The HOW and WHY of Offshore Investing

April 2016

Harbour Wealth Client Newsletter

Whenever the Rand or our president misbehaves, we know the interest in offshore investing peaks, and understandably so. Last year the Rand depreciated by roughly 30% against developed market currencies, and on average has historically depreciated by 6% p.a. Our neighbouring country Zimbabwe has taught many of our friends and family the harsh reality about what happens to your money and investments in a hyper inflationary environment. We all personally know of families and businesses that have literally had to start from scratch in rebuilding their livelihoods elsewhere. We can’t stick our heads in the stand, it is prudent that we hedge ourselves against currency depreciation and political risk.

If we take a step back from all the anxiety and heightened fears currently, we at Harbour Wealth agree whole heartedly that if you are serious about your financial being, you need to consider diversifying offshore. South Africa represents less than 1% of the world economy! Added to that, the South African stock market is extremely concentrated, with 20 of the biggest stocks making up nearly 80% of the entire stock market (in market capitalization.) Global investing gives you access to regions and equity sectors/industries that are not well represented locally such as IT and Electronics. It all boils down to diversification of risk and opportunities.

There are two methods of gaining offshore exposure:

1) Asset Swap – Rand Denominated Investing:

While your money is invested in and fully exposed to global markets, it ultimately is priced in Rands. You don’t need to use your foreign currency allowance as the money doesn’t physically leave the country. This is a great way for smaller investments and/or SA Trusts to gain offshore exposure, but it is important to remember that your investment value will be impacted by currency fluctuations.

2) Foreign Domiciled – Hard Currency Investing:

Only natural persons older than 18, and who are tax payers in good standing are entitled to a foreign currency allowance, this then
excludes legal entities, trusts and companies. Individuals are currently allowed to externalize R11 000 000 per calendar year, consisting of a R1 000 000 single discretionary allowance (no need to apply for tax clearance) and a R10 000 000 annual offshore allowance. This is Offshore Investing in the true sense as you stop monitoring currency movements against the Rand, and focus instead on earning returns in hard currency (USD,GBP, EURO, etc.) In essence this money has emigrated and is not coming home.

Whenever we advise our clients we always need to assess whether externalizing money is a viable option. Firstly the minimums are quite steep (USD 25 000) and secondly we do not want to be taking a short term view on the Rand if there are debts and expenses that need to be paid locally. If that is the case then foreign exposure via an asset swap (Rand based) would be better. We currently hold an overweight offshore position in our model portfolios, where we give our best investment view constantly. 2015 was a disappointing year for global equity markets, and equities had the worst start to the year in several decades! However Global Equity Markets rebounded strongly in March, as risk aversion abated, there was further quantitative easing in Europe and Japan and an expectation of a more moderate US rate hiking cycle.

We must be aware that due to unstable capital flows, the impact of political and economic shocks on financial markets will be exaggerated, so brace yourselves for a bumpy ride! We have yet to deal with the UK’s BREXIT referendum being held in June this year, plus the US Presidential Election, which usually results in an equity rally. Emerging Markets have been able to consolidate, however those in favour are the big oil consumers (India, China, Turkey) where structural and state sponsored reform is credible. We continue to favour global equities over local. The investment universe is far greater allowing for more investment opportunities, and valuations are still compelling.

For those clients that do have sufficient discretionary assets that warrant true offshore exposure, we have constructed a Global Growth Model Portfolio available on a select few offshore platforms. Our view is that once money is taken offshore it should be for long term capital growth objectives. As such our model portfolio is 98% invested in growth assets (equity and property). As offshore returns in hard currency are generally lower than Rand returns, due to lower inflation and interest rates, we focus hard on achieving diversification at a low cost.
For our more conservative clients or those with a short to medium investment time horizon, we do blend the Growth Model with a lower risk Income Fund.

Another vitally important consideration when investing offshore is the product wrapper that you wish to house your investment in. For some clients with special needs or large investment amounts an offshore trust could be an option, however the costs are large and SARS is currently investigating any ‘tax avoidance loop holes’ through the Davis Commission. The next and more
commonly used option is an offshore endowment. By investing in an offshore life plan issued by a South African life company, you can ensure that the investment forms part of your South African estate. Both the US and UK levy estate or inheritance taxes (currently 40% each) on assets classed as‘situs’ assets, even when that assets are owned by non-residents. This is an exceptionally complex area which we prefer our clients to avoid! You also avoid other Probate complications and additional costs that could arise from having an estate located offshore, such as having to draw up an offshore will. Many overseas jurisdictions do not recognise SA wills, therefore an offshore executor needs to be appointed, and this again is costly and complicated. As long as you comply with the exchange control regulations when you invest, you or your estate will not be obliged to repatriate the funds. There are many other benefits aside from estate planning advantages such as tax-efficiency and simplicity, protection from creditors and liquidity.

To summarize, diversifying offshore is a must but exactly how you invest, what you invest in and why you are investing are key considerations to discuss with your Wealth Planner, as one size does not fit all.If you would like more information please contact your Wealth Planner.

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