Given the compelling reasons for investing offshore, which include diversification benefits, reduced emerging market and currency risk, and maintenance of ‘hard’ currency spending power, how best should investors go about investing offshore?
The answer depends on investors’ personal circumstances, risk profile and longer-term financial planning objectives. We therefore suggest that investors consult a professional financial advisor who can help identify investment solutions that address their specific requirements, which may include:
Investing in an FSB-approved collective investment scheme (unit trust fund) that includes offshore assets (e.g. the Investec Diversified Income, Cautious Managed, Opportunity, Equity and Value funds). For example, a Regulation 28-compliant multi-asset or balanced fund is allowed to invest up to 25% in international assets. By making use of this type of fund, investors are effectively appointing a professional money manager who has the time, experience and access to information to decide when and how much to invest offshore on their behalf, and into which assets. Given relative valuations, most South African multi-asset funds are at the 25% offshore limit, and therefore the key decision is to select a manager who has a proven long-term track record and capability of investing offshore.
As a subset of this option, a worldwide flexible fund, such as the Investec Worldwide Flexible Fund, is potentially a more efficient investment solution as it is not constrained by geographical or asset class limits. While the optimal strategic allocation to foreign assets differs dependent on each investor’s personal circumstances, for many it could be at least a third of their assets, as evidenced in Figure 1 below.
Source: Professor Dave Bradfield, Brian Munro and Dieter Hendricks, Cadiz Securities, 2010
Therefore a Regulation 28 compliant multi-asset high equity or other domestic fund that is limited to 25% offshore exposure may not be the most efficient solution. In fact, an unconstrained investment mandate improves the return characteristics of a multi-asset (balanced) portfolio at only marginally higher risk.
Investing in an FSB-approved rand-denominated international unit trust fund (e.g. the Investec Global Multi-Asset Income Feeder Fund, Investec Global Strategic Managed Feeder Fund and Investec Global Franchise Feeder Fund, which invest directly into their respective underlying funds). By doing so, investors do not make use of their individual offshore allowance. Rather, they invest in rands and when they disinvest, the proceeds are paid in rands. While investors benefit from being invested in funds that only hold offshore assets, they remain exposed to South African political risk.
Investing in a foreign-domiciled international unit trust fund that is registered in South Africa (e.g. the Investec Global Multi Asset Income Fund, Investec Global Strategic Managed Fund and Investec Global Franchise Fund). By doing so, investors invest directly into an FSB-approved offshore fund in its dealing currency e.g. dollars, pounds or euros. Having completed the fund’s application form, investors effectively instruct their bank (local or international) to make payment to the fund’s bank account. When disinvesting, investors will then also receive the proceeds in the fund’s dealing currency.
Many South Africans have favoured rand-denominated international funds because of the perceived complexity of applying for tax and Reserve Bank clearance to invest offshore directly. However, now that investors can invest up to R1 million annually in an international fund without the need for any prior approvals, they can access foreign-domiciled international funds with relative ease and thereby diversify away South African political risk. In addition to the annual discretionary allowance of up to R1 million, investors also have a foreign capital allowance of up to R10 million per calendar year (a total sum of R11 million). Investors need to obtain foreign tax clearance from the South African Revenue Service when they wish to utilise their annual foreign allowance of R10 million. Reserve Bank approval is only required when investors wish to transfer funds offshore in excess of the maximum total sum of R11 million per calendar year.
Investec’s rand-denominated international funds can be accessed directly from Investec and via Investec Investment Management Services (IMS), or through most of the linked investment service provider (LISP) companies in South Africa. Similarly, our foreign-domiciled funds can be accessed directly, via the IMS GlobalSelect platform or through other LISP companies’ offshore fund platforms in South Africa.
The following table provides a summary of the means by which a South African investor can obtain offshore exposure.
|SA unit trust funds||Worldwide flexible funds||SA feeder unit trust funds||Foreign domiciled funds|
|Offshore exposure||0 - 25%||0 - 100%||95 - 100%||100%|
|Use of investor's offshore allowance||No||No||No||Yes|
|Use of Manager's offshore allowance||Yes||Yes||Yes||No|
|Does Investec have offshore capacity||Yes||Yes||Yes||N/a|
|Investment currency||Rand||Rand||Rand||$, €, £|
|Disinvestment proceeds currency||Rand||Rand||Rand||$, €, £|
|Exposure to SA political risk||Yes||Yes||Yes||No|
|Investec core funds||Investec Diversified Income, Cautious Managed, Opportunity, Equity and Value Funds||Investec Worldwide Flexible Fund||Investec Global Multi-Asset Income, Global Strategic Managed and Global Franchise Feeder Funds||Investec Global Multi-Asset Income, Global Strategic Managed and Global Franchise Funds|
All the information contained in this communication is believed to be reliable but may be inaccurate or incomplete. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. This communication is provided for general information only and for distribution only in South Africa. It is not an invitation to make an investment nor does it constitute an offer for sale. The full documentation that should be considered before making an investment, including the prospectus, key investor information documents and minimum disclosure documents which set out the fund-specific risks, are available from Investec Asset Management. Collective investment schemes (CISs) are generally medium- to long-term investments and the manager gives no guarantee with respect to the capital or the return of the funds. CISs are traded at ruling prices and can engage in scrip lending. A schedule of charges, fees and advisor fees is available on request from the manager. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. A feeder fund is a portfolio that invests in a single portfolio of a CIS, which levies its own charges which could result in a higher fee structure for the feeder fund. Performance shown is that of the funds and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. Past performance is not necessarily a guide to the future. These portfolios may be closed in order to be managed in accordance with their mandates. The value of participatory interests (units) may go down as well as up. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. A higher Total Expense Ratio (TER) does not necessarily imply a poor return, nor does a low TER imply a good return. Where portfolios invest in the participatory interests of foreign collective investment schemes, these may levy additional charges which are included in the relevant TER. The ratio does not include transaction costs. The current TER cannot be regarded as an indication of the future TERs. Fund prices are published each business day in selected media. Additional information on the funds may be obtained, free of charge, at www.investecassetmanagement.com. These offshore portfolios are sub-funds in the Investec Global Strategy Fund, 49 Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, and are approved under the Collective Investment Schemes Control Act. The unit trust manager, Investec Fund Managers SA (RF) (Pty) Ltd, is registered under the Collective Investment Schemes Control Act. Investec Asset Management and Investec Investment Management Services are authorised financial services providers. Investec Conflict of Interest Policy is available on request.