By: Philip Robotham, Head of Intermediary – Schroders, South Africa

While the benefits of offshore investing are relatively well known and doing so is an attractive concept to many South African investors, the process is often perceived as complex and overwhelming. But it doesn’t have to be. There are two main ways in which to invest offshore, which I detail below.

As a reminder, some of the advantages of investing offshore include:

• Diversification: Investing offshore can help lower the overall risk of an investment portfolio. The South African stock market makes up a mere 1% of the global stock market, which means investors could be missing out on 99% of global equity opportunities. It’s also highly concentrated with a number of large companies and sectors dominating returns. Investing outside our borders could protect against concentration risk.
• Exposure to global themes: High-growth and rapidly changing sectors like pharmaceuticals, biopharmaceuticals, aerospace and technology are underrepresented in our domestic market. By investing abroad, investors can increase their exposure to global companies and investment themes that they can’t necessarily access in South Africa.
• Protection against currency devaluation: If you’re concerned about an uncertain political/economic backdrop and protecting global spending power, offshore investing can help guard against any potential depreciation of the rand. The rand as an emerging market currency has a history of volatility and investing offshore can help to preserve wealth when it weakens.
• Increase in foreign currency costs: If an investor is planning on educating a child overseas, supporting a child’s international move or if they themselves plan on emigrating and/or retiring abroad, they may need to prepare financially by increasing their allocation to foreign assets in order to mitigate exchange rate risk.

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What are the options?

Direct exposure

You can convert rands into foreign currency by physically moving your money from a South African bank account into an offshore account. 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 annually with the approval of the SARB and a tax clearance certificate. This takes the total amount of cash a client can move abroad to R11 million. Once this physical cash is in an offshore account, the funds can be used to invest directly in offshore assets.

There’s quite a lot of administration involved in this route, not least of which is understanding and abiding by local regulatory requirements including the tax treatment of these investments. Most foreign-denominated offshore investments also stipulate a minimum investment amount that can be fairly high for your average investor. On the plus side, there’s a lot of flexibility associated with this approach and you can choose the currency you receive your proceeds in.

Indirect exposure

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 45% of their assets overseas
• A foreign-administrated rand-denominated local unit trust that invests entirely offshore. These are known as “feeder funds”.

Both structures afford 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 your are happy that the proceeds from any divestment are paid in rands. And importantly, this route can be the most accessible way to access offshore markets as some funds accept a minimum investment of R500.

All investors should be sure to understand the tax considerations and estate planning consequences of owning assets abroad. For more information of tax considerations and estate planning, please contact an adviser or consultant.