Exercise care offshore, say experts
Advisers say that during uncertain times diverse exposure to foreign markets is a better bet than a panic dump of funds abroad
Panicky investors should resist the urge to send money offshore amid domestic economic uncertainty, but should be well diversified, say experts.
In past times of uncertainty, South Africans had rushed to take money offshore and then lost out when the rand recovered and the economy stabilised, said Lance Solms, MD of iTransact, an exchange-traded products investment platform.
"Financial advice is of critical importance. Investors should not panic and should collect as much information as possible before investing offshore."
Wayne Sorour, head of Old Mutual International SA, said that for diversification purposes and considering the small size of SA’s economy, individuals should have at least 30% of their investable assets in offshore investments, across countries, sectors and currencies.
Cinnabar Investment Management CEO Alex Funk said investors who were seeking currency gains would get sufficient offshore exposure via the JSE’s Top 40.
The exchange’s Top 40 index generates about 65% of earnings in foreign currencies.
"Any investment in the JSE pays out in rand, so while an investment in the Top 40 hedges against weak domestic equity market returns, it does not make hard currency available," Sorour said.
Whether or not investors needed access to hard currency depended on where they planned to live and retire, as well as factors such as whether they wanted to travel extensively or educate their children overseas.
South Africans who planned to stay in the country needed to consider that their liabilities — most notably retirement income — were in rands, said Funk.
"It is very difficult to maintain that liability in a foreign currency due to potential timing risk," he said.
In terms of exchange control rules, South Africans can invest up to R11m offshore annually: R1m on a discretionary basis and up to R10m with foreign exchange and tax clearance from the South African Reserve Bank and the South African Revenue Service, respectively.
In terms of Regulation 28 of the Pension Funds Act, retirement funds can invest a maximum of 25% of their total funds under management in offshore assets.
South Africans with significantly more investable assets could apply for a special concession to breach the R11m limit, said Sorour.
Some large South African banks offered offshore bank accounts, while local asset managers made it possible to invest directly offshore via feeder funds, he said. Returns earned in these funds could be paid into foreign bank accounts or converted into rand and paid into domestic bank accounts.
Meanwhile, asset swap funds allowed investors to get offshore exposure without having to get tax clearance. However, these funds were paid out in rand and had higher tax implications, as capital gains tax was levied on total returns and not only on hard currency returns, said Sorour.
To avoid having investment returns taxed twice, South Africans needed to invest in jurisdictions that had tax treaties with SA, said Solms.
"Ensure your investments aren’t subject to two different types of estate law, as this can make repatriation difficult."