A Practical Guide to Offshore Investing
It’s been a tough few years for the South African Equity Market. The total return on the FTSE/JSE All Share has been a paltry 6.8% p.a. over the last 5 years. Compare this to the long-term average of just over 18% p.a. (since 1960, dividends reinvested). It’s only by being diversified into offshore markets that investors have been able to still generate inflation beating returns on their investment portfolios. Over the last 5 years the S & P 500 has returned about 18.7% p.a. in Rand, while the MSCI World Index has returned just over 14% p.a.
Let’s look at some practical ways the average South African Investor can diversify their investments into offshore markets:
Rand Hedge Shares
A quick look at the composition of the JSE Top 40 shows how some of our locally listed companies generate most of their revenue in offshore markets. Examples include Naspers, Richemont, AB InBev, BHP Billiton and Glencore. Buying these types of companies will give some indirect offshore economic exposure, and certainly add some Rand hedge to your portfolio, however its important to note that not all these companies will generate 100% of their revenues offshore.
Locally Listed Offshore Unit Trusts
It’s very simple to buy a locally listed offshore unit trust. Offshore exposure is gained via asset swop capacity, and the moment you invest your capital is effectively invested into offshore markets. There are also many options available, from global ETF’s, balanced funds, equity funds and property funds.
Investing via asset swop does not form part of your offshore allowance, however its important to note that
when you redeem your investment, it must pay out in South Africa. These options are also a means for local Trusts to invest into offshore markets (a local Trust cannot invest directly offshore under current legislation). Retirement funds can also invest into offshore unit trusts, subject to the limits imposed by Regulation 28.
From an Estate planning perspective, asset swop funds are not subject to Probate or Inheritance tax risk in offshore jurisdictions and can be dealt with by a South African Will and Executor.
Pre and Post Retirement Funds
If you have a Retirement Annuity, Preservation, Pension or Provident Fund you can still allocate a portion of your invested assets to offshore markets (check your fund rules on individual investment choice). These funds are all pre-retirement funds, and are limited to investing 30% into offshore markets, with an additional 10% into Africa. If you then combine some careful Rand Hedge shares into these portfolios you can create effective offshore exposure of about 50-60% of the portfolio. The graph below shows the investment growth of investing 100% offshore (S&P 500) vs 100% local on the FTSE/JSE All Share with options to change the weightings.
If you elect to invest into a Living Annuities post retirement, these limits fall away, and you could invest up to 100% of the funds offshore. There are a few exceptions, such as Living Annuities which are registered retirement funds, which will still be subject to the Regulation 28 limits. In some cases, the living annuity product providers may also run out of asset swop capacity, and then also limit offshore exposure.
Single Discretionary Allowance
Individuals 18 years and older are permitted to transfer up to a limit of R1 million per calendar year without the requirement to obtain a tax clearance certificate. Applications in excess of the R1 million will be considered on a case by case basis. Individuals, younger than 18 years, only have a travel allowance of R200 000 per calendar year.
Foreign Capital Allowance
Individuals, 18 years and older, in good standing with SARS, can invest up to R10 million per calendar year abroad, subject to obtaining a SARS tax clearance certificate. Income accruing thereon may also be retained abroad.
Individuals who wish to invest amounts in excess of R10 million may make an application to the South African Reserve Bank (SARB) together with the relevant tax clearance certificate for consideration.
Direct Offshore Options
There are many investment options for funds remitted directly offshore using the two allowances detailed above. Typically, funds are invested into Individual Share Portfolios, Offshore LISP platforms using unit trusts or Mutual Funds and Life policy wrappers.
A key consideration for the investor here will be Estate Planning. It’s important to understand that direct investments into offshore markets can result in Probate and Inheritance tax risks for the client in the jurisdiction that the investments are listed. This may require an offshore will to deal with the assets, as well as the appointment of an offshore executor. There are also various investment structures that can used to mitigate these risks.
For more expert and in depth advice on offshore investing and any other investments, contact Cornerstone Investment Advisory Services today. Also, remember to follow us on Facebook and LinkedIn for more useful and though provoking content.