2. Offshore investments

Question

I have been hearing a lot of talk about the benefits of investing offshore.  Should I do it and if so, how do I go about investing?

Answer

 If you were living anywhere in the world, would you invest everything in South Africa?  

If the answer is no, then why should we invest everything here? 

 It makes sense to spread the risk and diversify your investments geographically. 

Offshore equity investments have done well of late.  

• If you invested R$100 000 in the S&P500 index, 5 years ago, it would be worth $171 405 today – even with the Covid collapse. 
• R100 000 invested in the JSE 5 years ago would be worth R97 619

 There are several ways of investing offshore - some are easy and others are complicated. 

The simplest way is to invest in the top shares on the JSE.  You will get a lot of offshore exposure by default as 62% of their earnings come from offshore

A more focused option is to buy tracker funds on local investment platforms using Rands.  These track specific offshore indices like the world equity index or the emerging market index.  There is even a new one that tracks a Chinese index. (The indications are that China will be one of the few markets that will show a growth in GDP this year and they are expected to do better than the UK or USA over the next couple of years.) 

Moving up a level, there are structured products that give you offshore exposure while protecting your capital.  These have been very popular of late as many investors are concerned about market volatility and don’t want to risk their capital. These products typically require you to stay invested for 5 years.  They use sophisticated financial instruments to guarantee that you will not lose any capital while at the same time participating in the growth of a particular offshore index. Most of these require a minimum investment of R100 000. 

With the two investment types above, no money has been converted into a foreign currency, so the growth is purely a function of the growth in the underlying offshore funds.  There is no currency appreciation or depreciation coming through.  To put this into perspective is you converted your Rands into dollars at the beginning of the year, they would have grown in value by 15% by the middle of September. 

So how do we go about accessing this opportunity to make money on the depreciation of the rand? 

Each taxpayer can move R1m offshore every year.  The paperwork can be daunting when you encounter it for the first time but it is a relatively easy process and your financial adviser would be able to facilitate this.   

You can also move an additional R10m offshore, but this does take longer as you have to apply for special clearance. 

Once your money is in a foreign currency, you would be able to invest in in the vehicle of your choice like 

• Offshore bank account
• Investment plan
• Endowment policy

 Offshore bank accounts have been the default investment for many who moved their money offshore in the past.  The downside is that the banks do not pay a much interest, so the main growth has been the weakening rand.  These investors missed out on the great run that the offshore stock markets delivered over the past couple of years. 

Many South African financial services companies own offshore companies, domiciled in tax friendly areas like Bermuda or Guernsey.  They have developed several products which offer South African investors easy access to offshore markets.  These come in two broad types.  Those that offer a just a vehicle to invest in offshore funds and those where the investment is structured through an endowment policy.  Each has its advantages. 

The offshore investment plan is a simple vehicle for investors to invest in a range of offshore investment vehicles.  These are essentially the offshore equivalent of local discretionary investment plans.  

• The investment is made in dollars, pounds or euros using money that has been transferred offshore to invest. 
•  This money need never be brought back to South Africa. 
• There is no term to the investment and the funds are easily accessible.  

This is a great vehicle for South Africans who are living overseas and want to get a better return on their savings than leaving it in a bank.   

The offshore endowment plan is a great way for South Africans to create an offshore nest egg. 

•  As it is an endowment policy, tax is paid within the policy at a rate which makes it attractive to high earners.  
• You can nominate additional beneficiaries of ownership which ensures longevity of the investment and avoid executor fees. The structure helps you avoid the risk of having to pay the often-punitive offshore death duties. 

Offshore investing offers South Africans a great way to diversify their risk.  They must, however, use advisers that are skilled in this area.  Badly structured investments can expose one to a host of unintended consequences. 

Kenny Meiring MBA CFP ® is an independent financial adviser. You can contact him on 082 856 0348 or at Financialwellnesscoach.co.za