How best to go about investing offshore
Circumstances, risk profile and long-term objectives should dictate offshore choices
Given the compelling reasons for investing offshore, which include diversification benefits, reduced emerging-market and currency risk, and maintenance of “hard” currency spending power, how best should investors go about investing offshore?
The answer depends on investors’ personal circumstances, risk profile and long-term financial planning objectives. Investec therefore suggest that investors consult a professional financial adviser who can help identify investment products that address their specific requirements, which may include:
Investing in an FSCA-approved collective investment scheme (unit trust fund) that includes offshore assets (such as the Investec Diversified Income, Cautious Managed, Opportunity, Equity and Value funds). For example, a Regulation 28-compliant multi-asset or balanced fund is allowed to invest up to 30% in international assets.
By making use of this type of fund, investors are effectively appointing a professional money manager who has the time, experience and access to information to decide when and how much to invest offshore on their behalf, and into which assets.
Given relative valuations, most South African multi-asset funds are close to the 30% offshore limit, and therefore the key decision is to select a manager who has a proven long-term track record and capability of investing offshore.
As a subset of this option, a worldwide flexible fund such as the Investec Worldwide Flexible Fund is potentially a more efficient investment solution, as it is not constrained by geographical or asset class limits. While the optimal strategic allocation to foreign assets differs depending on an investor’s personal circumstances, for many it could be at least a third of their assets, as seen in Figure 1 below.
A Regulation 28-compliant multi-asset high equity or other domestic fund that is limited to 30% offshore exposure may therefore not be the most efficient option. In fact, an unconstrained investment mandate improves the return characteristics of a multi-asset (balanced) portfolio at only marginally higher risk.
Investing in an FSCA-approved rand-denominated international unit trust fund (such as the Investec Global Multi-Asset Income Feeder Fund, Investec Global Strategic Managed Feeder Fund and Investec Global Franchise Feeder Fund, which invest directly into their respective underlying funds).
By doing so, investors do not make use of their individual offshore allowance. Rather, they invest in rand and when they disinvest, the proceeds are paid in rand. While investors benefit from being invested in funds that only hold offshore assets, they remain exposed to South African political risk.
Investing in a foreign-domiciled international unit trust fund that is registered in SA (such as the Investec Global Multi Asset Income Fund, Investec Global Strategic Managed Fund and Investec Global Franchise Fund). By doing so, investors invest directly into an FSCA-approved offshore fund in its dealing currency, such as dollar, pound or euro.
Having completed the fund’s application form, investors effectively instruct their bank (local or international) to make payment to the fund’s bank account. When disinvesting, investors will then also receive the proceeds in the fund’s dealing currency.
Many South Africans have favoured rand-denominated international funds because of the perceived complexity of applying for tax and Reserve Bank clearance to invest offshore directly. However, now that investors can invest up to R1m per year in an international fund without the need for any prior approvals, they can access foreign-domiciled international funds with relative ease and thereby diversify away South African political risk.
In addition to the annual discretionary allowance of up to R1m, investors also have a foreign capital allowance of up to R10m per calendar year (a total sum of R11m). Investors need to obtain foreign tax clearance from the South African Revenue Service when they wish to use their annual foreign allowance of R10m. Reserve Bank approval is only required when investors wish to transfer funds offshore in excess of the maximum total sum of R11m per calendar year.
The table below provides a summary of how a South African investor can get offshore exposure: