Nice from far: tips for offshore investing
Almost 500 approved funds buy you a piece of the action abroad
Poor returns from local markets, the recession and government policies on land reform and the mining charter may be leading you to think about exporting some of your hard-earned investments to foreign lands. Advisers will tell you these aren't the best reasons for investing offshore, but none will deny that diversifying your investments is a good idea.
Investing offshore gives you access to markets and industries that are not available in SA, away from shares and bonds that are often subject to market sentiment affecting emerging-market countries.
Investors are spoilt for choice when it comes to investing in rand-denominated unit trusts and funds that invest in foreign markets and across foreign asset classes.
South African managers have funds managed from an office here or abroad and they offer feeder funds that accept rands and buy into an offshore-domiciled fund of a carefully chosen offshore partner.
Investing in funds that are registered in other countries (foreign-domiciled) and are denominated in currencies other than the rand can protect your investments in a hard currency and, if you plan to use the money overseas without bringing it back into rands, can potentially protect you from political and economic events at home.
However, it has until recently been the place for investors with larger sums - between $3,000 and $25,000 (about R44,880 R150,000) - to invest. For example, if you want to invest in dollars, Coronation's global equity fund needs $15,000, Foord's requires $10,000 and Nedgroup's $4,000.
If you send less than R1m offshore annually you can do so without getting tax clearance, making the process easier
Earlier this year, however, Allan Gray reduced its investment minimums from $10,000 to $1,500 and now Stanlib has launched an offshore investment platform, INN8, with an online-only process and no minimum investments.
Remember, however, that the cost of investing offshore directly can be higher and may make it less worthwhile to invest smaller amounts. You will incur costs converting your rands into foreign currency and will pay ongoing asset management fees to invest in a foreign fund.
If you use an investment platform, you will pay an administration fee to do so, which usually gets cheaper the more you invest, but you may also enjoy a lower asset management fee than you would if you invested directly into an offshore fund.
INN8 CEO Mickey Gambale says it charges an investment platform fee of 0.5% of amounts less than $350,000, down to 0.15% for amounts above $1m, but the fee is subject to a minimum of $120 a year.
Fred Liebenberg, head of fund specialists at Old Mutual Wealth, says if you have less than R300,000 to invest offshore you should probably use a rand-denominated foreign fund.
But Allan Gray's head of product development Earl van Zyl disagrees. He admits Allan Gray reduced its investment minimums because its rand-denominated feeder funds reached capacity. But he says the high minimums are not intended to discourage smaller investors but rather a result of offshore platforms needing to reach a certain scale before it is economical to offer access to smaller investors.
Investment platforms offer you access to offshore funds that can be marketed in SA as they are approved by the Financial Sector Conduct Authority as suitable for local investors because they are registered in countries with unit trust or mutual fund laws that are similar to ours, and have a representative in this country.
There are 456 of these funds, the Association for Savings & Investment SA reports, but most platforms offer a subset of them and some guide you to the ones they think are good picks through what are known as buy-lists.
Others, like Stanlib and Allan Gray's offshore platforms, display a rating from a fund-rating service such as Morningstar or Fundhouse to indicate funds that have done well on a variety of measures including performance, the experience and consistency of the management team and a consistent investment philosophy.
Some offshore platforms, like Allan Gray's, are domiciled in SA, while others, like those of Old Mutual International and Stanlib, are domiciled in other countries.
If you send less than R1m offshore annually you can do so without getting tax clearance, making the process easier.
It is possible to send an additional R10m offshore annually, but then you will need to apply to the South African Revenue Service for a certificate showing that your tax affairs are in order.
Many platforms and local asset managers that have offshore funds will direct you to a foreign-exchange dealer who can convert your rands into the relevant offshore
currency and you can then transfer the funds directly into the platform or manager's
offshore bank account.
When it comes to the tax you will pay on your foreign-domiciled offshore fund, there are a few things to consider.
You cannot use a tax-free savings account to invest in an offshore fund.
You can use an endowment policy, but this only makes sense if you have a tax rate above 30%.
Minimum investments on these products are usually high too - around $10,000- $25,000.
When it comes to capital gains, you can realise up to R40,000 a year without paying tax, but if you are likely to make higher gains and the rand continues to weaken, an offshore fund makes more sense.
Paul Hutchinson, sales manager at Investec Asset Management, says if you invest in a rand-denominated feeder fund, any depreciation in the rand will affect the value of your investment and the capital gain you make. You will be subject to capital gains tax on both the capital growth of the underlying assets in which the fund is invested and the rand depreciation.
However, when you invest in a foreign currency, the capital gain will be calculated in the foreign currency when you realise your investment and convert it to rands. If the rand has depreciated, your capital gain is likely to be lower on a foreign currency investment than it would be on a rand-
Hutchinson says Investec compared investing R1m in the Investec Global Strategic Managed Feeder Fund from August 1 2013 to July 31 this year, with the same amount converted to dollars ($101,770) and invested over the same period in the US dollar-equivalent fund, the Investec Global Strategic Managed Fund. At the time, the rand was R9.82 to the US dollar.
In the feeder fund, the R1m grew to R1,663,887 - a capital gain of R663,887, of which only R40,000 would be exempt from tax in a single year. For a taxpayer paying the highest marginal tax rate of 45%, this would mean tax of R112,300.
In the dollar-denominated fund, the $101,770 investment grew to $129,134 - a gain of $27,364, or R360,671 at the exchange rate at the end of July of R13.18 to the dollar. For a taxpayer paying the highest marginal tax rate of 45%, this means capital gains tax of R57,721.
Hutchinson says that since 1994, over rolling five-year periods, the rand has experienced periods of both depreciation (81% of the time) and appreciation (19% of the time) against the US dollar. On average, the rand has depreciated by approximately 6% a year over rolling five-year periods.