It is no secret that it is important to diversify your investment portfolio and that means not only across asset classes and industries, but also geographically. South Africa only contributes 0.35% to the world economy in terms of GDP, so it is important to gain foreign exposure as part of a good diversified portfolio. But how do you do that? Let us dive deeper into the two main strategies that South African investors can follow when they want to invest in international markets.
Indirect offshore Investment
- An indirect offshore investment is when you invest in a rand-based offshore investment meaning you do not need to convert your money into another currency. By investing through a local, reputable LISP platform that has a mandate to invest in foreign assets, you can effectively use the platform’s foreign exchange capacity to send your money offshore on an asset swap basis without having to convert your money into another currency.
- Generally, this is done through investing into a local asset manager’s “feeder fund”. Your money doesn’t physically leave South Africa, but you still reap the benefits of offshore investing. Although you will have to pay a fee to these platforms for making use of their foreign exchange capacity, it is a more cost effective and hassle-free way to get offshore exposure compared to a direct offshore investment.
- Investment managers of retirement products make use of this method to get offshore exposure as an example. Most products will also allow investors to invest in a feeder fund as the underlying such as tax-free savings accounts, endowments, unit trusts and sinking funds to name a few.
- It is important to also mention that this method of gaining offshore exposure comes with an additional risk known as currency risk. Because you are investing your rands, you will also have to withdraw rands meaning that if the rand depreciated while it was invested it will diminish the returns of the investment. It is therefore important to keep in mind what the exchange rate is when withdrawing your investment.
Direct offshore Investment
- This is when you convert your rands to invest in offshore markets directly with foreign currency. South Africans, over the age of 18, are allowed to externalise up to R11 million per calendar year. The first R1 million, which we refer to as a single discretionary allowance, is available to everyone and it does not require an application. The remaining R10 million is called your foreign investment allowance but requires an application known as a tax clearance.
- You can apply for a tax clearance when all your tax returns are up to date and you have a good standing with SARS. When applying, you will need to provide Sars with details of your personal assets and liabilities, as well as proof of availability of funds and the source of funds that will be externalised. When your tax clearance is approved and you are granted a foreign allowance that will be valid for only 12 months, from the date of approval.
- These allowances aren’t just to be used for investments and it is important to understand that when traveling internationally or buying things that require you to pay in a currency other than rands it will detract from your total available allowance.
- Whether you want to go ahead and invest either by using your single discretionary allowance or a foreign allowance, the next step will be to purchase foreign currency either through a bank or through a reputable currency broker. The currency will then be transferred into the appropriate investment.
- When externalising funds in this manner, it is important to keep track of how much you move offshore in a calendar year as any amount in excess of your allowance can be subject to penalties of between 20% and 40%.
- It is clear that it is important to diversify your portfolio with global investments, but understanding your options and their benefits are important to ensure your investment best suits your situation.
