A beginners guide to investing offshore
However, trusting foreign firms with your money can be daunting. Justmoney has put together a step-by-step guide explaining how offshore investments work.
Why do people invest offshore?
Jo-Anne Bailey, sales director and country manager for Africa at Franklin Templeton Investments said: “Global diversification enables investors in South Africa to diversify across markets with varying return potential, while reducing the region and economy-specific risks typical to single-country investing. We believe it makes sense to search globally for the best bargains available. By limiting the search to only one country, there is a chance of missing out on valuable investment opportunities, in addition to potentially losing the benefit of greater diversification.”
Krugel notes that there are two main reasons why people invest offshore. “Firstly, to help manage the risk of keeping your golden eggs safe. If you put all of your eggs into one basket, and something were to happen to that basket, you might lose a lot of your hard earned money.
“The second reason to invest offshore is that the local market and economy make up less than 1% of the global economy. In order to get all the rewards that the other 99% of the market has on offer, it is a good idea to have a portion of your investments put into an offshore investment. Some good practical examples are Warren Buffet’s company, Berkshire Hathaway, or Apple or Facebook. All great offshore companies where local investors can become shareholders.”
How do you invest offshore?
It’s key to pick a reputable institution that has the proper Financial Services Board (FSB), South African Reserve Bank (SARB) and SARS [South African Revenues Service] licensing to do offshore investing.
The process of investing offshore has several steps, according to Krugel:
· Establish and define a relationship with your chosen FSP,
· Provide your FSP with all necessary data, including your investment goals,
· Allow the FSP to analyse and evaluate all the information,
· The FSP should then develop and present recommendations to you,
· Once you have agreed to these recommendations, the FSP will implement them, and
· The offshore investments will be reviewed and monitored by the FSP.
Krugel emphasises that the first step to investing offshore is to find an FSP, preferably one that specialises in offshore investing, that you are willing to entrust with your investment. “A referral from a friend or family member is always good, or consulting an independent Certified Financial Planner.”
After you have found an FSP, the next step will be to “choose an appropriate offshore investment option through your chosen FSP, and then allocating your funds accordingly.”
Offshore investment options
Investing offshore can be done directly or indirectly.
Krugel explains: “Directly investing offshore means physically trading your local currency for an offshore currency and taking funds directly offshore.”
This is also known as Rand denominated offshore investments. Discovery Invest head of product development Craig Sher notes: “In this case, your money gets exposure to the performance of offshore investments including currency movements. When you decide to disinvest, it is paid back to you in Rands in South Africa. There are a range of investments including unit trusts available locally that give investors this investment opportunity.”
“Indirectly investing offshore means taking your local currency and investing in a local “feeder” offshore unit trust fund of a Collective Investment Scheme, which in turn holds direct offshore exposure on behalf of its investors,” reveals Krugel.
Sher notes: “When you decide to disinvest, the money remains offshore in offshore currency. You can decide to bring it back to SA in Rands or you can transfer it elsewhere in the world in other currencies.
“In this case you will need to use part (or all) of your R1m (a year) single discretionary allowance to take the money offshore. You may also apply for a tax clearance certificate which can give you up to R10m offshore allowance.”
According to Krugel, the investment vehicles available for offshore investing, whether direct or indirect are similar to those that are available in the local market, such as direct share portfolios and unit trusts.
“There are also numerous retirement vehicles available offshore, but which are restricted to citizens from other countries. In terms of asset classes, you will yet again have access to much of what the local market has to offer. [For example,] shares (equities), derivatives, currencies (cash), commodities, fixed interest assets, bonds and properties,” adds Krugel.
Limitations to investing offshore
However, there are limitations to investing offshore. Krugel highlights that South Africans wanting to invest offshore are “bound by exchange control regulations enforced and monitored by the SARB.”
Krugel elaborates: “Until recently an individual had an annual offshore allowance of only R4 million, with a R1 million offshore travel allowance on top of that. From 1 March 2015, that allowance has been increased to R10 million per annum by the Minister of Finance.
“Also, the FSB authorises, restricts and monitors investments in certain offshore assets, countries and investment vehicles. SARS monitors offshore investments for their cut of the capital gains, interest and dividends from the investments, if applicable. Lastly, the Financial Intelligence Centre (FIC) monitors offshore investments from a money laundering a fraud point of view.”
He adds: “The FSB and SARB monitor offshore currencies, stock exchanges and asset managers, and will from time to time publish a list of restrictions. It is mainly to protect the investor from fraud and capital loss. Also if sanctions were imposed on a country you are not allowed to invest there.”
What taxes do you pay when investing offshore?
The taxes that are applicable when investing offshore are dependent on the tax jurisdiction that the investment falls into. Krugel says that generally there are three types of taxes on investments. These are capital gains tax, dividends tax and income tax on interest earned.
“It depends on the tax jurisdiction the offshore investment falls into, along with any tax treaties the South African government has in place with the offshore investment country’s government. A lot of asset managers are nowadays setting up shop in tax friendly jurisdictions exactly for that reason – to give the tax benefit to the investor,” adds Krugel.
Where to invest
According to Krugel, there are certain factors which an investor should look at when deciding which country to invest in. The market cycles, political agenda and economic data and policy of a country can make a country either a good or bad investment option.
“At this moment in time the US is in favour due to strong economic data. Also, the European Central Bank has recently announced Quantitative Easing measures, which will most probably support asset growth,” states Krugel.
Tips for investing offshore
Sher highlights: “It is important to seek financial advice to get the product that is right for you.”
Krugel advises: “Get a referral you trust to a professional with expertise on offshore investing and partner with that advisor in order to define, implement and monitor your investment objectives. It really is that simple.
“It is also important to consider why an investor would want to invest offshore. The short answer is that the local economy and investment opportunities make up less than a percent of the global economy. Thus, in order for an investor to partake in global opportunities and growth (think Warren Buffet’s company, Berkshire Hathaway), an investor has to go offshore. Also, it is a risk diversification measure. If anything goes wrong in the local markets, at least you do not have all your eggs in one basket.”
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