Radhesen Naidoo and Thandi Skade, Head of Orbis Client Servicing in South Africa: Allan Gray
Diversifying your investment portfolio with offshore exposure can be an effective way to mitigate rand weakness and foreign currency fluctuations, which heavily influence the price of food, petrol, and other goods and services.
More importantly, it helps investors tolerate periods when markets can be turbulent as your investments are spread across different currencies, regions, and economies. This means you can maximise the potential to earn long-term returns under different market conditions, while still protecting your capital in real terms.
There are various ways to get offshore exposure; here are three to consider:
- You can get some offshore exposure through local unit trusts Most South African investors have some offshore exposure through their local unit trusts, which are allowed to invest up to 30% offshore and an additional 10% in other African countries. This is in addition to their exposure to locally listed companies that may have offshore operations.
- You can invest in rand-denominated offshore unit trusts If you go this route, you invest in rands, but your investment is fully invested in offshore assets. You use your asset manager’s offshore investment allowance, rather than your own. While this route saves you on the admin, the possibility remains that these funds may be closed to new investments from time to time when your asset manager reaches their South African Reserve Bank-prescribed foreign currency limits.
- You can invest with offshore managers You can use your annual offshore investment allowance and invest with offshore managers. However, navigating the world of offshore investing can feel overwhelming because of the sheer volume of global unit trusts available to choose from. In addition, the process of investing with different foreign managers directly can be administratively demanding.
Using an offshore investment platform, such as Allan Gray’s, can help when it comes to narrowing down the options and dealing with the associated administration. One key advantage is the lower minimum amounts required compared to investing directly because investment platforms aggregate multiple clients’ underlying assets. Furthermore, there are benefits from an estate planning and capital gains tax perspective, which are discussed in further detail below.
Estate-planning and tax benefits
If your offshore platform is locally domiciled, there are estate-planning benefits for South African tax residents if you die while invested. Your offshore assets will form part of your South African estate and be processed by a local executor. Tax, for South African tax residents, is calculated on worldwide assets, so this will not increase the tax paid, however, it will reduce the administration in managing probate issues in multiple jurisdictions.
From a capital gains tax (CGT) perspective, there are benefits to investing via the offshore platform or directly with an offshore manager, compared to investing in rand-denominated offshore unit trusts. If you invest in rand-denominated offshore unit trusts, when you sell your investment, you will pay CGT on all gains, including capital growth and currency fluctuations, on your original investment (i.e. both the base cost and the sale value are calculated in rands).
If you invest in foreign currency, when you sell assets, you only pay CGT on the capital growth earned in foreign currency. In other words, the growth in capital is in foreign currency and converted to calculate CGT using the exchange rate at the date of sale.
This means that if the rand weakens, it is more tax-efficient to be invested via the offshore platform or directly with an offshore manager, while if the rand strengthens, it is more tax-efficient to be invested in a rand-denominated unit trust.
As with local investing, there are many decisions you need to make before investing offshore. The most suitable avenue is one of them. You will also need to carefully consider how much exposure you need, how to manage your asset allocation, and which investment manager has a philosophy that resonates with you and funds that match your objectives. Remember, the decision to invest offshore should never be taken in reaction to movements in the market. Rather, it should form part of a diversified approach to constructing a well-balanced investment portfolio.