Investing offshore in difficult times

Should I invest offshore? How much can I invest offshore? These are some of the many questions City Press readers are asking, as they experience poor growth thanks to South Africa’s floundering economy. The country has been downgraded to junk status by all but one ratings agency – Moody’s Investors Service.

With panic over a coronavirus (Covid-19) sending the markets into free fall this week, investors are concerned about whether they should defer such plans or withdraw any offshore investments until the coronavirus pandemic has been contained.

However, investment commentators are warning against any rash decisions.

“While it’s natural for investors to want to guard against further pullbacks during market drawdowns, it is vital to maintain perspective, as steep, short-term downturns ultimately smooth out over the long term,” says chief investment officer Andrew Dittberner at Old Mutual Wealth Private Client Securities.

“History shows that volatility and drawdowns are inherent in equity investing. It’s not uncommon to experience intrayear declines well over 10%, yet more often than not, markets recover from those drawdowns within the calendar year.

“It’s therefore highly probable that exiting the market during periods of heightened volatility will result in investors missing the upside that inevitably materialises,” Dittberner says.

THE ULTIMATE CASE FOR INVESTING OFFSHORE

South African investors have traditionally seen offshore investing as a strategy to protect their investment portfolios. But investing offshore opens up so many other opportunities.

Chris Holdsworth, chief investment strategist at Investec Wealth and Investment, explains: “Going abroad, in particular gives investors access to growing markets and technologies around the world.

“Globally, there are more than 10 000 stocks that we would call investable – stocks that meet fund managers’ requirements in terms of market capitalisation and liquidity – whereas in South Africa the investable universe is about 100,” Holdsworth says.

“For example, if you want the best in biotech, you need to go abroad. If you want to invest in the leaders in technology, such as Tesla [electric vehicles] or Amazon [online retail, cloud computing], you have to go abroad. From a diversification perspective, there’s always an argument for going abroad and finding things that you cannot get in South Africa. It makes little sense to have 100% of our exposure here.”

OPTIONS FOR INVESTING OFFSHORE

• LOCAL FUNDS WITH OFFSHORE EXPOSURE

The easiest way for a South African to have offshore exposure is through a rand-denominated offshore unit trust or exchange-traded fund. You do not have to transfer funds offshore and can just invest in rands.

“Financial institutions allow clients to invest offshore within certain limits and within the regulations of exchange control.

“This arrangement is known as an ‘asset swap’. The distinguishing feature of this type of arrangement is that the funds need to be repatriated back to South Africa when the overseas investment is redeemed,” explains Nesan Nair, portfolio manager at Sasfin.

This is a good option if you just want to invest a monthly amount rather than taking a lump sum offshore. Most leading unit trust companies offer a range of rand-denominated global funds and you can also purchase exchange-traded funds such as Coreshares or Satrix which track global indices such as the World MSCI or the US index S&P 500.

TAKING MONEY OFFSHORE

You can invest up to R1 million abroad without the need of a tax clearance certificate and minimum paperwork. You can do more – as much as R10 million offshore a year – but this means jumping through several hoops and getting an SA Revenue Service tax clearance certificate.

If you’re not skittish about recent market volatility and want to gain some international exposure for your savings, there are several ways you can do this – including foreign currency accounts, offshore bank accounts, offshore funds and investing directly in stocks and shares that are listed on other stock exchanges.

VERSATILE BANK ACCOUNTS

This is an easy way of getting some exposure to a stronger currency. Most major banks, including FNB, Investec and Nedbank, offer currency accounts and you can typically exchange your rands for US dollars, euros, Australian dollars and British pounds.

It’s also possible to open a fully offshore bank account and this is particularly useful if you’re earning money abroad. Usually they are based in the Channel Islands – an archipelago in Europe – and come with a debit card and can be used anywhere in the world.

If you have the right documents at hand – such as a foreign passport – it’s also possible to open an account with one of the UK starter banks such as Monzo.

INDIVIDUAL SHARES

The money maintained in these accounts can also be used to invest in shares directly. This can give you exposure to companies that aren’t listed in South Africa, such as Amazon, Google and Tesla.

You even gain exposure to space by investing in companies such as Virgin Galactic which listed on the NYSE last year.

It is not usually possible for South Africans to open trading accounts with offshore entities due to stricter legislation around money laundering, so you need to use a local broker. Contact your bank or broker for more advice on how to do this. Brokers that offer offshore access include EasyEquities, Sasfin and iTrade.

OFFSHORE FUNDS

There are many South African asset management companies that provide offshore unit trusts. This makes it easier for South Africans who want to transfer money offshore to invest.

These are usually the same funds that you can invest in through the rand-denominated feeder fund. The advantage of using a South Africa-based global fund manager is the admin and they also provide the correct tax information for filing your tax returns.

South African tax residents are subject to tax on their worldwide income and capital gains, which will be subject to capital gains tax (CGT). Be aware that if you’re invested in a rand-denominated fund, also known as a feeder fund, the CGT can have a bigger impact as the rand depreciation is included.

There are ways to try and reduce this but Andrew Wellsted, director and head of tax at corporate legal firm CMS RM Partners, says it can be a complex and expensive endeavour.

“There is the possibility to invest via offshore estate planning structures and this can drastically reduce the South African CGT exposure. This is because the foreign structure would now be subject to tax in its own jurisdiction rather than the individual paying tax in South Africa. This can radically alter the tax implications of investing offshore if it has been properly structured.

“However, it can be expensive to administer, and many complex tax rules apply to these arrangements. Investors are advised to obtain specialist advice before setting up such a structure,” Wellsted says.

Tax-free savings accounts can also help to protect your money, up to R36 000 per year, against tax. However, when it comes to paying offshore dividends tax there’s no escape. Says Nesan Nair, portfolio manager at Sasfin: “Everyone pays offshore dividends tax. But you may qualify for some relief if there’s a double tax treaty agreement between two countries.”

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