Navigation Search
Close

Select your location and role to view strategy and fund content

South Africa
  • Global homepage
  • Australia
  • Belgique
  • Botswana
  • Denmark
  • Deutschland
  • España
  • Finland (Suomi)
  • France
  • Hong Kong (香港)
  • Ireland
  • Italia
  • Luxembourg
  • Namibia
  • Nederland
  • Norway
  • Österreich
  • Portugal
  • Singapore
  • South Africa
  • Sweden (Sverige)
  • Switzerland
  • United Kingdom
  • United States
  • International
Professional Investor
  • Professional Investor
  • Individual Investor

Tailored for investment professionals this site provides information on our products, strategies and services. Please remember capital is at risk and past performance is not a guide to the future. We use cookies to ensure that we give you the best experience on our website. This includes cookies from third parties. Such third party cookies may track your use of our website. By continuing you are confirming that you are happy to receive all cookies on our website. Please refer to our Cookie Policy for further information, including steps to take to disable cookies.

By entering you agree to our Terms & Conditions
Investment views

Same same but different!

7 May 2019
Author: Paul HutchinsonSales Manager

Reasons for investing offshore:

  • Diversification benefits
  • Access to asset classes, industries and companies not available in South Africa
  • Reduced emerging market risk
  • Maintenance of ‘hard’ currency spending power

Given the compelling reasons for investing offshore, a key question is how best to do so?

To date, many investors have favoured rand-denominated feeder funds because of the perceived complexity of applying for tax and Reserve Bank clearance to invest offshore directly. However, for discretionary investors (as opposed to investing via a retirement fund or living annuity product wrapper) the tax consequences favour investing directly offshore, not via a rand-denominated feeder fund, with the obvious exception of tax-free savings accounts. This is because, when you disinvest from an offshore fund, i.e. a US dollar-, pound- or euro-denominated fund, you calculate any capital gain in the applicable foreign currency (dealing currency) and multiply that gain by the rand exchange rate on the date of disinvestment1. So, if your initial investment of US$10 000 has grown to US$20 000, your capital gain is US$10 000, which is then multiplied by the current exchange rate. Therefore, the rand/US dollar exchange rate at the time that you made the initial investment is irrelevant in determining your capital gain, i.e. you are not subject to capital gains tax (CGT) on any rand depreciation.

Table 1: Simple example of the CGT calculation when investing in an offshore fund

Invested US$10,000
Realised US$20,000
Capital gain US$10,000
Rand / US$ @ disinvestment R14
Rand profit R140,000
Annual exclusion (assuming not already used) R40,000
Net gain after exclusion R100,000
40% added to taxable income R40,000
Tax @ marginal rate e.g. 45% R18,000
Net rand gain R122,000

However, if you invest in a rand-denominated feeder fund, any rand depreciation that impacts the valuation of the offshore assets in which that fund is invested, contributes to your capital gain. Therefore, you will be subject to CGT on both the capital growth of the underlying assets in which the fund is invested and rand depreciation.

Table 2: Key differences between investing in a rand-denominated feeder fund versus a foreign-domiciled international fund

Rand-denominated feeder fund Foreign-domiciled international fund
  • An example of such a fund is the Investec Global Strategic Managed Feeder Fund. A feeder fund invests directly into its underlying offshore fund.
  • 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.
  • Investors are subject to CGT on any rand depreciation.
  • An example of such a fund is the Investec Global Strategic Managed Fund.
  • Investors invest directly into an FSCA-approved offshore fund in its dealing currency e.g. US 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.
  • Investors are only subject to CGT on the applicable foreign currency return (dealing currency) at the prevailing exchange rate.

A practical example

To illustrate the respective after CGT return, we have compared an investment of R1 million into the Investec Global Strategic Managed Feeder Fund on 31 March 2014 with the US dollar-equivalent investment (US$94 607) into the Investec Global Strategic Managed Fund. At the time, the rand was R10.57 per US dollar.

Figure 1: Investec Global Strategic Managed Feeder Fund

Figure 1: Investec Global Strategic Managed Feeder Fund

Amount invested (rand) R1 000 000
Value (rand) after 5 years R1 600 130
Gain (rand) R600 130
Annual exclusion (assuming not already used) R40 000
Net gain after exclusion R560 130
CGT (18% assuming maximum marginal taxpayer) R100 823
End net value (rand) R1 499 306

Past performance should not be taken as a guide to the future; losses may be made. Source: Morningstar and Investec Asset Management calculations, as at 31.03.19. Performance figures are based on a lump sum investment, NAV to NAV, net of fees, for illustrative purposes only.

Figure 2: Investec Global Strategic Managed Fund

Figure 2: Investec Global Strategic Managed Fund

Amount invested (US$) US$94 607
Value (US$) after 5 years US$111 143
Gain (US$) US$16 536
Gain converted to rand (R13.1805 @ 31 July ’18) R236 459
Annual exclusion (assuming not already used) R40 000
Net gain after exclusion R196 459
CGT (18% assuming maximum marginal taxpayer) R35 363
End net value (Rand) R1 553 977

Past performance should not be taken as a guide to the future; losses may be made. Source: Morningstar and Investec Asset Management calculations, as at 31.03.19. Performance figures are based on a lump sum investment, NAV to NAV, net of fees, for illustrative purposes only.

The result, is a difference of R54 670 for investing in the dollar version of essentially the same fund. Money in one’s pocket trumps simplicity and relative ease!

The performance of the rand is a key consideration

The above analysis illustrates that the performance of the rand is a key contributor to an offshore investment’s overall rand return. Rand depreciation adds to the offshore investment’s return calculated in rands, and rand appreciation detracts from the overall return.

Figure 3 shows that since 1994, over rolling five-year periods, the rand has experienced periods of both depreciation (85% of the time) and appreciation (only 15% of the time) against the US dollar. On average, however, the rand has depreciated by approximately 6% per annum over rolling five-year periods.

Figure 3: Rolling five-year performance of the rand (May 1994 – March 2019)

Figure 3: Rolling five-year performance of the rand (May 1994 – July 2018)
Source: Morningstar and Investec Asset Management calculations.

Ease of investing offshore

Investors can now invest up to R1 million annually in an international fund without the need for any prior approvals. In addition to this annual discretionary allowance of up to R1 million, investors 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 foreign allowance of R10 million, which should be forthcoming if their tax affairs are up to date. Reserve Bank approval is only required when investors wish to transfer funds offshore in excess of the maximum total lump sum of R11 million per calendar year.

Oh yeah, one more thing (with apologies to the late Steve Jobs)

To make a discretionary offshore investment even more tax efficient, consider investing into an offshore unit trust fund via the Investec GlobalSelect Access sinking fund, available on the Investec Investment Management Services (IMS) platform.

GlobalSelect Access offers investors subject to high tax rates a significant reduction in the rates of tax applicable to their investment. In addition, Investec Assurance Limited (IAL) takes care of all tax administration by undertaking the calculation and payment of any tax due. This is possible because a sinking fund is taxed in terms of the five funds approach, which means the policyholder fund is the taxpayer and not the end investor. The result being that all tax is deducted within the sinking fund policy, and the following rates apply:2

  • 30% on income (if any), rather than the investor’s marginal tax rate which may be a maximum of 45%
  • 12% on capital gains (40% inclusion rate x 30% income tax rate), rather than a maximum effective rate of 18% (inclusion rate of 40% taxed at the investor’s marginal tax rate which may be as much as 45%)
    • The net result being that for maximum marginal tax-paying investors, the CGT paid relative to an equivalent feeder fund investment is reduced by one-third.

The proceeds, when received, are tax free in terms of current revenue practice. And importantly, in the event of the death of the policyholder, no CGT is payable when the policy is transferred into the name of the beneficiary.

As always, the best approach is to seek professional financial and tax advice.

Reference funds: Annualised returns (%)

Investec Global Strategic Managed Fund A Acc (USD) Comparative Index: 60%MSCI AC World NR, 40% FTSE WGBI* Investec Global Strategic Managed Feeder Fund A (ZAR) Benchmark: 60% MSCI AC World NR, 40% FTSE WGBI*
1 year -5.6 -0.8 17.7 23.1
5 years 2.7 4.0 9.9 11.0
10 years 8.6 8.5 12.6 12.6

Source: Morningstar Direct, dates to 31.03.19, NAV based (net of fees, excluding initial charges), gross income reinvested, in US dollars (Investec Global Strategic Managed Fund) and ZAR (Investec Global Strategic Managed Feeder Fund). Highest and Lowest refers to the highest and lowest 12-month rolling performance figures. Highest: 44.3%, Lowest: -39.4% – Investec Global Strategic Managed A Acc share class (10 years). Highest: 45.2%, Lowest: -25.5% – Investec Global Strategic Managed Feeder A class (since inception:02.09.03). The total expensive ratio and transaction cost for the Investec Global Strategic Managed Feeder A is 2.15% and 0.06%, respectively. *Pre 31.12.2010: 60% MSCI World NR, 40% Citigroup WGBI.

 


1 You can also use the average exchange rate in the year of disposal.
2 Applicable to the 2019/2020 tax year. Taxed in the individual policyholder fund.

 

Paul Hutchinson
Paul Hutchinson Sales Manager

Important information

All information provided is product related and is not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security. Collective investment scheme funds are generally medium to long term investments and the manager, Investec Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing and scrip lending. The fund may borrow up to 10% of its market value to bridge insufficient liquidity. A schedule of charges, fees and advisor fees is available on request from the manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund 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. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant Total Expense Ratio (TER). A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The ratio does not include transaction costs. The current TER cannot be regarded as an indication of the future TERs. Additional information on the funds may be obtained, free of charge, at www.investecassetmanagement.com. The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. The scheme trustee is FirstRand Bank Limited, PO Box 7713, Johannesburg, 2000, Tel: (011) 282 1808. A feeder fund is a fund that, apart from assets in liquid form, consists solely of units in a single fund of a collective investment scheme which levies its own charges which could then result in a higher fee structure for the feeder fund. The fund is a sub-fund in the Investec Global Strategy Fund, 49 Avenue J.F. Kennedy, L-1855 Luxembourg, Grand Duchy of Luxembourg, and is approved under the Collective Investment Schemes Control Act. This document is the copyright of Investec and its contents may not be re-used without Investec’s prior permission. Investec Asset Management (Pty) Ltd is a member of the Association for Savings and Investment SA (ASISA). Investec Investment Management Services(Pty) Ltd and Investec Asset Management (Pty) Ltd are authorised financial services providers. Issued May 2019.

The content of this page is intended for investment professionals only and should not be relied upon by anyone else

Please confirm you fall under this category

By entering you agree to our Terms & Conditions