Offshore investing in a nutshell: the ‘when’, ‘how’ and ‘where’ of moving money abroad

Kondi Nkosi – South Africa Country Head for Schroders

Offshore investing should be part of everyone’s investment strategy. It helps diversify your portfolio across different investment instruments, markets and even manager. This is vital for managing risk and potentially increasing your returns.

Furthermore, investing offshore gives you access to some of the biggest and most successful companies and markets in the world as well as lesser-known businesses that have really good growth prospects.

You also broaden your exposure to sectors that aren’t as accessible in the local market, like the aerospace or medical device industries.

We look at the nuts and bolts of where and how you can invest overseas.

When should I invest offshore?

Clearly the wrong time to invest offshore is when the rand is weak because one unit of foreign currency is going to cost more rands than it did before the currency weakened.

Trying to time the movement of the rand, like trying to time the markets, has proven to be a futile undertaking.

Sure you can make an educated guess, but it’s far better to consistently move your money over time. This way your gains from exchanging at a good rate, and your losses from exchanging at a bad rate, should balance each other out.

The principle remains that it’s the long-term effects that matter most and these are the most deserving of your focus and planning.

How should I invest offshore?

Broadly speaking, there are two approaches: direct offshore investment using your investment allowance, or indirectly – accessing a fund managers’ institutional allowance.

Direct

You can convert your rands into foreign currency by physically moving your money from a South African bank account into an offshore account if you are over the age of 18 and a taxpayer in good standing. This is most suitable for investors who are happy to leave assets offshore for the long terms, perhaps because they plan on a lot of international travel or they expect to incur expenses overseas. The South African Reserve Bank (SARB) allows individuals to take up to R1 million out of the country a year without tax clearance. A further R10 million can be moved offshore each year with the approval of the SARB and a tax clearance certificate. These funds can then be used to invest directly in offshore assets of your choosing. There’s a lot of flexibility associated with this approach and you can choose the currency you receive your proceeds in.

Indirect

The alternative is to invest in rands through:

• A locally-administered unit trust that is mandated to invest a portion of the fund in international markets. Local funds can invest up to 30% of their assets overseas and an additional 10% across the African continent.

• A foreign-administrated rand-denominated local unit trust that invests entirely offshore. These are known as “feeder funds”.

Both structures can give you access to international markets without physically moving your money abroad and you are not restricted by how much you can invest in the unit trust (it doesn’t count as part of your personal R11 million offshore allowance). This can be a straight forward option if you are happy that the proceeds from any divestment are paid to you in local currency again. And importantly, this route can be the most accessible way to access offshore markets as investors could start saving with R 500 a month via debit order in some of these funds.

All investors should be sure to understand the tax considerations and differentiations involved with these routes, as well as the estate planning consequences for owning assets abroad.

Where should I invest offshore?

Where you invest will depend very much on your own financial circumstances. You should consider your investment horizon, your financial objectives and your appetite for risk, amongst other things.

Broadly speaking though, looking at both developed and emerging markets increases the opportunity set of your investments. While developed markets might carry less risk, investing some of your money in emerging markets gives you access to the dynamic growth potential of companies from some of the world’s fastest-growing economies, including China, Taiwan and India, and often at discounted prices.

Speaking to a trusted professional can help you identify where, how much and through which avenue you could invest offshore. There is an increasing number of global asset managers with funds on offer in South Africa so it’s becoming easier every day to invest offshore.

Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.