otherwise lacklustre stock performance in many balanced portfolios with returns of 7% or more.

This year, that fixed income “sweetener” has also gone away and those returns are down at 3 or 4 percent. The one portion of any diversified portfolio that has actually performed well is offshore, both in Rand hedge stocks, and in offshore ‘feeder’ funds or ETFs. You don’t have to have a load of money to start getting offshore exposure or if this is all new to you, start with a global ETF, perhaps linked to the MSCI (Global) index. There are also ‘active’ feeder funds or ‘unitised’ ETFs that don’t have extortionate fees that you could put into your RAs or flexible investments. 

2. Watch out for fees

In lower growth times like now, unnecessarily high fees can erode your investment. Local ‘feeder’ funds are inclined to be more expensive (there are a bunch of unavoidable underlying costs that they have to cover) but you should be able to keep it to around 1.5%. Watch out for “FUND OF FUNDS”, a unit trust made up of other unit trusts – real fees are often hidden and can go as high as 2.8%). Remember, for every 1% you pay in excess fees on a R1m investment, R10,000 is wasted. 

3. Rand denominated, offshore or physically offshore

You can still invest in a number of funds that have global shares etc but the funds are domiciled here and you don’t need to get forex approval. If you sell them, you would get paid out here, in Rands. These funds can be used in your regulated retirement funds (subject to Regulation 28 maximums).  Your advisor will be able to send you some ‘fund fact sheets’ of these – but read the small print when it comes to fees. Local global ETFs are a good way to build up your offshore exposure, especially if you’re putting away regular amounts every month. 

4. Situs tax

Once you physically move your funds offshore and they are on an offshore platform then you must understand the implications of situs tax/estate duty in that domicile. Simply put, this is estate duty levied on an asset depending on where it is located, and if you start investing offshore you will come across it sooner rather than later. This is one of the main considerations when you choose where to locate your investment, what to invest in and how (as shares, ETFs or within a Unit Trust type ‘wrapper’). In UK the Situs tax is 350k GBP, the US it’s $66k , then (both) taxed at 40%, compared to the South African estate duty of 20%. (There are also other implications on the ‘rollover’ to a spouse, which is allowed in the UK and SA but not US). 

If you are a SA tax resident, all your assets all over the world will fall into your estate on your death. Obviously, this does not include trusts. You wouldn’t pay double tax, but you’d still have to pay the higher amount (40% instead of 20%). Always ask your Financial Advisor what your potential Situs tax exposure might be, and how to mitigate it (without expensive and complicated Trust structures). If you have a large offshore investment where a trust might be appropriate, try and get independent advice – not from someone who earns their living from flogging them. Some locations may require you to have a will, lodged with them so that your estate can be wrapped up concurrently with your local one. 

If you don’t, a probate officer will still have to be appointed (and paid) and that part of the estate will be wrapped up after your local estate. This is not a quick process.  In some parts of Europe your beneficiaries can choose where the estate is going to be finalised (for dual or multiple citizenships). A couple of locations in the world (including Mauritius) have ‘enforced heirship’ to protect a spouse. (this website might help https://www.globalpropertyguide.com/).  If you want or need liquidity in your offshore estate on your death consider ‘joint’ or ‘survivor’ accounts and platforms that don’t just invest but also transact (like a bank). Once you have offshore investments, and estate plan and not just a financial plan is essential. 

5. Know your “why”

The first thing I ask a client when they ask me to help them invest offshore is ‘Why’? There are numerous answers, and all of them are right – but the ‘why’ will determine the how, how much and where. If you’re intending to emigrate at some stage, then the funds can be put into a growth portfolio to grow and be added to until you move (and aligned with the country you are emigrating too). Both retirement savings and excess funds can be moved there because in time you’ll be moving all (or most) your wealth into the ‘new’ country.

If however you want to build up a legacy (but will live and retire in RSA), then the decision is also fairly straight forward, but you would use excess funds only, not your retirement funds. At a push of course, a legacy investment can be used if SA Inc goes Zimbo on us. (On a personal note, I have lived all over Africa, been through three coup d’états in my life and have access to several different citizenships but I am still here and I wouldn’t be if I thought we were going to hell in a Potjie pot.) 

Most of my clients just want global investment exposure and Rand hedging but want their funds physically located offshore (rather than using a Rand denominated fund that would give you the same result). If you have a critical mass of funds, it is often cheaper to invest offshore, especially if you can access the very low cost ETFs and purchase shares rather than mutual funds. Physically having the funds offshore of course doubles up as security if exchange controls tighten in the future and give you emigration options.  Thirty countries still have exchange controls, so we are in the minority, and not aligned with South Africa’s aspirations to be a global payer yet (the list is here if you’re interested https://en.wikipedia.org/wiki/Foreign_exchange_controls

6. Keep it simple

While there isn’t free flow of forex in South Africa (exchange controls) the allowances are still relatively generous, up to R10m per person per year. Some local providers like you to think that it is really complicated and the only way to do it is with complicated (and expensive) structures on their offshore platforms and with their funds. That is nonsense. Keep it simple.  You don’t need a lot of funds to open an offshore trading account get on with it. This is the ideal solution if you’re years away from retirement and the funds are in excess of your needs.

If that offshore portfolio starts to become significant (say $50,000+) and you want it to compliment your retirement pot, you’re going to need help. There are tens of thousands of different investment choices across the globe and choosing the right one/s that aligns with your objectives is not an easy task (and could be risky if the investment is important to your retirement plans). Know when you need help and put those costs in perspective. Single stocks or ETFs can rise and fall by several percentage points in a single day so paying a wealth manger say 1% a year to help you pick the right one should be put in perspective.  

7. Avoid illiquid, fixed term propositions when investing offshore

Investments all over the world are in a state of flux and you need to be able to swap out of an investment quickly and with no penalty if the sector no longer aligns with your investment objectives. This pandemic has shown us, quite brutally, that some sectors can be almost wiped out by a single event. Who knows when international travel is going to come back to pre-Covid levels? Who wants a rental portfolio when millions have lost their jobs and there is a moratorium on evictions? Who wants to own a huge stadium that you can’t fill to capacity? The pandemic has shifted spending, buying, and working patterns, perhaps permanently. Investment propositions that want to tie to their product for years know this, they are protecting their interests (not yours). 

8. Understand the ‘reward for risk’

To put this simply, if you’re being offered an investment but you are going to be  stuck there for some years, called a termed investment  (opportunity loss risk) or  there is not a large repurchase market (Illiquidity risk) then you should be paid well for taking that additional risk. To check if you are really being paid for that additional risk, find a similar investment that is not termed or illiquid and compare the returns. Often, there will be 2 returns. The ‘yield’ (dividends, rental income etc) and the growth added to together are often called (usually incorrectly but I won’t bore you with the math)  the IRR (Internal Rate of Return). How much more should the investment be rewarding you for the additional risk? 3%? 5%? Discuss this with your investment advisor. Be careful going into ‘niche’ markets or products unless it is a small part (say 2%) of a larger diversified portfolio. 

9. Diversifying currency

Most South African investors going offshore will use dollars as the base currency, but with the Fed making a concerted effort to devalue the dollar (making exports cheaper and boosting local manufacturing, and imports more expensive, sticking it one more time to China) you could get caught on the back foot. Your offshore investment advisor will tell you the optimum currency spread, and if you’re intending to emigrate then the currency used should be aligned with that. 

10. What on earth to invest in offshore

If you thought the local investment arena was complicated, wait until you invest offshore. Just ETFs! Okay, which ones? Last year there were 7,000 registered ETFs, BlackRock alone has over 350. Which ones are you going to choose and in what proportion? How are you going to decide when to change the mix? When the US stock markets were in the middle of an 11 year bull run it was relatively easy, but the future is increasingly uncertain and the markets are volatile. Right now, with offshore interest rates and bond rates ultra-low or even negative, diversifying asset classes in your offshore investment becomes much more difficult and can only really be achieved but adding asset classes that you might be less familiar with like commodities instead of the usual cash and bonds.  

11. The Rand just keeps on depreciating

The Rand is known to be one of the most volatile currencies in the world and is much loved by currency day traders for just that. If you iron out the volatility over the last decade or more the direction is clear – constant depreciation, around 5% per annum. Much of this has to do with the fact that our inflation has been considerably higher than developed markets, but we can’t ignore repeated episodes of shooting ourselves in the foot with rampant corruption and mismanagement. If we can turn the tide on corruption alone, the Rand’s slide can be slowed. 

12. Difficult for most to emigrate

Skilled and higher net worth ‘workers’ can quite easily get (or buy their way) into other countries, maybe not in the ones you might want. Ancestral visas (grandparents) are also very popular, but for everyone else it isn’t that easy, and the pandemic is likely to make it even more difficult as unemployment across the world surges. The ‘ex-pat’ tax has prompted people who were just working offshore but saw RSA as their base to financially emigrate – but Tito is now changing the goal posts on that too. It isn’t being unpatriotic to make sure you are financially secure for the rest of your life.

  • Johannesburg-based intermediary Dawn Ridler, MBA, BSc and CFP ® is the founder of Kerenga Wealth Ecology

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