In recent times, much has been written and said in South Africa about diversifying one’s investment portfolio. In fact, some of the biggest names in wealth management circles have been extremely vocal in their advice to the general market: “Invest Offshore Now!”
At Carrick Wealth, we have been advising our clients on the benefits of a Global Wealth Strategy since 2014.
We believe that offshore diversification should not be a “flavour of the month” or “knee-jerk” reaction. It should form part a well thought through wealth strategy, using both international and local allocation to the best benefit of your personal financial wellbeing.
If you have already followed this advice, you may be utilising any of a number of what you believe to be “offshore investment options”. But are you truly invested offshore? Will you actually achieve the benefits and protection you require?
Investing ‘offshore’ versus ‘being truly offshore’… at first glance the question may seem frivolous: but it’s definitely not. There are distinct differences and not knowing them could deny you achieving the investment outcome you desire in terms of diversification, protection, growth, tax efficiency and above all, really being invested in an offshore jurisdiction in a stable foreign currency such as pound sterling, US dollar or euro.
At Carrick Wealth, as leading specialists in providing advice on offshore tax-efficient investment structures in hard currency for mid to long-term investments, we have often found that people confuse the two concepts. Often they believe they are ‘truly’ invested offshore, when they are not.
The main differences lie in being indirectly invested offshore but still in rands, through unit trusts for instance; or being directly and truly invested offshore in a foreign hard currency where you can access the assets without having to bring them back into South Africa. Different requirements and qualifying criteria apply to the two types.
Why invest offshore
The most common reasons for South Africans wanting to invest offshore are to diversify the risk associated with an exclusively South African-based investment portfolio; to have their investments hedged or protected against local currency devaluation, political risk and low economic growth; to take advantage of global investment opportunities that are more attractive than those that are locally based; or to be invested in more stable, high-growth and more tax efficient jurisdictions and structures. You may require this for purposes such as retirement planning, tax-efficient estate planning, providing for international education, transacting in foreign currency or acquiring structured foreign-based investments among others.
Investors living in developed economies typically hold around 40% of their portfolio offshore, or rather truly offshore. In South Africa, a developing economy, the figure is typically much smaller. The risk or downside of this becomes patently clear when considering that South Africa represents less than 1% of the global economy, which may leave you with little or no exposure to many of the biggest, most successful global businesses, growth industries and markets.
In addition, with little or no offshore diversification, you will be exposed to rand depreciation. Historically the rand has devalued at an annual rate of approximately 6% against the currencies of developed economies over the last 10 years. In 2015 alone, it lost 26% of its value within 6 months after Fitch Ratings revised down the sovereign rating to one notch above “junk” status against the backdrop of weak economic prospects due to external and domestic headwinds along with the famous Nenegate debacle in which we saw three different Finance Ministers in a few days. Clearly, as a South African investor you need to hedge against such currency depreciation.
Over the last 12 months the Rand has lost a further 16.19% to the British Pound. Certainly a “risk” that should be a key topic in a South African’s wealth strategy.
Let’s take a closer look at the key differences between an ‘offshore’ and a ‘truly offshore’ investment.
Rand-based ‘offshore’ investment
Most asset managers in South Africa offer a range of rand-based global mutual funds, or unit trusts, in which investors can collectively invest and withdraw in rands. Your capital, together with that of the other investors, is invested into these global assets using the asset swap allocation of the fund concerned, indirectly giving you a measure of global diversification and foreign currency exposure.
But the investment is priced in rands, your invested rands never actually leave the country, and your gains are earned and drawn in rands.
‘Truly offshore’ investment
To invest in a ‘truly offshore’ fund you will have to structure your investment so it is not rand-denominated or based in South Africa. You will not be investing in South African rand, but in a hard, foreign currency such as GBP, US dollars or euros.
In terms of South African foreign exchange regulations, R1-million per annum can be taken offshore without the need for a tax clearance certificate from SARS. Any amount higher than that up to the allowed R10-million per annum will require such a tax clearance certificate. For amounts over R10-million per annum a tax clearance certificate from SARS plus approval from the Financial Surveillance Department of the South African Reserve Bank is required.
In a truly offshore investment structure, your investment is housed in a highly regulated and often tax-efficient jurisdiction that is safe and politically stable. Your choice of investments is not restricted and you can have access to Discretionary Fund Managers that have a global footprint and can manage your portfolios to a target risk and return using not only traditional asset classes but also real assets such as infrastructure, private equity, property and commodities.
Like any major investment decisions, investing offshore is not a decision to be made lightly and requires the advice and assistance of qualified Wealth Specialists with experience in the (true) offshore arena. At Carrick we take a client-centric approach when ensuring that clients’ overall long-term investment portfolios are structured in ways that will maximise benefits such as tax efficiency, grow their investments and protect them from unnecessary risks.
To learn more about how you can truly invest offshore in hard currency, contact Carrick Wealth at [email protected] to arrange for one of our qualified Wealth Specialists to call you.