Understanding your offshore investment options
EXECUTIVE SUMMARY: On top of making investment decisions, there are various practical options to choose from when investing offshore. Exchange controls are currently a constraint only for the very wealthiest of South Africans, but analysing which investment options are best for you and tackling the administrative challenges can be daunting. For investors who believe that now may be an opportune time to invest offshore, Jeanette Marais discusses, simplifies and compares some of the available choices.
Regular readers of our investment commentary will know that for some time now we have said that we do not have high expectations for returns from South African shares or for continued rand strength. As a result, where we are allowed discretion in our mandates to do so we have generally preferred offshore opportunities and our unit trusts and institutional portfolios reflect this view, remaining close to their maximum allowable offshore exposure. Many investors who agree with our view on local stock market valuations and the rand may still be hesitant to invest offshore due to the perceived difficulty in doing so. But investing offshore need not be complicated.
What are your options?
There are different routes you can take to invest offshore (see Graph 1). Each option has advantages and disadvantages, but your choice depends on how much you wish to invest and whether you want to invest in rands or foreign currency.
1. You can use your fund manager's offshore allowance
If you value simplicity, and do not particularly want to expatriate your assets but are simply making an investment decision, there are various rand-denominated offshore unit trusts available locally. The advantage of this route is that there are few administrative requirements and you do not need to buy foreign currency in order to invest - transactions are all in rands even though the underlying investments are offshore. Since you are investing offshore using your unit trust management company's offshore allowance, you also do not need to get tax clearance from SARS. This route is convenient and simple and a range of rand-denominated unit trusts are on offer from local management companies and investment platforms, including our own, that trade daily at relatively low minima. Nevertheless, it may not be right for you if you want to expatriate assets, or if you prefer not to be restricted to the funds of this type on offer in South Africa.
2. Use your own foreign investment allowance
The other option is to invest in foreign currency using your foreign investment allowance (currently R4 million per year) or money already in an offshore bank account. There are various ways to do this:
You can choose from the huge selection of collective investment schemes available worldwide and go directly to the individual offshore investment management companies. If, however, you find too much choice confusing, you may wish to invest via an offshore platform - this gives you options, but makes the selection more manageable. In addition, investing via a platform means you will have one point of contact you do not have to go to different companies to invest in funds from different investment managers and you may switch between funds easily if you need to. Meanwhile, the minimum investment amounts per fund are often lower. You can also invest in an offshore product, such as an offshore endowment, available through some offshore platforms (although not offered through Allan Gray).
No matter which route you choose, you need to get clearance from SARS, exchange your rands into foreign currency, and make sure you comply with either international or South African FICA or know-your-client (KYC) requirements (requirements vary depending on the investment manager and the country in which it is based).
Our offshore platform simplifies choice and administration
The Allan Gray Offshore Investment Platform is one example of an offshore platform. It follows the same principles as our local platform, including a strong focus on individual choice, fee savings and transparency. We currently offer 32 mutual funds and unit trusts from different international investment managers. We do not endorse or promote any of the funds except for those of our offshore investment partner Orbis. Our fund selection changes roughly once a year and is based on demand. We get no benefit from any of the offshore fund providers but many of them pay rebates that we pass back to investors in full on the platform, thus reducing the net administration fees payable, in the majority of cases, to zero.
As a South African based offshore platform, we are well equipped to help with local tax and foreign exchange processes. In addition, investors must comply with the same FICA requirements as those for local investments, instead of international KYC requirements. To help streamline the process of investing offshore we have recently arranged with Global Treasury Solutions (GTS), an independent foreign exchange risk management company, to provide investors on our platform with preferential rates for foreign exchange services. GTS facilitates the foreign exchange and offshore transfer process, including applying for a tax clearance certificate on your behalf, currency conversions from rands into any of our accepted offshore currencies and transferring foreign currency into our offshore bank accounts.
We also offer online functionality, making it easy for investors to invest, access their investment values and transact using the secure section of our website.
How do offshore investment products compare with the Allan Gray investment platform?
There are no initial administration fees on the Allan Gray platform and investors pay no annual administration fees for 26 of the 32 funds listed on our platform. This is because Allan Gray negotiates fee discounts from all the investment managers on our platform, and similar to our local platform, we pass these discounts on to investors by offsetting them transparently against our annual administration fee. In most cases, the discount reduces the administration fee payable by investors to zero. The net result is that the total costs of international funds listed on our platform are comparable with (and often lower than) their local equivalents.
Some offshore vehicles, for example offshore endowments, either tie up your money for five years or levy very high penalties on disinvestment. There are no penalties when you withdraw all or part of your Allan Gray offshore investment. Although Allan Gray is a locally registered company, your investment is physically offshore. This means that when you make withdrawals we can transfer the investment to an offshore bank account registered in your name. Since you will already have been through the approval process when you invest, your money will already be offshore and exchange controls therefore do not apply at the point of withdrawal.
In most cases, in addition to the benefits of simplicity and convenience, using a platform with transparent, low price structures reduces the high direct and indirect costs of international investing. This may help to mitigate the risks and uncertainty of investing in foreign markets.
Jeanette has spent her career in the financial services industry, heading up distribution operations in life offices and investment companies. Her responsibilities include managing client services and the different channels through which all of our clients access Allan Grays retail products.