Limits curb offshore investments
Easy routes to offshore markets have narrowed for some investors as two popular fund managers have reached their offshore asset ceiling and one large investment platform has implemented offshore limits.
But there are still many other ways to gain exposure to offshore markets and South Africans needing this exposure would do well to take advantage of the current relative strength of the rand to diversify into international markets, asset managers say.
Allan Gray has closed its popular Allan Gray-Orbis Global Fund of Funds and its Allan Gray-Orbis Global Equity Feeder Fund to new investments, while Foord closed its Global Equity Feeder Fund and its International Feeder Fund in 2016.
These funds allowed investors to get the benefits of exposure to foreign markets while investing in rands, but local unit trust management companies are limited by the South African Reserve Bank to investing no more than 35% of their retail assets under management in offshore markets.
In addition, Allan Gray is limiting investors using a living annuity or endowment policy on its investment platform to investing no more than 25% of new contributions in rand-denominated global, regional and worldwide funds.
Global funds invest across the world but not in local markets; regional funds invest in a specific region outside of local markets; and worldwide funds invest across local and global markets depending on where they see the best opportunities.
Existing investors in a living annuity or endowment policy on the Allan Gray platform may maintain their holdings in rand-denominated global, regional and worldwide funds but may not increase their exposure. This is because Allan Gray offers its living annuity and endowment policies through its life company, which has also reached its limit of 35% for offshore assets.
Allan Gray and Foord appear to be the only popular managers affected by a lack of offshore capacity so far, despite many managers and investors making full use of offshore investment allowances.
Shaun Duddy, a manager in Allan Gray's product development team, says the main reason Allan Gray has reached its offshore limit is that the demand for its unit trusts with offshore exposure outweighs the demand for purely local investments.
Its Equity, Balanced and Stable funds can invest up to 25% offshore, and the rand-denominated Allan Gray-Orbis funds are 100% offshore. This is in contrast to some South African fund managers whose local interest-bearing funds constitute a larger share of their assets.
For investment platforms offering living annuities and endowments within large life assurance groups, the offshore limits are typically not reached because life companies also manage large amounts of money invested in guaranteed investments with underlying investments mostly in local assets, Duddy says.
Investors still have full access to other managers' rand-denominated foreign funds when using the Allan Gray platform for a tax-free or discretionary unit trust investment, he says.
Rand-denominated foreign funds remain available on a limited basis for retirement fund, living annuity and endowment investments.
Investors can also consider investing offshore directly - Allan Gray has an offshore investment platform which offers offshore funds that are approved by the Financial Services Board as suitable for South Africans.
Company investments in Investec Asset Management's money market funds have helped prevent it reaching its offshore capacity, says Daryll Welsh, the head of product at Investec's investment platform, IMS.
Stanlib still has a lot of capacity, says its chief operating officer, Anthony Katakuzinos, because it has large amounts invested in money market and fixed-income funds.
Foord's popular funds are its equity and multiasset funds. It has received strong inflows into its worldwide Flexible Fund and this was compounded by rand weakness after Nenegate in late 2015.
This fund reflects its best views on local versus offshore markets and currently has 70% invested offshore and only 30% invested locally.
The rand-denominated Foord Flexible Fund is still open for direct investments and discretionary investments on the Allan Gray platform.
Foord's foreign currency Global Equity and International funds and the Global Equity and Global Balanced funds (among others) managed by Allan Gray's sister offshore management company, Orbis, can still take your investment if you use your offshore investment allowance and convert your rands into the relevant foreign currency.
Why it makes sense to invest elsewhere
The strength of the rand relative to other currencies makes now a good time to enter offshore markets if you need offshore exposure, say Paul Cluer, chief investment officer at Foord, and Shaun Duddy, a manager at Allan Gray.
Cluer says the local equity market universe is increasingly dominated by large rand-hedge shares - the shares of companies that have offshore earnings - and not companies that make the most of their money in South Africa.
He says in Foord's view growth markets are offshore, although it is not good to close your eyes to local opportunities.
Your level of offshore exposure should be made in line with your investment time horizon and the currency in which your future liabilities or expenses will be.
He says you are exposed to higher volatility when you invest in foreign markets because the rand, although depreciating against a basket of overseas currencies over time, fluctuates from being oversold to being overbought.
Your investment time horizon for an offshore investment should be at least three years and ideally more than five years.
With increasing longevity, most people saving for retirement or in retirement should have this investment time horizon, but those who have not saved enough and are drawing down too aggressively will have to be careful of the volatility an offshore investment introduces, he says.
Investors who use feeder funds (rand-denominated funds that feed into a single foreign currency offshore fund) are incurring additional costs and will be taxed on the gains they make on the depreciation of the rand.
Investing directly into the underlying offshore funds means when you cash in your investment you will be paid out in a foreign currency and only pay on the taxable gain made in the foreign currency.
How you can get global exposure
Invest in rands in a global, worldwide or regional unit trust fund.
Convert your rands into a foreign currency, make use of your R1-million annual foreign currency allowance or your R10-million investment allowance and invest in a foreign fund. Choose a fund approved by the Financial Services Board for marketing to South African investors as it means there will be a representative of that company in South Africa if you have any problems. The fund structure will also be similar to that of local funds.
Don't forget that a foreign currency offshore investment may necessitate your drawing up an offshore will.